CNC Q&A: Pillar 2 impact on LUX GAAP financial statements disclosures

On 15 February and 7 March 2024, the Luxembourg Accounting Standards Commission (Commission des normes comptables - “CNC”) published two Q&A on the impact of the Pillar 2 Law on the company’s notes to the annual and consolidated accounts.

Q&A 24/031

As a reminder, the law dated 22 December 2023 implemented into Luxembourg law the Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation of 15% for multinational enterprise groups and large-scale domestic groups in the EU (the “Pillar 2 Law”).

In this context, the International Accounting Standard (IAS) 12 Income Taxes has been recently amended by the International Accounting Standards Board (IASB) in order to take into account the implementation of Pillar 2 rules. The amendments cover, inter alia, the disclosure requirements of the affected entities.

Considering that some Luxembourg undertakings prepare their annual accounts and/or consolidated accounts according to IFRS, including the IAS 12, the CNC recommends for 2023 accounts that Luxembourg undertakings preparing their annual accounts and/or consolidated accounts according to LUX GAAP or LUX GAAP-JV disclose the same information in the notes to the accounts so as to help users of such accounts to understand the exposure of the Luxembourg undertaking and/or group to income tax arising from the Pillar 2 Law. This would ensure a level playing field for Luxembourg companies, irrespective of the accounting framework used (LUX GAAP, LUX GAAP-JV or IFRS-EU).

This is aligned with the principle set out in articles 26, paragraph 4 LRCS¹ and 1712-1, paragraph 4 LSC², which provide that when the application of legal provisions is not sufficient to give a a true and fair view, additional information must be provided in the notes to the accounts. Accordingly, Luxembourg companies and/or group should provide in the notes to the accounts the information known or capable of being reasonably be estimated which would assist users of the annual accounts and/or consolidated accounts to understand the exposure of the Luxembourg companies and/or group to income tax arising from the Pillar 2 Law. This information would not have to reflect all the specific provisions of the Pillar 2 Law but they could be presented in the form of an indicative range. In the case the information would not be known or could not reasonably be estimated, Luxembourg companies and/or the group should indicate this fact and provide information on the progress of the evaluation of their exposure.

This recommendation is useful especially for some transactions or events that are recognised under IFRS but not under LuxGAAP. This is the case for example, of deferred tax assets (DTA) on used tax losses which must be considered for the determination of the total deferred tax adjustment amount under Pillar 2 Law (and ultimately for ETR calculation purposes). In this case, notes to the accounts will help taking into account the DTA to determine the exposure to income tax arising from the Pillar 2 Law.

Q&A 24/032

This Q&A is the sequel to Q&A CNC 24/031 and applies to constituent entities that fall within the scope of the Pillar 2 Law right upon its entry into force.

For the background, Article 53, paragraph 2 of Pillar 2 Law provides that the multinational enterprise group (MNE) or the large-scale domestic group “takes into account all deferred tax assets and deferred taxes liabilities recognised in the financial statements, or as they are disclosed in the financial accounts, of all the constituent entities located in a jurisdiction (…)”.

In this respect, the CNC recalls the accounting principle embodied in Article 26, paragraph 3 LRCS³ according to which the annual accounts shall give a true and fair view of the undertaking’s assets, liabilities, financial position and results.

Accordingly, the CNC recommends Luxembourg undertakings preparing their annual accounts and/or consolidated accounts according to LUX GAAP or LUX GAAP-JV and falling into the scope of the Pillar 2 Law to disclose in the notes to the 2023 accounts, the deferred tax assets and liabilities so as to meet the true and fair view accounting principle.

As for the methods of calculating the amount of deferred tax assets and liabilities to be presented in the notes to the 2023 accounts, the CNC is of the opinion that the deferred tax asset or liability should be calculated on the basis of gross amount of tax attributes or temporary differences by applying – if applicable– the income tax rate applicable in Luxembourg, i.e. a rate of 24.94% for companies whose head office is located in Luxembourg city. It was clarified that it is not necessary for the company to carry out an analysis of the recoverability of deferred tax assets in relation to tax losses carried forward, which may base its calculation on the gross amount of said tax losses carried forward.