Pillar 2 rules and Q&A CNC 25/035 – Impact on financial statements

Context

The Q&A CNC 25/035 follows the issuance of Q&A CNC 24/031 and Q&A CNC 24/032 published in 2024, which dealt with the impact of the Pillar 2 law on annual and consolidated accounts for the 2023 financial year. The new Q&A generally applies to financial years preceding the transition year, as well as to financial years beginning from the transition year.

Financial year prior to the transition year

Q&A CNC 25/035 outlines that it is the responsibility of the management bodies to determine when the Pillar 2 law will apply to a company or group. As per Q&A CNC 25/035, the recommendations differ depending on whether the application to fall under the requirements of the Pillar 2 law is probable or certain. 

If the application is probable (for the next financial year), disclosures described below are optional and depend on management willingness, whereas if the application is deemed certain (for the next financial year), the CNC strongly recommends disclosing information in the financial statements. 

Regarding the information to provide, and similar to Q&A CNC 24/031, Q&A CNC 25/035 recommends disclosing information known or that can be reasonably estimated at the closing date, as well as:

• Qualitative information, including how the Luxembourg company or group is expected to be impacted by the rules and the main countries where the Luxembourg company or group could be exposed to taxes arising from the Pillar 2 law.
• Quantitative information, such as an indication of the portion of profits that would likely be subject to taxes arising from Pillar 2, the average effective tax rate applicable to these profits, as well as an indication of how the Pillar 2 law, if it already applied, would have an impact on the overall tax burden.

Q&A CNC 25/035 reminds us that it is not allowed to record deferred tax assets in standalone accounts but confirms the possibility for companies to provide in their annual accounts any additional information in the notes to the accounts that may contribute to the objective of a true and fair view as required by the Luxembourg accounting law⁸ (article 26(3)). Deferred tax assets can be disclosed in the notes to the annual accounts, allowing better traceability per company.

With respect to the consolidated financial statements, Luxembourg market practice allows the recognition of deferred tax assets in the consolidated accounts, if it is highly probable that the deferred tax asset will be recovered in the foreseeable future. However, it is also acknowledged that the recognition of deferred tax assets in the consolidated accounts is only an option. Groups have also the possibility to disclose their deferred tax assets only in the notes to the financial accounts, based on the same argument as for the standalone annual accounts (i.e., to provide a true and fair view).

Q&A CNC 25/035 further addresses the methods to compute deferred tax assets. It mentions that deferred tax assets must be computed based on the gross amount of the tax attribute or temporary difference, applying the income tax rates known and applicable in Luxembourg. For example, for deferred tax assets at the end of the 2024 financial year, a rate of 23.87% will be applied for companies whose registered office is in Luxembourg City. 

For standalone accounts or for groups having opted for the disclosure in their financial statements as mentioned above, Q&A CNC 25/035 mentions that it is not necessary to perform an analysis on the recoverability of deferred tax assets in relation to tax attributes. Nevertheless, for groups choosing to recognise their deferred tax assets in the consolidated accounts, while the calculation methods will be based on the same principles, it will be necessary to conduct a recoverability analysis of the deferred tax assets (and subject to the condition that the recoverability is highly probable).

Financial years from the transition year 

As from the transition year, companies within the scope of the Pillar 2 law are no longer in the stage of assessing the potential impact but rather should determine and account for the actual impact of the rules. Q&A CNC 25/035 mentions that it is not necessary to provide a qualitative and quantitative assessment on the exposure to the rules (such analysis being recommended in the year prior to the transition year).

Based on the general accounting principles, a distinction is made whether additional taxes due for the Pillar 2 rules are (a) non-material/non-existent or (b) are of a significant nature.

(a) If they are non-material or non-existent, no additional information is required in the notes to the annual or consolidated accounts. If, however, the administrative or management bodies consider this information relevant for users of the accounts in line with the principle of true and fair view, additional information can be provided in the notes to the accounts.

(b) If they are significant, additional information must be provided in the notes. The nature and extent of this information are determined by the administrative or management bodies to achieve the objective of a true and fair view. For illustrative purposes, Q&A CNC 25/035 mentions that the information to be presented in the notes to the accounts could consist of a separate presentation of the tax charge due arising from the Pillar 2 rules.

Additionally, to maintain traceability of information and provide a true and fair view, the Q&A CNC 25/035 recommends that companies which have previously disclosed deferred tax assets in the notes to their annual or consolidated accounts should track information related to deferred taxes, specifically to reflect the utilisation or increase of tax attributes.

For consolidated accounts, Luxembourg groups have the option to recognise deferred tax assets when it is highly probable that these will be recovered in the foreseeable future. For those groups, once the option to recognise deferred tax assets has been exercised, the group is then - in application of the principle of consistency of methods – committed to continue to recognise said deferred tax assets in its consolidated accounts and to present in the notes to the accounts a monitoring of those deferred taxes.

How to book and present the tax expenses and tax debts arising from the Pillar 2 law?

In absence of specific accounts in the Standard Chart of Accounts for the allocation of tax expenses and liabilities arising from the Pillar 2 law, Q&A CNC 25/035 recommends using the account 688 "Other taxes” or alternatively to create internal subdivisions of this account to identify them separately, such as:

• the Qualified Domestic Minimum Top-up Tax (QDMTT): account 6881;
• the tax resulting from the Income Inclusion Rule (IIR): account 6882;
• the tax resulting from the Undertaxed Profits Rule (UTPR): account 6883.

Following the mapping provided by the Grand-ducal Regulation dated 12 September 2019⁹, the account 688 is presented in the caption 17. “Other taxes not shown under items 1 to 16” of the profit and loss account. However, this caption is not appropriate, and Q&A CNC 25/035 recommends reclassifying this expense in the caption 15. “Tax on profit or loss” of the profit and loss account. 

Regarding the counterpart of these expenses, Q&A CNC 25/035 suggests using the account 46128 “ACD – Other debts” or its subdivisions, such as 461281 for QDMTT, 461282 for IIR and 461283 for UTPR. These accounts are mapped under the line “8. Other creditors, a) tax authorities” in the balance sheet.