The OECD’s Pillar Two project aims to ensure that Multinational Enterprises (MNE) groups meeting the EUR 750 million consolidated revenue threshold are always subject to a minimum corporate taxation of 15% in each jurisdiction where they have a taxable presence.
On 4 August 2023, Luxembourg published a bill of law (the Luxembourg Bill) to transpose the EU directive implementing the GloBE Rules (the Directive) into domestic law as per 31 December 2023 (see our prior Tax Flash). The Luxembourg Bill is now being amended to reflect additional guidelines and solutions released by the OECD after the adoption of the directive in December 2021 not yet taken into account in the Luxembourg Bill.
In line with a recent statement from the European Commission, supporting the OECD Administrative Guidance, the amendments to the Luxembourg Bill reinforce the expectation that rules are to be interpreted and applied in accordance with such Guidance.
Any term not defined herein shall have the same meaning as defined by the EU Directive or OECD Administrative Guidance.
- The Bill amends and clarifies further the Qualified Domestic Minimum Tax (QDMTT) provisions and the QDMTT safe harbour, in light of the OECD guidance of July 2023.
- Further adjustments to determine the GloBE income or loss are now foreseen, including (i) an election regarding the treatment of hedging results, (ii) the Equity Investment Inclusion Election (EIIE), and (iii) the treatment of payments under hybrid financial instruments.
- The Adjusted Covered Taxes article of the Luxembourg Bill is also amended to mitigate the exposure to top-up taxation in a year in which there is some low-taxed income but also overall a net GloBE loss in a jurisdiction.
- Additional safe-harbours, as well as the guidance on the treatment of tax levied under the US Global Intangible Low-Taxed Income (GILTI) regime, are introduced.
- An Insurance Investment Entity within the meaning of the Bill should not be considered as an Intermediate Parent Entity or as a Partially-Owned Parent Entity (POPE).
- Not all items from the OECD Administrative Guidance were captured by the amendments. For instance, the guidance related to asset carrying value and deferred assets and liabilities on a transfer of assets during transition period (article 47 (4) of the Directive, respectively 9.1.3 of the OECD GloBE Model Rules) is not yet included.
- The amendments fully introduce the QDMTT safe harbour: if a foreign jurisdiction introduces a QDMTT meeting the standards set in the July guidance, the group may elect to apply the safe harbour such that no top-up tax would be due under the GloBE Rules. However, the election would not apply to entities (i) whose effective tax rate is computed separately and (ii) which are subject to additional restrictions regarding the application of the domestic minimum top-up tax of that jurisdiction.
- For the purposes of QDMTT, if all Luxembourg constituent entities have the same financial year as the one used for purposes of the consolidated accounts, the GloBE profit or loss shall be determined in accordance with Luxembourg GAAP provided that all the constituent entities of the MNE group located in Luxembourg use such financial accounting standard. If some entities use IFRS and some use Lux GAAP, the QDMTT computations are to be made based on IFRS financial statements. The consolidation accounting standard would apply if at least one entity has a different financial year.
- Investment Entities and Insurance Investment Entities would be excluded from the scope of QDMTT, as permitted by OECD guidance.
Adjustments to determine the GloBE income or loss
- Implementing rules (règlement grand-ducal) will be issued to specify the conditions under which tax credits which are negotiable and transferable are to be considered as income for the calculation of the GloBE income or loss of a constituent entity. There is no such tax credit in Luxembourg at the moment. However, this change may be relevant to determine the effective tax rate in foreign jurisdictions (such as the United States) where a Luxembourg entity would be the ultimate parent entity of the group.
- Another amendment introduces the OECD guidance on the qualification for tax purposes of a financial instrument issued by a constituent entity and held by another constituent entity of the same MNE or large-scale domestic Group. If the qualification diverges under the relevant accounting standard(s), the qualification followed should be the one adopted by the issuing entity, i.e., the “debtor”.
- The EIIE would be introduced to reduce mismatches between the domestic participation exemption regime and the GloBE participation exemption rules. Under such election, a constituent entity’s GloBE Income or Loss could include otherwise exempt equity gains or losses to the extent they are included in the domestic tax base of that constituent entity. Covered taxes on such equity gains or losses would also be taken into account accordingly.
- Next to the EIIE, there would be an option to also include in the GloBE base any dividend on portfolio shareholdings (i.e., interests of less than 10%) and not just those received on portfolio shareholdings held for less than 12 months.
- Another amendment proposes to introduce the OECD guidance on certain hedging results related to exempt participations. The hedging result would be treated as an excluded equity gain or loss subject to certain conditions.
Adjusted Covered Taxes
- A key criticism towards the initial Model Rules (article 4.1.5) was that they could cause top-up tax to be levied on constituent entities of a jurisdiction where there is a net GloBE loss in the financial year, if expenses/losses are used to offset low-taxed income in that year. The amendments propose to implement the OECD additional guidance on this topic, whereby the levying of such top-up tax may be deferred to subsequent years where there would be a net GloBE income.
Transitional UTPR Safe Harbour
- The amendments introduce a transitional UTPR Safe Harbour, pursuant to which the Top-up Tax for low-taxed entities in the UPE jurisdiction would be deemed to be nil, provided that the UPE jurisdiction has a nominal corporate income tax rate of 20%. The UTPR Safe Harbour applies for years commencing on or before the end of 2025 and ending before 31 December 2026.
Permanent Safe Harbour
- The Luxembourg Bill already planned to introduce the transitional Country-by-Country safe harbour. An amendment would in addition introduce permanent safe harbours, once agreed at the level of the OECD.
Taking into account tax levied under GILTI
- The transitional solution to allocate GILTI amongst non-U.S. constituent entities would be introduced. Given the implementation of the QDMTT in the Luxembourg Bill, the GILTI allocation to Luxembourg subsidiaries of a US entity subject to GILTI depends on whether the QDMTT will be creditable against GILTI for US tax purposes. If so, in principle no GILTI would be allocated to a Luxembourg subsidiary, and all GILTI tax would be allocated to Low-Taxed Constituent Entities in other countries with an ETR below 15%.
Substance-based Income Exclusion
- This amendment would give MNE groups the flexibility to apply the substance-based income exclusion only to part of the expenditure on eligible tangible fixed assets and payroll costs.
The parliamentary examination of the Bill should continue in the upcoming weeks, as the new members of Parliament have taken office and a new Luxembourg government will be in place shortly. In parallel, certain bodies such as the Chamber of Commerce and the State Council will also have to issue their (non-binding) opinions on the Luxembourg Bill and on the amendments. The official intention remains for the Bill being adopted prior to year-end.
We will keep you informed about further developments. Should you have any question on the impact of these amendments or more broadly of the GloBE Rules, please reach out to an author of this flash or to your trusted Loyens & Loeff contact.