Transitional Country-by-Country Reporting (“CbCR”) Safe Harbour
The bill would introduce the provisions of the December guidance into the Transitional CbCR safe harbour (Article 59), which on the one hand includes some clarifications on how various aspects of the transitional CbCR safe harbour should apply, and on the other hand provides the new anti-avoidance provisions:
- Clarifications: the bill would introduce, amongst other items, (i) additional information on qualified financial statements (including for example in which cases the financial statements of a constituent entity may not be considered as “qualified” for the purpose of the CbCR safe harbour), (ii) a reference to the fact that no adjustments are permitted unless explicitly required by the Pillar Two Law, and (iii) the requirements for MNE groups and large-scale domestic groups (referred together as “Groups” or individually as a “Group””) that are not subject to CbCR filing. In addition, the bill also clarifies that for the Routine Profits test, the transitional rates may be used when calculating the substance-based income exclusion.
- Anti-avoidance provisions: there would be a new paragraph to require certain adjustments to the “Profit/loss before income tax” or to the income tax expense in case the Group has entered into a hybrid arbitrage arrangement as per the December guidance. A hybrid arbitrage arrangement may take the form of a deduction/non-inclusion arrangement, a duplicate loss arrangement, or a duplicate tax recognition arrangement. This new provision would only be applicable for transactions entered into after 18 December 2023 (as opposed to 15 December 2022, the alternative date proposed by the OECD).
Qualified domestic minimum top up tax (“QDMTT”) and QDMTT safe harbour
The bill introduces several amendments to the QDMTT and QDMTT safe harbour:
- A new paragraph (9) is added in Article 44 to provide that the QDMTT would be deemed to be zero in the following situations:
- In the first five years of the initial phase of the international activity of the MNE group, starting 31 December 2023 or once the MNE group enters in scope for the first time, and
- In the first five years starting from the first day of the fiscal year a large-scale domestic group falls within the scope of the Pillar Two Law.
This new provision is an extension of the general exclusion from IIR and UTPR for MNE groups that are in their initial phase of international activity and for large-scale domestic groups as provided under Article 55 of the Pillar Two Law.
- Another new paragraph (8) in Article 44 includes some guidance on the currency to be used as per the July guidance.
- An amendment to paragraph (5) in Article 44 is proposed with respect to the foreign taxes that are generally allocated to a Luxembourg constituent entity, but excluded for QDMTT purposes. The amendment aligns the exclusion to those foreign taxes that are listed by the OECD in the July guidance. Currently the relevant provision in the Pillar Two Law is stricter than the July guidance.
- The current text of the Pillar Two Law provides for two QDMTT safe harbours under Article 14, the QDMTT safe harbour as provided by the EU Directive (Article 11(2) of the EU Directive) and the QDMTT safe harbour as proposed by the OECD in the July guidance. The bill proposes to remove the QDMTT safe harbour as per the EU Directive, so that Luxembourg would only apply the QDMTT safe harbour as provided by the OECD in the July guidance.
Entities owned by an Excluded Entity
Under the current Pillar Two Law, an entity may be considered as an Excluded Entity (meaning that the Pillar Two rules would not be applicable to the entity) if (i) it meets a certain activity test and (ii) it is owned by another Excluded Entity (such as an investment fund that is the Ultimate Parent Entity (“UPE”) or a Real Estate Investment Vehicle (“REIV”) that is the UPE). It should be noted that such an exclusion was extended in the OECD Commentary (section 1.5.2. paragraph 45) to an entity that is a member of a Group but that is held by an investment fund or a REIV that is not the UPE.
As for other topics, the bill proposes to implement such an extension into Article 2 of the Pillar Two Law. This amendment would be especially welcome for Luxembourg investment funds, which typically benefit from a consolidation exemption (such that they are not the UPE of a Group).
EUR 750m revenue threshold
There would be a new paragraph (6) in Article 2 aiming at providing additional clarifications on the types of revenue considered for the EUR 750m revenue threshold, which is in line with the December guidance.
The definition of “Revenue” shall include the inflow of economic benefits arising from delivering or producing goods, rendering services, or other activities that constitute the Group’s ordinary activities, net gains from investments (whether realized or unrealized), and income or gains separately presented as extraordinary or non-recurring items.
Mismatches in fiscal year-ends
Another new clarification would be included in Article 3 for constituent entities that have a fiscal year-end not matching with the fiscal year-end of the consolidated accounts.
The clarification incorporates the December guidance and provides that the fiscal year for Pillar Two purposes is generally the accounting period used in the consolidated accounts of the UPE.
In the case that some constituent entities maintain their financial accounts with a year-end diverging from the Group consolidated financial statements, the Pillar Two computations should be based on the same method to address the discrepancy in the fiscal years that is used by the Group in the consolidated financial statements.
