Pillar Two law — The positive vote of the Parliament marks a key milestone

At a glance

On 20 December 2023, the Luxembourg parliament adopted the law implementing EU Council Directive 2022/2523 of 14 December 2022, which establishes a global minimum taxation level (15%) for multinational enterprise (MNE) groups and large-scale domestic groups within the EU (“the Pillar Two law”). The law will be applicable for fiscal years commencing on or after 31 December 2023.

As highlighted by the Ministry of Finance immediately following the vote, the adoption of the Pillar Two law demonstrates Luxembourg’s ongoing dedication to adhering to internationally- and European-agreed tax standards. It also reaffirms the government’s commitment to enhancing the competitiveness of the Luxembourg economy and aligning corporate tax rates more closely with the OECD country average in the medium term.

A closer look

The income inclusion rule (IIR) and the qualified domestic minimum top-up tax (QDMTT) will come into effect for fiscal years starting on or after 31 December 2023 whereas the undertaxed profits rules (UTPR) should become effective for fiscal years commencing on or after 31 December 2024.

The provisions of the Pillar Two law encompass the content of the draft law issued in August 2023 and incorporate amendments proposed by the Luxembourg government in November 2023 to align with certain administrative guidelines issued by the OECD in February and July 2023. Textual adjustments mandated by the Council of State also have been integrated.

Nevertheless, considering the acknowledgment, during the legislative process, of the ongoing technical work at the OECD level aimed at clarifying model rules, potential amendments to the current Pillar Two law may be expected in the coming weeks.

Furthermore, certain tax measures currently in force, such as the investment tax credit, will have an impact on the adjusted amount of taxes used to calculate the effective tax rate for groups of companies within the scope of the legislation. The government commits to carry out the necessary analyses as quickly as possible and to propose, where appropriate, the necessary legal adaptations aimed at ensuring that these tax incentives continue to be fully effective.

Takeaway

Any group falling within the scope of the Pillar Two rules should assess the potential impacts these new measures might have on their operations and start preparing to face additional operational and compliance obligations. This process begins with incorporating the relevant disclosures into both standalone and consolidated financial statements for the year 2023.

Should you have any questions or need assistance with respect to the application of the Pillar Two rules, please contact our tax professionals.