Luxembourg’s progressive approach to international tax reform is evident with the unveiling of the bill of law on 4 August 2023, aimed at transposing the EU directive on minimum taxation, known as Pillar Two, into domestic law by 31 December 2023. The directive is a significant step towards ensuring a minimum corporate tax of 15% for Multinational Enterprises (MNE) groups that meet a consolidated revenue threshold of EUR 750 million. This article delves into the key aspects of the bill, examining its alignment with OECD guidelines, the introduction of the Qualified Domestic Minimum Tax (QDMTT), and the implementation of transitional safe harbours.
Context and Foundation
The foundation of this transformative legislation rests on the OECD’s Pillar Two project, striving to establish a level playing field for MNE groups and their tax responsibilities. Over the past 18 months, substantial strides have been made:
- In December 2021, the OECD unveiled the GloBE Rules encompassing the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), aiming to foster equitable taxation practices globally.
- The EU member states officially ratified the EU directive in December 2022, marking a harmonized implementation of Pillar Two’s model rules within the European Union.
- Additional guidance, such as the “Guidance on Safe Harbours and Penalty Relief” released in December 2022, provided a transitional “CbCR Safe Harbour” mechanism based on country-by-country reporting data.
- The OECD’s Administrative Guidance for the Pillar Two model rules received approval in February 2023, setting the stage for precise implementation.
- In July 2023, the OECD released supplemental reports on the Subject-to-Tax Rule (STTR), further Administrative Guidance, and detailed information on the GloBE Information Return (GIR).
Bill’s Fundamental Tenets
The Luxembourg Bill intricately captures the essence of the Directive while introducing distinctive elements. Below are pivotal aspects of the bill:
- Independent Legal Framework: The Bill establishes a dedicated legal framework for the GloBE Rules, distinct from the standard income tax law. This ensures a comprehensive approach to implementing Pillar Two’s principles.
- Qualified Domestic Minimum Tax (QDMTT): The introduction of QDMTT serves as a linchpin for effective implementation. It aligns with GloBE Top-up Tax computations and is computed based on the GloBE tax base and covered taxes. The QDMTT’s initiation coincides with the Income Inclusion Rule’s enforcement on 31 December 2023, with the Undertaxed Profits Rule following suit on 31 December 2024.
- Safe Harbours and Reporting: Transitional safe harbours, grounded in country-by-country reporting data, offer a balanced transition for businesses. The bill acknowledges corporate income tax, municipal business tax, and net wealth tax as covered taxes.
- Non-Creditable and Non-Deductible: The Bill reaffirms that the Income Inclusion Rule, Undertaxed Profits Rule, and QDMTT cannot be credited against or deducted from Luxembourg’s corporate and municipal taxes.
Challenges and Unresolved Matters
While the Bill demonstrates alignment with the overarching directive, certain nuances require attention:
- Incomplete Integration: Some aspects of OECD supplementary guidance have not been fully incorporated. Notably, Luxembourg’s Bill does not reflect the optional “Equity gain or loss inclusion election,” posing potential disparities.
- Pending Implementation of STTR: The Bill defers addressing the Subject-to-Tax Rule (STTR), which awaits Luxembourg’s adoption of an OECD model convention, necessitating a separate law.
- Unresolved Clarifications: The bill omits clarifications from the OECD’s Administrative Guidance, potentially creating uncertainties in the application of deemed consolidation and interactions with the GILTI regime.
- Mitigation of Double Taxation: The Bill does not integrate OECD guidance aimed at mitigating double taxation arising from transfers of assets deemed for GloBE purposes.
Luxembourg’s pivotal step in implementing the Pillar Two directive through the bill of law signifies its commitment to international tax reform. The intricacies within the Bill, its synchronization with OECD guidelines, and the introduction of the Qualified Domestic Minimum Tax paint a portrait of a proactive and pragmatic approach. As the Bill undergoes meticulous review, tax professionals and investors must appreciate its implications. The legislative journey, marked by parliamentary examination and expert opinions, culminates in a transformative legal framework for multinational taxation.