How does the Pillar 2 law drive up global minimum tax rates, and what does this mean for your approach to ESG?

Amendments to the Pillar 2 law

On 13 June 2024 an amendment bill was published, which makes changes to the Luxembourg Pillar 2 law with effect as from 31 December 2023 (retroactively). The amendment bill mainly aims to integrate the clarifications and additional technical provisions resulting from the OECD administrative guidance approved in 2023, including amongst other things, the following items:

• Revenue concept of Pillar 2 (reference to OECD December 2023 administrative guidance);
• Substance based carve out and operational leasing aspects (reference to OECD July 2023 administrative guidance);
• Clarification on the eligibility of mutual insurance companies for the tax transparency election in case of interest held in investment entities (i.e., OECD art. 7.5, as clarified in the OECD Guidance of February 2023);
• Rules on different functional currencies used by Luxembourg companies applying Qualified Domestic Top-up Tax (QDMTT): elect to use EUR or currency used for group currency (election valid for 5 years). If QDMTT is computed under consolidation GAAP, then the consolidation currency should be used;
• QDMTT does not apply for expanding Multinational Enterprises (MNEs) for the first 5 years of entering the first time within the scope of the law;
• Inclusion of the transitional rule allowing the recognition of intragroup transfers at fair market value or with a Pillar 2 Deferred Tax Asset (DTA) for taxes paid (instead of recognising all at book/carrying value under the transitional rule – as included in OECD administrative guidance of February 2023); and
• Inclusion of additional CbCR transitional safe harbour guidance.

For more details on the transposition of the Pillar 2 Directive into Luxembourg law and the amendments to the Pillar 2 law, please refer to our previous spring edition¹ and our recent newsletter².

Notes:
^{[1] https://www.pwc.lu/en/banking/keeping-up-with-tax-banking-and-capital-markets/spring-edition-2024/law-global-minimum-tax.html}

^{[2] https://www.pwc.lu/en/newsletter/2024/luxembourg-releases-draft-law-to-amend-the-pillar-2-law.html}

Next steps

Considering the increasing importance of ESG in terms of the organisation’s purpose and reputation, and the relevance of tax transparency and governance in the context of ESG, it will be important to ensure that tax and finance functions are connected to parts of the business leading on broader ESG initiatives. Tax will be critical in shaping the future ESG agenda and ensuring that the business response to new requirements for disclosure and transparency around tax are aligned to the organisation’s overarching purpose and objectives.

PwC Luxembourg and the PwC network firms provide tailor-made solutions to prepare groups for their Pillar 2 obligations, including estimating potential top-up tax impact, reviewing disclosures in annual and consolidated accounts, preparing systems for data gathering and automation, upskilling teams and assisting groups with the Pillar 2 compliance process.