Luxembourg Tax Alert 2024-01

Luxembourg has implemented the Pillar Two rules into domestic law on 22 December 2023 (“Pillar Two law”). The new Pillar Two law has introduced three new taxes to ensure that large multinational groups and large-scale domestic groups (“group”) with consolidated revenues of EUR 750 million or more (for at least 2 of the past 4 years) are taxed at a minimum rate of 15% on a newly defined broad tax basis. Although, the new rules only started to apply for fiscal years starting on or after 31 December 2023, there are already important disclosure requirements that need to be addressed in 2023 year-end financial statements. 

Article 53(2) of the Pillar Two law provides that for purposes of calculating the effective tax rate, a group shall take into account all deferred tax assets and deferred tax liabilities (“DTAs/DTLs”) reflected or disclosed in the financial accounts of all of the constituent entities in a jurisdiction for the transition year. The transition year is the first year the Pillar Two rules apply for the group. Article 53 (2) of the Pillar Two law therefore refers to all tax attributes that relate to the period before Pillar Two became applicable.

In this respect, two important publications have been made that provide helpful clarifications that are relevant for Luxembourg entities.

• On 25 March 2024, the Luxembourg tax authorities have published an FAQ on Pillar Two (PDF, 0.2MB) on their website, providing clarifications with respect to Article 53 of the Pillar Two law. In summary, the FAQ provides the following:
• Confirmation that all DTAs/DTLs that relate to the transition year, can be made in the annual accounts of the constituent entity and/or the consolidated accounts. If the DTAs/DTLs are disclosed in the consolidated accounts, they would need to be reliably and consistently traceable to the Luxembourg constituent entity. The Luxembourg tax authorities, in this respect, also make a reference to the Q&A 24/032 (PDF, 0.3MB) of the Accounting Standard Commission (Commission des Normes Comptables (CNC)) which clarifies certain aspects of the disclosure from an accounting perspective (see below for more information).
• Clarification that the term “constatés dans les états financiers (in English: reflected)” refers to the DTAs/DTLs that are booked in the accounts. The term “tels qu’ils ressortent des états financiers” (in English: disclosed)“ refers to the DTAs/DTLs that are included in the notes to the annual accounts.
• DTAs/DTLs can be reflected (i.e., booked) in the annual accounts or disclosed in the notes to the annual accounts. The FAQ confirms that for purposes of article 53 (2) of the Pillar Two Law, a sole disclosure in the notes would be sufficient.
• DTAs/DTLs should be reflected or disclosed in the accounts for the year preceding the transition year (i.e., 31 December 2023, for taxpayers in scope that have a calendar financial year from 1 January 2024 to 31 December 2024).

On 7 March 2024, the CNC provided a Q&A covering the possibility to present DTAs/DTLs in the notes of Lux GAAP accounts.

In its Q&A, the CNC confirms that Luxembourg entities that are part of a Pillar Two group can present all DTAs/DTLs relating to the transition year (i.e., pre-Pillar Two deferred taxes), in the notes of the financial statements for the year preceding the year of entering into scope. This disclosure is in accordance with article 26 (4) of the Luxembourg Accounting Law which requires companies to provide in the notes of the financial statements any additional information which allows them to meet the objective of providing a true and fair view with respect to the Pillar Two law.

The CNC further provides that the disclosure is to be based on the gross amount of the tax attribute or the timing differences multiplied by the corporate income tax rate (i.e., 24.94% for companies located in Luxembourg-city). The CNC further illustrates this with the example of tax losses carried forward. A company should apply the corporate income tax rate to its estimated total amount of tax losses carried forward, which corresponds to the tax losses carried forward as per the last corporate income tax return, and the tax losses carried forward that have not been declared yet. It should be noted that it is not necessary for the company to conduct an analysis of the recoverability of DTAs in connection with tax losses carried forward. On the other hand, if a tax loss carried forward is challenged or expected to be challenged, then the contested amount should be disclosed in the notes to the annual financial statements, provided it is significant in relation to the objective of providing a true and fair view.

We highly recommend all groups in scope to check and review their tax attributes so that all DTAs/DTLs can be reflected or disclosed in the 2023 financial statements. This is an essential step to ensure that these tax attributes are available for purposes of calculating the effective tax rate in line with the Pillar Two law. 

Please do not hesitate to contact your KPMG tax adviser or auditor in charge with any questions you may have.

For more information on the Luxembourg Pillar Two law,  please refer to our previous newsletters on the initial bill (KPMG Tax Alert 2023-11) and the amended bill (KPMG Tax Alert 2023-18).

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 our brand-new KPMG’s implementation tracker.