In brief
On 20 December 2023, the Luxembourg Parliament transposed in domestic law the EU Directive 2022/2523 (also known as the Pillar Two minimum taxation rules) which aim to ensure a 15% minimum tax rate for multinational groups (MNE) and large-scale domestic groups in the European Union with a consolidated revenue of at least EUR 750 million (hereafter the Pillar 2 Law).
This law may have implications for the notes preparation to the annual and consolidated accounts established under LUX GAAP for financial years beginning no later than 30 December 2023.
To clarify the impact on the annual accounts, the Luxembourg Accounting Board1 (CNC) issued recently two Q&As, the Q&A 24/31 – Impact of the Pillar 2 Law on the notes to the accounts of stand-alone and consolidated accounts under LuxGAAP or LuxGAAP-FV and the Q&A 24/32 - Pillar 2 Law and option to disclose deferred tax assets and liabilities in the notes to the 2023 annual accounts.
In detail
Pillar 2 Law applicable as from 2023
On 20 December 20232, the Luxembourg Parliament enacted the Pillar 2 Law. The Pillar 2 Law entered into force as from fiscal years starting on or after 31 December 2023 and may have an impact on the future years results and disclosures of Luxembourg entities. Consequently, the question arising is whether such law has already an impact on the preparation of the annual accounts (both stand-alone and consolidated accounts) for all financial / fiscal years beginning no later than 30 December, 2023, e.g such as for annual accounts closing on 31 December 2023.
In this respect, the CNC recently issued 2 recommendations, the Q&A 24/31 on the impact of the Pillar 2 Law on the notes to the annual and consolidated accounts under LuxGAAP or LuxGAAP-FV and the Q&A 24/32 on the Pillar 2 Law and the option to disclose deferred tax assets and liabilities in the notes to the 2023 annual accounts.
Q&A 24/31 – Impact of the Pillar 2 Law on the notes to the annual and consolidated accounts under LuxGAAP or LuxGAAP-FV
The CNC is of the opinion that Luxembourg companies and groups subject to the Pillar 2 Law should give proper information in their notes to the accounts in accordance with Commercial Law3 and Accounting Law4 which state respectively that consolidated accounts and annual accounts must give a true and fair view of assets, liabilities, financial situation and of the results of the company and/or group, and in case the application of legal provisions is not sufficient to give such true and fair view, additional information must be provided in the notes to the (consolidated) annual accounts.
The company and/or Luxembourg group should provide in the notes to its accounts the known or reasonably estimated information that would help users of the annual accounts and/or consolidated accounts to understand the company’s and/or group’s exposure to income tax resulting from the Pillar 2 Law. To meet this objective, the company and/or Luxembourg group should provide qualitative and quantitative information on their exposure to income tax resulting from the Pillar 2 Law at the closing date. This information could be presented in the form of an indicative range.
In case the information is not known or cannot be reasonably estimated, the company and/or Luxembourg group should indicate this fact and provide information on the progress of their exposure assessment.
To this extent, the CNC refers to norm IAS 12 as amended on 23 May 20235 to take into account the Pillar 2 impact. According to the CNC, the following information should be given:
- Qualitative information, in particular on how the Luxembourg company and/or group would be affected by the Pillar 2 Law and the main countries where the Luxembourg company and/or group could be exposed to income tax arising from the Pillar 2 Law;
- Quantitative information, such as:
- An indication of the fraction of their profits that might be subject to income taxes arising from the Pillar 2 Law and the average effective tax rate applicable to these profits;
- An indication of how the Pillar 2 Law, if it had been in force in 2023, would have changed their overall effective tax rate.
Q&A 24/32 - Pillar 2 Law and option to disclose deferred tax assets and liabilities in the notes to the 2023 annual accounts
In separate Q&A - which is to be read in conjunction with the previous one – the CNC acknowledges that according to article 53(2) of the Pillar 2 Law: “the MNE group or a large-scale domestic group shall take into account all the deferred tax assets and deferred tax liabilities reflected or disclosed in the financial accounts of all the constituent entities in a jurisdiction (…)”.
The CNC confirms the possibility for Luxembourg entities forming part of a group of MNEs to present their deferred tax assets and liabilities in the notes to their annual accounts for the last financial year preceding the first year of application of the Pillar 2 Law. Such mention in the notes to the annual accounts of a company forming part of an MNE group has the advantage of offering better traceability (by entity and by jurisdiction) compared to presentation only in the consolidated accounts of the parent company.
Such disclosure is considered in accordance with article 26(4) of the Accounting Law which states that it is the responsibility of any company to provide information in the notes to its annual accounts to meet the objective of providing a true and fair view in view of the Pillar 2 Law.
According to this CNC Q&A, an entity can disclose in the notes to its accounts for the year 2023 the deferred tax assets and liabilities calculated on the basis of the gross amount of the tax attributes/temporary differences. They also state that it is not necessary for the company to carry out an analysis of the recoverability of deferred tax assets in relation to the tax losses carried forward, the company can base its calculation on the gross amount of said tax losses carried forward.
Take away
The Pillar 2 rules are not clear whether deferred taxes should be recorded/disclosed in the group or standalone accounts to be grandfathered for Pillar 2 purposes. According to the Pillar 2 Law and OECD guidance, a recording/disclosure in the consolidated accounts (on an aggregated basis) should be sufficient, however:
(i) It is currently uncertain whether all countries would follow that position; and
(ii) There could be a risk that tax attributes/deductible temporary differences may not be taken into account for Pillar 2 purposes if the consolidated accounts do not make any disclosure.
Consequently, it is highly recommended to disclose in the notes to the accounts the deferred tax assets related to these tax attributes and deductible temporary differences in the Luxembourg standalone accounts to reduce risks of discussions on the validity of these tax attributes or deductible temporary differences for Pillar 2 purposes.
For any tax related question, we invite you to consult our Pillar Two micro site and have a look at our PwC's Pillar Two Training Programme a customised training course to upskill your teams, adapted to the needs of your organisation and business industry.
Date of application
These recommendations are applicable for all the accounting years starting at the latest on 30 December 2023. If your entity is following the civil year, it will be subject to these new requirements for the financial year 1st January 2023 to 31 December 2023.
Notes:
1: Commission des Normes Comptables.
2: Law of 22 December 2023 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the European Union.
3: Article 1712-1, paragraph 4 of the Law of 10 August 1915 on commercial companies (the Commercial Company Law or CCL).
4: Article 26(3) and article 26(4) of the Law of 19 December 2002 on the register of commerce and companies and the accounting and annual accounts of companies (the Accounting Law or AL).
5: Adopted by the European Commission on 8 November 2023.
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