Background

The OECD’s Pillar Two project aims to ensure that Multinational Enterprises (MNE) groups meeting the EUR 750 million consolidated revenue threshold are always subject to a minimum corporate taxation of 15%. Much progress has been made in the past two years: 

  • On 20 December 2021, the OECD released its model rules for the income inclusion rule (IIR) and undertaxed profits rule (UTPR), also referred to together as the GloBE Rules (for more information, see our Tax Flash). 
  • On 15 December 2022, the EU member states formally approved the EU directive setting out a harmonised implementation of the Pillar Two model rules in the EU, also including large-scale domestic groups in scope (for more information, check our Tax Flash ).
  • On 20 December 2022, the OECD released amongst others its “Guidance on Safe Harbours and Penalty Relief”, which includes a transitional “CbCR Safe Harbour” for the initial three years (in most cases). Read our Tax Flash for more details.
  • On 1 February 2023, the OECD approved its first Administrative Guidance for the Pillar Two model rules.
  • On 17 July 2023, the OECD released additional reports regarding the Subject-to-Tax Rule (STTR) (see our Tax Flash), further Administrative Guidance (see our Tax Flash), and additional details concerning the GloBE Information Return (GIR) (see our Tax Flash).
  • On 18 December 2023, the OECD released another set of administrative guidance (see our Tax Flash).

Key takeaways

The final law is largely in line with the draft bill presented in August 2023, and amended in November 2023. The income inclusion rule and the qualified domestic minimum top-up tax will become effective for fiscal years starting on or after 31 December 2023, whereas the undertaxed profits rule would become effective for fiscal years starting on or after 31 December 2024.

Luxembourg implements the rules on time. As such, groups that are in scope of Pillar Two and have a presence in Luxembourg (whether through a separate entity or a permanent establishment) might have compliance obligations related to Pillar Two as from tax year 2024 (for taxpayers that have a book year aligned with the calendar year).

The Luxembourg legislator has also tried to implement most of the OECD guidance released up to summer 2023, and it has also confirmed in parliamentary documents the intention to (i) treat existing and additional OECD guidance as relevant source of interpretation of the rules and (ii) implement (if appropriate) additional OECD guidance that may require a change of law. In particular, some additional clarifications for the fund industry and the implementation of the December OECD guidance could lead to amendments to be voted in the course of 2024.

A qualified domestic minimum top-up tax applicable to tax years starting on or after 31 December 2023 may require groups to pay top-up tax on profits of low-taxed Luxembourg constituent entities of the group in Luxembourg rather than the ultimate parent entity’s jurisdiction. The qualified domestic minimum top-up tax will be determined based on Lux GAAP or IFRS (depending on the group’s situation) rather than on the basis of the financial accounting standard used by the ultimate parent entity of the group for consolidation purposes.

This law does not address the implementation of the subject-to-tax rule through ratification of a multilateral convention released by the OECD.

We will keep you informed of further developments. In case of questions on the impact of Pillar Two on your group or the implementation of Pillar Two rules in Luxembourg, please contact a member of the team listed below or your trusted Loyens & Loeff adviser.