Luxembourg Tax Alert 2023-18

On 13 November 2023, an amended bill implementing the EU Minimum Tax Directive (Council Directive (EU) 2022/2523 of 14 December 2022) was filed with the Luxembourg Parliament. The amended bill incorporates several clarifications and technical aspects from the OECD administrative guidance released in February 2023 (“February guidance”) and the OECD administrative guidance released in July 2023 (“July guidance”) of the Pillar Two rules, which were not yet included in the initial bill released on 4 August 2023 (“initial bill”). 

The main highlights of the amended bill are summarized hereafter:

1. Use of Local Accounting Standard

The amended bill introduces changes with respect to the accounting standard to be used for calculation of the qualified domestic minimum top-up tax (“QDMTT”). 

The initial bill followed the general Pillar Two rules, whereby in most cases the group is required to calculate the QDMTT based on the financial accounting standard used for the preparation of the consolidated financial statements of the ultimate parent entity (“UPE”). The amended bill now introduces a new paragraph, which would require a QDMTT to be calculated using a local accounting standard, being either the Luxembourg generally accepted accounting principles (LUX GAAP) or International Financial Reporting Standard (IFRS). For the local standard to apply, all constituent entities would need to prepare their financial statements in one of the local accounting standards and the financial statements would need to be based on the same fiscal year. The following tie-breaker rule determines whether Lux GAAP or IFRS should be used:

• Lux GAAP, if all Luxembourg constituent entities prepare their financial statements in Lux GAAP; or
• IFRS, if at least one Luxembourg constituent entity prepares the annual accounts in IFRS, but all others use Lux GAAP.

In case the above-mentioned conditions are not fulfilled (e.g. where one Luxembourg constituent entity uses a financial accounting standard that is not a local accounting standard or the financial statements are not based on the same year-end), then the general rule would apply.

These specific conditions have been designed in accordance with the July guidance on the QDMTT safe harbour, to ensure that the Luxembourg QDMTT would qualify for the QDMTT safe harbour in other jurisdictions. 

2. Exclusion of Investment Entities and Insurance Investment Entities from the QDMTT

The amended bill also provides that investment entities and insurance investment entities will not be subject to the QDMTT, in line with the July guidance. This is to preserve their tax neutrality towards any minority-interest holders.

The amended bill incorporates three new safe harbours: 

1. QDMTT Safe Harbour 

The amended bill introduces the QDMTT safe harbour as foreseen in the July guidance. Under these rules, no top-up tax calculation would be due in Luxembourg for constituent entities of the same group located in another jurisdiction that has a QDMTT meeting the conditions of the QDMTT safe harbour. The conditions include (i) the QDMTT accounting standard, the (ii) QDMTT consistency standard, and (iii) the QDMTT administration standard. The safe harbour would be applied via an annual election. The amended bill specifies that the election is to be made on a jurisdictional basis for each subgroup or standalone constituent entities that are subject to separate QDMTT calculation (such as joint venture groups).  

This amendment is a welcome change because it aligns the QDMTT safe harbour with the July guidance. It should be noted though that the initial bill also included the QDMTT safe harbour in line with the EU Minimum Tax Directive, which was designed and adopted in December 2022, before the July guidance was released. This safe harbour has not been removed in the amended bill and consequently, the bill now includes both QDMTT safe harbours.  

It is unclear whether this was intentional. In our opinion, a change of law would be required to remove the initial safe harbour, as the current OECD guidance does not provide for the possibility of having two QDMTT safe harbours. 

2. Permanent Safe Harbour 

The amended bill introduces the permanent safe harbour whose detailed computation is currently being developed by the OECD. Under the permanent safe harbour, the Luxembourg top-up tax would be deemed to be zero if one of three tests is fulfilled. 

3. UTPR Safe Harbour 

The amended bill also introduces the UTPR safe harbour in line with the July guidance. This may be beneficial for MNE groups with a UPE located in a jurisdiction that has not implemented the Pillar Two rules or a QDMTT, but which has a statutory corporate tax rate of 20% or more. If these conditions are fulfilled and the UTPR safe harbour is applied, the top-up tax would be deemed to be zero for this jurisdiction.   

However, it should be noted that the UTPR safe harbour is only available temporarily and may be applied for fiscal years beginning on or before 31 December 2025 and ending before 31 December 2026. Also, it is important to note that the UTPR safe harbour may not be applied simultaneously with the transitional safe harbour (for more information on the transitional safe harbour, please refer to our newsletter). This means that if the MNE group applies the UTPR safe harbour for the UPE, it cannot make use of the transitional safe harbour for that jurisdiction for any future years. Groups should carefully analyse which safe harbour might be most beneficial for them. 

The amended bill also includes several other elections and amendments. A few highlights are listed below: 

1. Introduction of the Excess Negative Tax Carry-forward election: The Pillar Two rules contain a provision which could lead to a top-up tax being due in a year where the jurisdiction has a loss under GloBE (e.g. due to a permanent benefit). As it has been considered as detrimental, the February guidance provides an adjustment to this provision by providing an election to carry forward the excess negative tax expense rather than imposing it. This would then lead to a reduction of the ETR in a future year and potentially a top-up tax. 

2. Equity investment inclusion: The amended bill also incorporates the Equity Investment Inclusion Election as per the February guidance. This is a 5-year election that allows the inclusion in GloBE income or loss of certain equity gains or losses that would otherwise be ignored for GloBE. The goal is to create a symmetry between the local rules and GloBE.  

3. Substance-Based Income Exclusion: The amended bill also introduces new provisions of the July guidance which deal with open issues with respect to the substance-based income exclusion, such as how to deal with employees working in multiple jurisdictions. The amendment also introduces the possibility of a grand-ducal regulation that would provide more specifics on the substance-based income exclusion and the treatment of certain tangible assets such as airplanes, ships and satellites, for which more guidance is still expected from the OECD. 

4. Insurance investment entities: The initial bill excludes investment entities from the definition of “Intermediary Parent Entity” and “Partially-Owned Parent Entity”. A new amendment has been included to also exclude insurance investment entities, to similarly preserve the tax neutrality towards any minority-interest holders.  

Although some open questions remain, the changes provided by the amended bill are generally seen as very welcome because the incorporation of the different aspects of the OECD guidance into the draft law not only provides taxpayers more flexibility and simplicity, but also legal certainty when applying these provisions. However, what remains unclear is to what extent other aspects clarified by the OECD that are not yet reflected are to be considered. This includes, for example, the guidance on transitional rules with respect to transfer of assets, or the additional guidance on the deemed consolidation. While the initial bill provides that the work of the OECD can be used as a source of illustration or interpretation, uncertainty nevertheless remains whether a change of law would be required for any of the aspects clarified by the OECD, or whether taxpayers can rely on this general statement. 

In this respect, it should also be noted that all EU member states, on 9 November 2023, approved an important EU Council Statement, which among others, endorses the view that the February guidance and the July guidance are considered compatible with the EU Minimum Tax Directive and that all EU Member States should follow this guidance when transposing the EU Minimum Tax Directive into national law in order to avoid divergences and inconsistencies in interpretation. Please refer to this newsletter from the KPMG’s EU Tax Centre for more information. This endorsement should certainly provide additional comfort to Luxembourg constituent entities, but in some circumstances the direct incorporation of provisions into domestic law would still be preferable to provide more legal certainty. 

The draft law still needs to undergo the usual legislative process to become law, which amongst others includes the comments of the State Council. Whether it may still be expected that the law will be voted before the end of the year to comply with the transposition deadline of the EU Minimum Tax Directive, considering that the IIR and QDMTT are supposed to enter into effect for fiscal years starting on or after 31 December 2023, remains an open question at this stage.

Although Pillar Two will only be applicable for fiscal years starting on or after 31 December 2023, certain actions are already required in the very short term, including disclosures impacting the 2023 financial statements. Please refer to this website for an overview of what would be required for the 2023 financial statements. On top of this, discussion and analysis should be initiated with respect to the pre-Pillar Two tax attributes (e.g. tax losses carried forward etc.) and their appropriate disclosures in the 2023 financial statements to ensure their recognition for Pillar Two purposes.

KPMG Tax Professionals will follow the developments of this bill and remain at your disposal for any question you might have.

For more information on the other provisions of the Luxembourg bill, including the entry into effect and an overview of the impact for investment funds, please refer to our previous newsletter.

For an overview of KPMG Pillar Two technology solution, you can visit this website and contact us if you would like to get a demo of the technology.

For a state of play of the implementation of Pillar Two around the world, please refer to KPMG’s implementation tracker (PDF, 1.5MB).