Luxembourg Parliament adopts law implementing the EU Minimum Tax Directive

Executive summary

On 20 December 2020, the Luxembourg Parliament voted and adopted the Draft Law2 as recently amended3 by the Luxembourg government.

The Draft Law aims at implementing the Pillar Two Global Minimum Tax rules as laid down in the Minimum Tax Directive. The Minimum Tax Directive introduces minimum effective taxation of 15% for large multinational enterprise (MNE) groups and large-scale domestic groups with annual revenues of at least €750m in at least two of the last four financial years. It sets forth a system consisting of two interlocked rules — the primary Income Inclusion Rule (IIR) and the secondary Undertaxed Payment Rule (UTPR), together referred to as the Global anti-Base Erosion (GloBE) rules. In addition to introducing the IIR and the UTPR, the Draft Law makes use of the option provided in the Minimum Tax Directive to introduce a Qualified Domestic Minimum Top-up Tax (QDMTT), allowing Luxembourg to collect top-up tax on the excess profit of a low-taxed Luxembourg entity that is part of an in-scope group.

Through the various amendments tabled by the government, the Draft Law now also incorporates guidance and options that were agreed at the level of the Organisation for Economic Co-operation and Development (OECD) /G20 Inclusive Framework through Agreed Administrative Guidance on the GloBE Model rules (Pillar Two) in February 20234 and July 2023.5

After the State Council issued its opinion on the Draft Law, the Luxembourg Finance Commission made certain linguistic adaptations that were formally requested by the State Council. These amendments, however, do not materially change the provisions of the Draft Law.

It is expected that the final law will be published in the Official Gazette (Mémorial A) before year-end and will be effective as from 31 December 2023. The IIR applies for financial years starting on or after 31 December 2023 and the UTPR applies for financial years starting on or after 31 December 2024. If an MNE's Ultimate Parent Entity is in a jurisdiction that, pursuant to the Minimum Tax Directive, delays implementation of the IIR, the UTPR will apply for financial years starting on or after 31 December 2023. The QDMTT will become effective for financial years starting on or after 31 December 2023.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Tax Advisory Services Sàrl, Luxembourg City

• Bart Van Droogenbroek, Luxembourg Tax Leader
• Christian Schlesser, International Tax and Transaction Services Leader
• Dietmar Klos, Real Estate Sector Leader
• Elmar Schwickerath, Global Compliance and Reporting Leader
• Laurent Capolaghi, Accounting, Compliance and Reporting Leader
• Marie Sophie Hélier, Banking & Insurance Tax Leader
• Nicolas Gillet, Transfer Pricing Leader
• Olivier Bertrand, Private Equity Tax Leader
• Patricia Gudino Jonas, Infrastructure Tax Leader
• Renaud Labye, Asset Services Tax Leader
• Rosheen Dries, EMEIA Wealth & Asset Management Tax Leader
• Vincent Rémy, Credit Funds Leader

Ernst & Young LLP (United States), Luxembourg Tax Desk, Chicago

• Alexandre J. Pouchard
• Andres Ramirez-Gaston

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.