The OECD/G20 Inclusive Framework involves over 145 countries committed to tackling tax avoidance, improving the coherence and transparency of international tax rules and keeping step with increased digitalisation. A particular concern is ‘Base Erosion and Profit Shifting, by which multinationals shift profits to low or no-tax locations where they have little or no economic activity, or use deductable payments to erode tax bases.

By way of response, Inclusive Framework countries agreed to enact a ‘two-pillar solution’, to ensure that a minimum Effective Tax Rate (ETR) of 15% corporation tax would be applied. The EU passed a Directive (2022/2523), widely known as the “EU Minimum Tax Directive” or “Pillar Two Directive.” It applies to both public and privately held multinational or domestic groups with consolidated revenue over €750m in 2 of the 4 preceding years.

On 22 December 2023 the Pillar Two Rules, often referred to as the Pillar Two Law (PTL) was implemented into domestic Luxembourg law. It applies in relation to fiscal years commencing on or after 31 December 2023.

Where a 15% ETR is not achieved in a relevant jurisdiction, the PTL introduces 3 new tax rules to top up the ETR: the Income Inclusion Rule, the Undertaxed Profits Rule and the Qualified Domestic Top-Up Tax. Several complicated mechanisms apply and substantial additional financial data will have to be disclosed to tax departments.

As the PTL looks backwards to preceding financial years, relevant groups must pay particular heed to the disclosure obligations. One example of this obligation is to reflect deferred tax assets and deferred tax liabilities in the accounts.

The Luxembourg accounting standard commission (the ‘Commision des Normes Comptables’) has provided guidance as to how that disclosure may either be booked into a company’s annual accounts or may be included in the notes to those accounts so that companies can comply with their duty to file accounts which provide a ‘true and fair’ view of the company’s finances.

On 12 June 2024, Luxembourg published a bill of law amending the PTL and clarifying the “deemed consolidation” test. This is particularly relevant for investment funds who may own special purpose vehicles and whether they can be excluded entities.

It now more important than ever for large groups and their tax advisors to understand the relevant new taxation principles and consolidated financial statements requirements, the transitional adjustments and the nuances and the interplay of the different accounting standards such as IFRS and Lux GAAP.

Centralis, well versed in Pillar II, work with our Luxembourg based clients to assist with Pillar II regulations. If you would like to know more, please contact your Centralis account manager.