On 4 August 2023, the Luxembourg government released the text of the draft law (the “Draft Law”) transposing the Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise (“MNE”) groups and large-scale domestic groups in the Union (the “Directive”). This Directive implements the Global Anti-Base Erosion (“GloBE”) rules, also called “Pillar Two”, agreed upon by the OECD/G20 Inclusive Framework on BEPS in the Statement to Address the Tax Challenges Arising from the Digitalisation of the Economy and the Detailed Implementation Plan, on 8 October 2021.
To ensure that large internationally operating businesses pay a minimum level of tax regardless of where they are headquartered or the jurisdictions they operate in, Pillar Two introduces a global minimum corporate tax rate set at 15% through a top-up tax using an effective tax rate test calculated on a jurisdictional basis and using a common definition of covered taxes and a tax base determined by reference to financial accounting income (with agreed adjustments consistent with the tax policy objectives of Pillar Two and mechanisms to address timing differences). The minimum tax would apply to MNE or large-scale domestic groups with a combined annual turnover above EUR 750 million. For more details about the GloBE Rules at OECD and European Union levels, read one of our previous articles.
In order to implement this minimum effective taxation in Luxembourg, the Draft Law provides for the introduction of three new taxes in Luxembourg law.
The first two are based on the application of two interdependent rules, namely the income inclusion rule ("IIR”) and the undertaxed payments rule ("UTPR"). Under the IIR, the minimum tax is paid at the level of the parent entity in proportion to its ownership interests in entities that have low-taxed income. The UTPR is designed to operate as a backstop to the IIR.
A qualified domestic top-up tax (“QDMTT”) will also be implemented, allowing Luxembourg to tax Luxembourgish low-taxed entities and prevent the application of the IIR and UTPR rules by other jurisdictions with respect to these entities.
In principle, the IIR and QDMTT are intended to come into effect for tax years beginning on or after 31 December 2023, while the UTPR will come into effect for tax years beginning on or after 31 December 2024.
These complex measures about to be implemented in Luxembourg are largely in line with the Directive. However, additional guidance and clarification, as well as additional complementary rules (in line with OECD guidance), are still required to address important Luxembourg-specific points.
Please see below a few selected issues.