Luxembourg: Draft law implementing Pillar Two global minimum tax

Three new taxes would be introduced as part of the bill.

Three new taxes would be introduced as part of the bill.

The draft law (Bill of Law 8292) implementing the OECD’s Pillar Two model rules as set out under the EU Minimum Tax Directive (Council Directive (EU) 2022/2523 of 15 December 2022) was filed with the Parliament on 4 August 2023.

The bill would introduce rules to ensure that large multinational groups and large-scale domestic groups with consolidated revenues of €750 million or more (for at least two of the past four years) are taxed at a minimum rate of 15%.

Three new taxes would be introduced as part of the bill:

  • A tax levied based on the income inclusion rule (IIR), which is applied at the level of the ultimate parent entity (UPE), or an intermediate parent entity (IPE) as the case may be, and imposes a top-up tax on constituent entities in jurisdictions that have an effective tax rate (ETR) below 15%
  • A tax levied based on the undertaxed profits rule (UTPR), which acts as a backstop rule in case top-up taxes have not been collected under the IIR and allocates the remaining top-up tax to be collected amongst the jurisdictions having a UTPR in force based on a specific formula
  • A qualified domestic minimum top-up tax (QDMTT) to collect the top-up tax on Luxembourg constituent entities (if the ETR in Luxembourg falls below 15%), which would apply before the IIR and UTPR 

The bill closely follows the text of the EU Minimum Tax Directive. However, the elements included in the bill are limited and some important aspects clarified by the OECD are not yet reflected. For example, the bill does not include guidance on the transitional rules with respect to transfer of assets, on the deemed consolidation or the optional equity gain or loss inclusion election. The bill also does not seem to take into consideration the administrative guidance issued by the OECD in July 2023, including the transitional UTPR safe harbor that would apply in case the UPE is located in a jurisdiction that has a nominal tax rate of at least 20%. It remains to be seen whether any further points will be added during the legislative process to provide more legal certainty to taxpayers.

Next steps

The bill now has to follow the usual legislative process to become law. It may still be subject to changes during this legislative process. Although the timing is unclear at this stage due to the upcoming Parliamentary elections in October, it is expected that the bill will still be enacted this year

Read an August 2023 report prepared by the KPMG member firm in Luxembourg



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