Luxembourg Tax Alert 2024-09

On October 31, 2024, the Luxembourg government published a revised draft law (PDF,  5.5MB), amending the Law of December 22, 2023, on Global Minimum Taxation (“Pillar Two Law”). The revised draft law introduces additional amendments to the initial draft law published on June 12, 2024. The new amendments incorporate additional guidance and clarifications from the OECD Administrative Guidance (PDF,  3.9MB) released on June 17, 2024 (“June 2024 Guidance”).

Please refer to our newsletter (Tax Alert 2024-05) for previous coverage of the initial draft law. For a summary of the June 2024 guidance, please refer to this KPMG report.

In the June 2024 Guidance, the OECD agreed that jurisdictions adopting qualified domestic minimum top-up taxes (“QDMTT”) are not required to impose top-up tax liabilities on entities that are used in securitization transactions. A new definition of a securitization entity (“SE”) has been introduced. The new definition outlines the specific conditions for qualifying as an SE under Pillar Two, such as the requirement to distribute all cash received from its assets to creditors on an annual or more frequent basis (with some exceptions).

Three options are proposed for the jurisdictions to incorporate into their QDMTT legislation:

• The top-up tax liability in respect of an SE would be allocated to other constituent entities located in the jurisdiction that are not SEs; or
• SEs would be excluded from the scope of QDMTT; or
• SEs remain in scope of the QDMTT and will be subject to the top-up tax liability in line with the Pillar Two rules (no adjustment).

In either case, the consistency standard for the purposes of the QDMTT Safe Harbour would be met. However, under the second option, the MNE group would need to apply the switch-off rule with respect to the jurisdiction where the SE is located, meaning that other constituent entities located in the same jurisdiction would not be able to benefit from the QDMTT safe harbour anymore. This would not be the case under the first option, where the top-up tax liability would be allocated to other constituent entities in the same jurisdiction, or alternatively to the SE itself if it cannot be collected otherwise. In this case, the QDMTT safe harbour could still be applied to the other constituent entities in the same jurisdiction.

In the revised draft law, Luxembourg proposes adopting the first option, and as a result, any top-up tax liability arising from Luxembourg securitization vehicles falling within the definition of a SE under the revised draft law would be allocated to other constituent entities in Luxembourg. If no such entities exist, the top-up tax liability would remain with the SE. The commentary to the draft law further clarifies that if multiple constituent entities are present in Luxembourg within the same group, the SE’s top-up tax liability would be allocated in proportion to the total amount of top-up tax liability due by these other constituent entities. Lastly, the revised draft law clarifies that if the top-up tax liability is allocated to another constituent entity in Luxembourg, the SE would no longer be jointly and severally liable for paying the top-up tax.

It should, however, be noted that the number of Luxembourg securitization vehicles impacted by Pillar Two may, in practice, be limited. Only those Luxembourg securitization vehicles that are part of an MNE group for Pillar Two purposes, as determined according to the financial accounting standard used in preparing the ultimate parent entity's consolidated financial statements, would be impacted by this rule. Also, SEs are generally not expected to be subject to significant top-up taxes, as, broadly speaking, they generate, at most, a small profit.

In addition to the guidance for SEs, the June 2024 Guidance also provides clarification on the following five topics:

• Chapter 1: Deferred Tax Liability (“DTL”) recapture
• Chapter 2: Divergences between GloBE and accounting carrying values
• Chapter 3 and Chapter 4: Allocation of Cross-border Current Taxes and Deferred Taxes, and
• Chapter 5: Allocation of profits and taxes in structures including flow-through entities.

All of these elements have been incorporated into the revised draft law. While Chapter 5, which addresses the allocation of profits and taxes in structures involving flow-through entities, has been included directly in the draft legislation, Chapters 1–4 are referenced more briefly. The comments to the draft law indicate that these chapters will be implemented through forthcoming Grand-Ducal Decrees.

The amended text must now go through the usual legislative process again. It is currently still expected that the amended law will be voted by the end of the year. Once adopted, these amendments will apply retroactively to fiscal years beginning on or after 31 December 2023.

KPMG offers a full technology solution that can help you evaluate, monitor, compile, analyze, report and comply with Pillar Two obligations. 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 State of Play.