The Pillar 2 law voted!

On 20 December 2023, Bill of Law No 8292, which transposes the so-called Pillar 2 Directive into Luxembourg national law, was voted by the Luxembourg Parliament (the “Law”).

The Law largely reproduces the content of the Pillar 2 Directive[1], which itself largely mirrors the OECD’s Pillar Two Model Rules (also referred to as the “Global Anti-Base Erosion” or “GloBE” Rules).

As a reminder, the Pillar 2 rules aim at ensuring a global minimum level of taxation of 15% for multinational enterprise (MNE) groups and large-scale domestic groups in the EU. In particular, the Law targets constituent entities located in Luxembourg that are part of a group – a multinational enterprise (MNE) group or a large-scale domestic group – with an annual revenue of EUR 750 million or more (including the revenue of the excluded entities) based on consolidated financial statements of its ultimate parent entity (“UPE”) in at least two of the four previous consecutive fiscal years.

Not all group entities are subject to the rules. Excluded entities are not subject to the IIR, UTPR or QDMTT (see below) but are however taken into account for purposes of determining the 750 million threshold. The Law took over the exclusions provided under the Pillar 2 Directive which includes inter alia investment funds, pension funds and real estate investment funds (under conditions) as well as entities that are owned directly or indirectly at least 95% by excluded entities (under conditions).

In a nutshell, the Law is structured around three rules, namely the Qualified Domestic Minimum Top-up Tax (“QDMTT”), the Income Inclusion Rule (“IIR”) and the Undertaxed Payments Rule (“UTPR”). These rules apply where the Effective Tax Rate (“ETR”) in a jurisdiction in which the group operates falls below the minimum tax rate of 15%. In such a case, the group has to pay a top-up tax to make the ETR up to the minimum rate of 15%.

The Parliament requested the exemption from the second vote to the State Council which we expect should be granted so that the Law will be applicable to fiscal years beginning on or after 31 December

2023 for the IIR and the QDMTT and generally to fiscal years beginning on or after 31 December 2024 with respect to the UTPR.

More information on this topic will follow.

[1] Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union.