On 4 August 2023, the Luxembourg government introduced to the parliament the Draft Law (the “Pillar Two Draft Law” or the “Draft Law”) to transpose Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (the “Pillar Two Directive” or the “Directive”).
Background
The Pillar Two Directive implements at EU level the OECD GLoBE Rules on Pillar Two, which were released on 20 December 2021. The Directive provides for adjustments compared to the OECD Model Rules to ensure compatibility with EU law, notably in that it also applies to purely national groups.
Under the Pillar Two Directive, multinational and national groups with an annual revenue of at least EUR 750 million, per the consolidated financial statements of the ultimate parent company, should effectively be liable to a 15% tax in each jurisdiction on the net profits realized by the constituent entities established in that jurisdiction. The level of taxation is assessed on a harmonized taxable basis (i.e., “Net Qualifying Income” in the Directive and “Net GloBE Income” in the OECD Model Rules) which is to be compared to the taxes effectively paid (“Adjusted Covered Taxes” in both frameworks). If the effective tax rate for a jurisdiction is below such agreed minimum rate, an additional amount of tax would be payable (“top-up tax”) to reach the minimum agreed level of taxation. Parent entities (the Ultimate Parent Entities or UPE, an Intermediate Parent Entity or a Partially Owned Parent Entity as defined in the Pillar Two Directive) should levy the top-up tax through an Income Inclusion rule (“IIR”). Where such rule cannot be enforced, the Undertaxed Profits Rule (“UTPR” and together with the IIR, the “GLoBE Rules”) would apply at the level of the constituent entities (i.e., any entity part of a multinational or domestic group) entitling the latter to levy the top-up tax. Jurisdictions considered as low tax jurisdictions are entitled to levy the top-up tax before application of the IIR and UTPR if they implement a Qualified Domestic Top-Up Tax (“QDMTT”).
Another component of Pillar Two, as agreed by the OECD / BEPS Inclusive Framework, is the Subject to Tax Rule (“STTR”) allowing source countries to levy additional taxes on certain payments regardless of the allocation of taxing rights under an applicable double tax treaty. The STTR will be implemented separately through a multilateral agreement and will apply in priority to the GLoBE Rules.
The Pillar Two Draft Law closely follows the Pillar Two Directive and provides certain additions derived from the administrative guidelines published by the OECD.
Key characteristics of the Pillar Two Draft Law
- The Pillar Two Directive will be transposed through a separate law and will not be included into the Luxembourg income tax law.
- Three new taxes have been introduced: an IIR Tax (impôt relatif à la règle d’inclusion des revenus), a UTPR Tax (impôt relatif à la règle des bénéfices insuffisamment imposés) and a QDMTT (impôt national complémentaire). These taxes are neither creditable nor deductible against other taxes.
- As per the introductory comments to the Draft Law, the Pillar Two Draft Law also takes into consideration the OECD Model Rules, the OECD Commentary on the Model Rules and the OECD administrative guidance issued on 2 February 2023. Items from the latter guidance transposed in the Pillar Two Draft Law notably includes clarifications on entities that are excluded from the scope of application of the rules (“Excluded Entities”) and exclusion of certain debt releases from the GloBE Income. It remains to be clarified whether and how other elements of the February 2023 OECD administrative guidance as well as the administrative guidance issued in July 2023 will be taken into account during the legislative process.
- The Pillar Two Draft Law also includes the transitional CbCR Safe Harbour rules agreed by the OECD Inclusive Framework on BEPS on 15 December 2022. These rules are intended as temporary simplification measures applicable to fiscal years beginning on or before 31 December 2026 but not including the fiscal year that ends after 30 June 2028. The CbCR safe Harbour provides for three alternative tests (a de minimis revenue and income test, a simplified ETR test and a route profits test) based on the data available in the Country-by-Country Reports (“CbCR”) filed by multinational groups. Where one of the tests is met for a jurisdiction, the top-up tax would be deemed as equal to zero for such jurisdiction.
- Entry into force of the new taxes: the IIR Tax and the QDMTT will be applicable to fiscal years starting on or after 31 December 2023. The UTPR will be applicable to fiscal years starting on or after 31 December 2024 unless the UPE of the group in located in an EU Member State having opted for a delayed application of the IIR and UTPR under Article 50 of the Directive, in such case the UTPR would apply as from fiscal years starting on or after 31 December 2023.
Transposal options
- The Draft Law does not provide for the option allowed under Article 50 of the Pillar Two Directive for a delayed application of the IIR and UTPR.
- Luxembourg will introduce a QDMTT allowing Luxembourg constituent entities to levy any top-up tax due, should Luxembourg be considered as a low tax jurisdiction for the purpose of Pillar Two, with respect to a given group.
- The UTPR will be introduced as an additional top-up tax rather than as a denial of deduction against taxable income.
Luxembourg specific commentaries on Covered Taxes
Commentaries to the Draft Law provide that for the purposes of computing the effective tax rate of Luxembourg constituent entities, Covered Taxes would notably include corporate income tax, municipal business tax and net wealth tax.
Per the Directive and the Draft Law, the amount of Covered Taxes is reduced by “any amount of current tax expense that is not expected to be paid within three years after the end of the fiscal year.” Commentaries of the Draft Law provide that the application of the Luxembourg self-assessment procedure (i.e., issuance of a tax assessment based on the filed tax returns subject to a review by the tax authorities within the statute of limitation) would not imply that the taxes are not to be paid within three years. In addition, the commentaries to the Draft Law provide that the filing of a tax return by a taxpayer, except for specific circumstances, is considered as triggering an expectation that the relevant taxes are to be paid within three years.
Key obligations and deadlines
- Registration: Each Luxembourg constituent entity must register with the Luxembourg tax authorities (“LTA”) within 15 months after the end of the relevant fiscal year (18 months for the transition year which is the first year the multinational group or the domestic group falls within the rules). Any change in status must be notified with 15 months after the end of the relevant fiscal year. A EUR 5,000 fine might apply in case the obligations (registration, notification, deregistration) are not met.
- GloBE information return: Each Luxembourg constituent entity must file a GloBE information return. One Luxembourg constituent entity can be designated as the reporting entity. Such obligation would not apply in case the UPE or the designated entity located in another jurisdiction has filed such return in another jurisdiction with which Luxembourg has entered into an eligible agreement allowing for the automatic exchange of such information. The LTA must be notified in such case. The information return must be filed within 15 months after the end of the relevant fiscal year (18 months for the transition year). A fine of up to EUR 250,000 might apply in case of non-filing, incomplete or incorrect filing of the information return and a EUR 5,000 fine applies in cases where the notification obligation is not fulfilled.
- Top-Up Tax return: Luxembourg parent entities liable to IIR Tax and constituent entities liable to the UTPR Tax or QDMTT (for the latter taxes a designated constituent entity can be in charge of the obligations) must file a specific return within 15 months after the end of the relevant fiscal year (18 months for the transition year) and the relevant tax must be paid within one month after the filing of the return (interest for late payment might apply and a draft Grand Ducal Decree has been issued to include these taxes within the scope of interests for late payment applicable to the currently applicable Luxembourg taxes). Luxembourg constituent entities are jointly and severally liable for the payment of the top-up taxes. In case of non-declaration, incomplete or incorrect declaration, the LTA can assess the taxes due under the IIR, UTPR or QDMTT and issue a tax assessment in that respect.
- A draft Grand-Ducal Decree has been issued to clarify that the above-mentioned registration, deregistration, notification and filing processes should take place electronically.
Next steps
The legislative process will now continue, notably, by seeking comments from the State Council and other interested parties which could result in amendments to the initial Draft Law.
Per the Pillar Two Directive, the transposition should take place by 31 December 2023.
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