Financial years preceding the Transition Year

As from when?

The CNC clarifies that it is up to each Luxembourg company or group to determine when the Pillar Two rules are likely to apply to them. If it is concluded (possibly by way of internal projections and business plans) that the consolidated turnover threshold of EUR 750M has been or will be for the first time exceeded by a MNE or large domestic group, this should be an indicator that the Pillar Two rules might soon apply, and relevant information may be included in the accounts.

What information to include? 

Before the Transition Year, the Luxembourg companies (part of MNE groups) or large domestic groups in scope of Pillar Two may disclose in the notes to the accounts, information known or reasonably estimated about their exposure to taxes arising from the Pillar Two rules. This might be qualitative data (e.g., as the potential tax exposure arising from the Pillar Two rules and identification of the jurisdictions affected) and/or quantitative data (e.g., by including an estimate of the Pillar Two liability). However, if exact or determinable figures are not available, the Luxembourg companies or groups should mention this in the notes and report the status of its internal exposure assessment.

How can DTAs be disclosed?

Luxembourg companies in scope of Pillar Two may disclose their deferred tax assets (DTAs) in the notes to their annual accounts. The CNC suggests that doing so in the standalone accounts rather than just in consolidated accounts would ensure greater transparency and traceability of these DTAs (but there is no obligation).

If a group elects to report the DTAs in the consolidated accounts prepared under LUX GAAP or LUX GAAP-FV, it can book them if their recovery is highly likely, or alternatively disclose them in the notes. If booked in the accounts, the DTAs should be computed based on the the gross amount of the tax attributes or temporary differences by using the applicable income tax rates: for example, DTAs accounted for in the 2024 financial year should be valued using an income tax rate of 23.87% if the company is resident in Luxembourg City. This rate may vary over time and depending on the municipality where the in-scope Luxembourg company is located.

In-scope Luxembourg companies do not need to assess recoverability of DTAs concerning tax attributes (computation is based on gross amount) if the DTA is just disclosed in the notes. 

Financial years as from the Transition Year

What information to include?

As from the Transition Year, in-scope companies must disclose the effective Pillar Two exposure in their consolidated accounts. As from that moment, qualitative and quantitative information used by the companies to internally assess the potential impact of Pillar Two is no longer sufficient (as it was before the Transition Year).

If the Pillar Two exposure is inexistent or not material, no specific Pillar Two information disclosure is required, except if the management considers it relevant for users of the financial accounts. However, if the tax impact of Pillar Two is significant, further information should be disclosed in the notes. The content of this information to be disclosed in not legally defined, so the management should be responsible for determining the nature and the extent of the information to be provided (e.g., CNC suggests that a separate presentation of the tax liabilities arising from Pillar Two should be included in the notes).

Should DTAs and DTLs related to taxes arising from the Pillar Two rules be disclosed from Pillar Two?

Following IAS 12 principles, the CNC confirms that there is no obligation for in-scope Luxembourg companies to recognise or disclose DTAs and deferred tax liabilities (DTLs) arising from income tax under Pillar Two rules (QDMTT, IIR and UTPR) but there is an obligation for them to disclose that they have applied this exception.  

However, Luxembourg companies that opt for disclosing DTAs and DTLs in their notes should closely and consistently monitor such information over time. The CNC considers it would be a good practice to track the use and accumulation of the tax attributes (e.g., losses carried forward) to ensure greater transparency and traceability, contributing to a true and fair view of the financial statements of those companies.

Which accounts within the Standardised Chart of Accounts are recommended for use?

The Standardised Chart of Accounts (SCA) lacks specific accounts for recording tax charges and liabilities related to Pillar Two, notably QDMTT, IIR and UTPR.

For that reason, the CNC recommends recording the tax charges under account 688 of the SCA (“Other taxes”) with possible subdivisions. The amounts included in these accounts should ultimately be reported under Item 15 (“Income tax”) in the profit and loss account.

Concerning Pillar Two relevant tax liabilities, the CNC recommends that they are recorded under account 46128 “Other Liabilities, with possible subdivisions. These amounts should then be included in the “Tax debts” account in the balance sheet.

Next steps

While the guidance published by the CNC is not binding, they are of authoritative nature. Hence, we would expect auditors to follow the Q&As published by the CNC. It is expected that the CNC will continue to expand its guidance and that more Q&As will be issued in the coming months.

We will keep you informed. Should you have any question on the impact of these CNC Q&A or more broadly of the Pillar Two rules, please reach out to an author of this flash or to your trusted Loyens & Loeff contact.