Vote of the law amending Pillar Two minimum taxation rules in Luxembourg

The law of 22 December 2023 introducing the Pillar 2 minimum taxation rules (the Pillar Two Law) enacted the Income Inclusion Rule (IIR) and the Qualified Domestic Minimum Top-up Tax (QDMTT) which are to be effective for fiscal years starting on or after 31 December 2023, whereas the Undertaxed Profits Rule (UTPR) would generally become effective for fiscal years starting on or after 31 December 2024.

The main provisions of the draft law amending the Pillar Two Law as detailed in our previous PwC Flash newsletters remain unchanged. 

There were however additional amendments brought by the Government after the publication of the draft law to introduce some of the OECD's administrative guidance published in June 2024 as detailed below. 

Securitisation vehicles

The June 2024 OECD Guidance allows jurisdictions that introduced a QDMTT to take account of the specific situation of securitisation vehicles in the context of the Pillar Two rules.

While securitisation vehicles rarely form part of a Pillar 2 group, we welcome the fact that Luxembourg opted to allow securitisation vehicles within the scope of Pillar Two to have their potential additional tax allocated to other constituent entities that are located in Luxembourg. This option enables Luxembourg to retain the benefit of the QDMTT safe harbour. This means that other jurisdictions with Pillar 2 rules are in principle not expected to apply IIR or UTPR provisions on Luxembourg entities that are subject to Luxembourg QDMTT rules.  

Securitisation vehicles are also excluded from the application of the joint and several liability mechanism. However, if there are no other constituent entities of the Multinational Enterprise (MNE) group in Luxembourg, the amount of top-up tax remains allocated to the securitisation vehicles.

Flow-through entities

New provisions for determining whether an intermediate transparent entity is considered fiscally transparent or a reverse hybrid entity based on local tax rules are included in the Pillar Two Law in line with the June 2024 OECD Guidance. The rules clarify how situations where flow-through entities holding other flow-through entities should be treated for Pillar 2 purposes.

Specific rules for the allocation of taxes to hybrid and reverse hybrid entities are also included. The allocation is based on the fiscal treatment of the entity and its owners, ensuring that taxes are appropriately attributed according to the entity's classification at the level of its direct or indirect owners.

Grand-Ducal Regulation

Amendments have been made to allow the issuance of Grand-Ducal regulations to clarify the application of certain rules, such as the deferred tax liability recapture rule, the determination of deferred tax adjustment in situations where there are divergences between the GloBE and accounting value of assets or liabilities and the allocation of cross-border current and deferred taxes in specific situations.

These amendments will enter into force for Fiscal Years (FYs) ending on or after 31 December 2023. The Luxembourg Government included several arguments to defend the retroactivity of the rules in the commentary to the law.