On 25 March 2025, the Luxembourg accounting board (Commission des normes comptables, “CNC”) issued a third Q&A with respect to Pillar 2 focusing on relevant accounting information to be provided in standalone and consolidated financial statements before and as of the transition year.
Background
Pillar 2 has been implemented in Luxembourg through the law of 22 December 2023 (the “Pillar 2 Law”) and applies to MNE groups and large scale domestic groups as defined under the Pillar 2 Law for fiscal years starting as from 31 December 2023 (see our previous newsflash for more details on Pillar 2).
On the accounting aspects, the CNC already issued two Q&As (CNC 24/031 and 24/032) in 2024 providing guidance for financial year 2023. The Luxembourg tax authorities also issued guidance on the tax treatment of deferred tax assets (“DTA”), deferred tax liabilities (“DTL”) and transferred assets upon transition also referring back to the CNC Q&A (see our previous newsletter).
Q&A 25/035 applies to (i) financial years preceding the first fiscal year the group falls within the scope of Pillar 2 (the “Transition Year”) and (ii) financial years starting as from the Transition Year. The Q&A is relevant for Luxembourg entities and groups preparing their stand alone or consolidated financial statements under LuxGAAP or LuxGAAP-JV.
The CNC guidance relies on the updated IAS 12 – “income taxes” issued by the International Accounting Standards Board and also adopted by the EU in order to maintain a level playing field for groups preparing their consolidated financial statements under Lux GAAP or Lux GAAP-JV.
Financial years preceding the transition year
When to include information in the notes to financial statements
- Pillar 2 application is probable: the CNC takes the view that that the assessment whether Pillar 2 could apply to the entity or group is under the responsibility of the management which can rely on “internal indicators” (consolidated revenue thresholds of previous years, budget or business plan of the group). When Pillar 2 is likely to apply, information can be included in the financial statements.
- Pillar 2 application is certain: When the EUR 750 million revenue threshold is exceeded, the inclusion of relevant information is strongly recommended.
Which information to include in the standalone and consolidated financial statements appendices
- The CNC provides that information known or that can reasonably be established can be included in the notes to the financial statements with the objective to illustrate the entity or group’s exposure to Pillar 2. In line with IAS 12, the entity or group can provide qualitive (entities and countries impacted) and quantitative information on Pillar 2 (fraction of profits subject to additional taxation, applicable average effective tax rate, prospective impact) related taxes at the end of the financial year. It is not required to cover all the specifics of Pillar 2 rules and indicative ranges are allowed. When the information is not known or cannot be estimated, the entity or group should indicate this fact with an update on the progress made in the evaluation process.
Reflecting DTA in standalone accounts of Luxembourg companies’ part of a Pillar 2 group:
Under the Pillar 2 Law, deferred tax assets and liabilities are taken into consideration as booked or reflected in the financial statements of each constituent entity of a jurisdiction. The question arises for Luxembourg companies’ part of a Pillar 2 Group, how to reflect deferred tax assets accumulated at the end of the financial year preceding the transition year as they cannot be accounted for. The CNC provides that a mention in the notes to the standalone financial statements is more granular and provides more traceability than a presentation only in consolidated financial statements, concluding that both presentations are complementary rather than exclusive.
On the legal basis allowing the presentation of deferred tax assets in notes to the standalone financial statements, the CNC provides that such presentation falls within the obligations to present in annexes complementary information enhancing the true and fair view standard set by article 26 (3) of the Luxembourg accounting law.
Accounting for DTA in consolidated financial statements under Lux GAAP and Lux GAAP-JV
The CNC provides that Luxembourg accounting practice and ongoing accounting law reform allow for the accounting of DTA under both regimes when they are highly likely to be recovered in the foreseeable future. Accounting for DTA being optional, Pillar 2 groups have the possibility to present DTA in the notes to these consolidated financial statements in line with the true and fair view standard.
DTA computation
According to the CNC, the aggregate rate of corporate income tax and municipal business tax as known at the end of the financial year should be applied to the gross amount of tax attributes or temporary differences. Recoverability analysis is only required where the DTA is booked in the consolidated financial statements, as only DTA whose recoverability is highly probable can be accounted for.
Financial years starting as from the Transition Year
According to the CNC, as from the Transition Year the above described qualitative and quantitative information are no longer required as their sole purpose is to provide a prospective information on the impact of Pillar 2 and as from the Transition Year such impact should be computed and accounted for.
Information in the notes to the stand alone and consolidated financial statements
The level of information should be guided by general accounting principles and in particular the true and fair view objective (of entity/group’s assets, financial positions and result) and the significance of the information (an information is deemed significant when, if omitted or inaccurate, it can reasonably be expected to influence decisions based on the accounts).
The Q&A provides for two illustrative examples where the Luxembourg company or group are within the scope of Pillar 2:
- Additional taxes resulting the application of Pillar 2 are nil or not significant: in line with the general accounting principles applicable under Lux GAAP or Lux GAAP-JV and the true and fair view objective, in principle, no additional information is required to meet such objective. Where the management of the company or group considers Pillar 2 related information as relevant for the users of the accounts, they can be included.
- Additional taxes resulting from Pillar 2 are considered as significant: based on the above-mentioned principles, additional information should be provided in the accounts. Determining the nature and scope of such information lies with the management of the company/group. In CNC’s opinion, such information could take the form of a separate presentation of the tax liability resulting from the application of Pillar 2 Law.
Other items in relation with financial years as from the transition year
- Accounting for or information on the DTA or DTL in relation to taxes resulting from the Pillar 2 Law: the CNC adopts the position of the IAS 12, such that no obligations to make such accounting or provide information in that respect even for groups that usually account for DTA/DTL arises. The mandatory application of this exception is being justified by the complexity of the Pillar 2 rules and the exception should be mentioned in the financial statements.
- Follow-up of DTA in notes to standalone or consolidated financial statements: in the CNC’s opinion, Luxembourg companies or Pillar 2 groups choosing to mention DTA in notes to their standalone or consolidated financial statements should provide a follow-up on the evolution and use of their tax attributes to ensure a granular and traceable information in line with the true and fair view standard.
- Accounting for DTA in consolidated financial statements prepared under Lux GAAP/Lux GAAP-JV is possible as long as there is high probability that they will be recoverable in the foreseeable future. Once accounted for, in application of the consistency principle, the accounting for DTA as well as the provision of an explanatory note must be continued annually.
- Accounting for Pillar 2 tax liabilities under the Luxembourg charter of accounts: in the absence of dedicated accounts in the Luxembourg standard chart of accounts, the CNC provides guidance on which accounts to use and how to adapt the current charter of accounts.
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