On 4 August 2023, Luxembourg published draft law No.8292 (the Bill), to transpose Council Directive (EU) 2022/2523 of 14 December 2022, which addresses the global minimum taxation for multinational corporate groups and substantial national entities within the European Union.
This directive, referred to as the EU Pillar Two Directive or the Global anti-Base Erosion Directive (GloBE Directive), is a pivotal element in establishing a universal minimum tax rate, set at a minimum of 15 per cent. It is grounded on the OECD global anti-base erosion rules (so-called GloBE or Pillar Two rules), introduced on 20 December 2021, with necessary modifications to align with EU legal requirements.
Under the GloBE Directive, a minimum global tax rate is established to control competition based on the discrepancy of corporate tax rates. The new rules will apply to multinational enterprises (MNEs) and large national groups that operates in the EU, with a consolidated revenue of €750,000,000 or more and with an effective tax rate, in the relevant country, below 15 per cent. Additionally, the GloBe Directive permits each EU Member State to impose additional domestic top-up taxes.
On that basis, the Bill introduces new Luxembourg taxes which would however be separated from the Luxembourg income tax law, namely:
- The Income Inclusion Rule (IIR)
- The Under-Taxed Profits Rule (UTPR)
- The Qualified Domestic Minimum Tax (QDMTT)
Considering that some of these new rules will apply as of 1 January 2024 (1 January 2025 for QDMTT), the Bill also introduces transitional safe harbors rules based on country-by-country reporting data with the aim to provide taxpayers with relief for MNEs operating in low-risks jurisdictions.
Importantly, the Bill clarifies that the IIR, the UTPR, and QDMTT cannot be credited or deducted against Luxembourg corporate and municipal taxes.
The explanation accompanying the Bill mentions that the Luxembourg covered taxes for Pillar Two will include corporate income tax, municipal business tax and net wealth tax. Luxembourg withholding tax on dividend distribution should also be covered however no explanation is given in respect of the subscription tax, we should expect that discussion during the legislative process is likely to cover this point. On the other hand, indirect taxes will not be considered as covered taxes.
- Pillar Two implementation: The Bill will broadly enter into force on 1 January 2024, with the coming into force of some provisions being deferred until 2025, meaning that relevant MNE groups will soon be impacted and will need to take appropriate measures to comply with these new rules.
- Global tax threshold: Pillar Two introduces a minimum global tax rate of 15 per cent (and incidentally rules to have harmonised taxable basis with the EU) to combat competition based on corporate profit tax rates.
- Applicability: These rules apply to entities within multinational corporate groups or large national groups (ie MNEs) with consolidated revenue equal to or exceeding €750,000,000.
- IIR and UTPR: To achieve the 15 pe cent minimum taxation threshold, the Bill introduces two new Luxembourg taxes namely the Income Inclusion Rule (IIR) and the Under-Taxed Profits Rule (UTPR). The IIR and UTPR rules involve calculations based on effective tax rates for each jurisdiction where group entities are located. These taxes would be levied in the country where the ultimate parent entity is located. However, reporting obligations will also have to be met by each of the Luxembourg constituent entity of the same MNE group (or certain Luxembourg group.)
- QDMTT: Luxembourg chose to also introduce through the Bill a qualified national additional tax which would allow Luxembourg to levy a national top-up tax.
The legislative process is on the way and the Bill is expected to be approved by Parliament before the end of the year to comply with the EU deadline.
Stay informed about this important milestone in international taxation as Luxembourg takes the lead in implementing global minimum taxation rules, ensuring equal opportunity for all.
The Ministry of Finance’s communication can be found here (only in French).
Council Directive (EU) 2022/2523 of 14 December 2022 can be accessed here.