New bill implementing Pillar 2 into Luxembourg law

Luxembourg’s government council approved on 28 July 2023 a new bill aiming to implement into Luxembourg law the so-called “Pillar 2 Directive” (Council Directive (EU) 2022/2523), which aims at ensuring a global minimum level of taxation for multinational enterprise (“MNE”) groups and large-scale domestic groups in the EU with a consolidated annual turnover of at least €750 million. 

As anticipated, pension funds, investment funds or real estate investment vehicles and the said funds’ direct or indirect subsidiaries are excluded from the application of the rules under certain conditions.

As a reminder, Pillar 2 Directive mainly consists of two interlocking rules, i.e. the Income Inclusion Rule (“IIR”) and the Under-Taxed Profits Rule (“UTPR”), collectively referred to as the GloBE rules, by which an additional amount of tax (called a “top-up tax”) will be levied each time that the effective tax rate (“ETR”) of an MNE group’s entities in a given jurisdiction is below 15%. 

• The IIR imposes a top-up tax at the parent entity level corresponding to the difference between the effective tax rate of all consolidated companies or branches in one jurisdiction and the minimum tax rate of 15%. 
• The UTPR will apply after the IIR and serve as a backstop to the IIR (where, for instance, the jurisdiction of the parent entity has not implemented the IIR). It means that a jurisdiction will effectively collect part of the top-up tax due at the level of the entire group if some jurisdictions where group entities are based, tax below the 15% minimum effective tax rate and do not impose any top-up tax. The amount of top-up tax that a Member State will collect from the entities of the group in its territory is determined via a formula based on employees and assets.

As mentioned in the press release of the Luxembourg Government, Luxembourg has chosen to implement the qualified domestic minimum tax that will allow Luxembourg to tax its own low-taxed profits (instead of topping-up that low-taxed profits in foreign jurisdictions under the IIR or the UTPR).

The new rules should enter into force on or after 1 January  2024.

More information will be provided once the new bill is published (which will happen in the coming days according to the Government’s press release).