Understanding the impact of Pillar Two on financial reporting: Key takeaways from CNC Q&A 25/035

This article focuses on the accounting and financial reporting recommendations provided by the Luxembourg Accounting Standards Board's (Commision des Normes Comptables - CNC) Q&A document CNC 25/035, in relation to the OECD’s Pillar Two framework.¹

Key topics include the distinct accounting treatment between fiscal years before the transition year and years starting from the transition period, the recognition of deferred tax assets, disclosure recommendations and practical implications for Luxembourg businesses in terms of financial reporting. 

Notably, this article will not cover specific methods for calculating taxes under the Luxembourg Pillar Two Law, as the CNC has clarified that such calculations are beyond the scope of the issued guidance.

Introduction

On March 24, 2025, the Luxembourg CNC released Q&A document CNC 25/035, which provides essential guidance for companies preparing their annual and consolidated financial statements under Luxembourg Generally Accepted Accounting Principles (Lux GAAP or Lux GAAP-JV) in light of the OECD’s Pillar Two framework. This guidance is significant for multinational enterprises (MNEs) and large national groups, as it clarifies the accounting and financial reporting implications of the global minimum tax rules, both before and after the transition period.

The CNC's Q&A 25/035 builds upon previous guidance issued in 2024 (Q&A 24/031 and Q&A 24/032), which focused on the impact of Pillar Two on financial statements for the period before the transition year. The transition year is defined as the first fiscal year during which an MNE group or large national group falls within the scope of the GloBE Rules for a particular jurisdiction.

Understanding Pillar Two

Pillar Two, as transposed to Luxembourg law, aims to establish a global minimum tax rate for MNEs or large-scale domestic groups, ensuring that they pay a fair share of taxes in the jurisdiction(s) where they operate. The rules apply to groups with consolidated annual revenues of at least EUR 750 million in two of the preceding four fiscal years. 

Key aspects of the CNC’s Pillar Two Q&A 

1. The accounting of Pillar Two taxes can be different before and after the start of the transition period.

• Year before the Transition Year: Companies do not record any Pillar Two-related current or deferred tax liabilities in their financial statements as they are not yet subject to Pillar Two. However, they could evaluate and disclose the potential impact of Pillar Two on their financial position. The CNC emphasizes the importance of presenting a true and fair view of financial statements, allowing companies to disclose potential exposure while strongly recommending reporting if the impact of Pillar Two rules is certain.
• Transition Year and later years: Once Pillar Two taxes become applicable, companies must reflect the actual impact of the Pillar Two rules in their financial statements. The level of detail required in the disclosures will depend on the significance of the impact of Pillar Two as determined by management.

In the context of the application of the Pillar Two law, there are two distinct ways for Luxembourg companies or groups to reflect the impact of Pillar 2 in the accounts. 

In the first case, if a company or group is subject to the Pillar Two Law but finds that the taxes resulting from this legislation are either insignificant or nonexistent, it is, in principle, not necessary to disclose any related information in the notes to its annual or consolidated financial statements. However, should the administrative or management bodies of the company deem the Pillar Two information relevant for the reader and users of the financial statements, additional disclosures must be made. This aligns with the principles of providing a true and fair view as mandated by LUX GAAP.

Conversely, in the second scenario, if the taxes arising from the "Pillar Two" law are deemed significant, the company or group should provide supplementary information in the notes to the financial statements. The nature and extent of this additional information are left to the discretion of the management, who must ensure that the disclosures fulfill the objective of presenting a true and fair view of the financial position of the company or group. For instance, the CNC suggests that this could include a separate presentation of the current income tax expense attributable to the "Pillar Two" legislation, thereby enhancing transparency and compliance with the accounting standards. Please refer to our comments below with respect to “Accounting for Pillar Two Taxes”

2. Disclosure Recommendations (for periods before the transition year) – The CNC outlines specific qualitative and quantitative information that must be disclosed in the financial statements:

• Qualitative Information: Companies should describe how they might be impacted by Pillar Two, including the main countries where they could be exposed to taxes.
• Quantitative Information: This includes details such as the proportion of profits subject to Pillar Two taxes, the effective tax rate on these profits, and an analysis of how Pillar Two would affect the overall tax burden of the Luxembourg company or group.

3. Deferred Tax Assets (DTAs) – The guidance also addresses the treatment of deferred tax assets:

Determining the calculation of DTAs related to tax attributes and temporary differences is crucial for Luxembourg companies, especially those within MNE groups or large national groups. This is particularly important regarding tax attributes earned before the transition year to be able to use them subsequently under Pillar Two rules and how deferred tax movements may impact Pillar Two results once in transition and future years.

In this regard, the CNC advises that DTAs should be disclosed based on the gross value of these tax attributes or temporary differences, utilizing the applicable income tax rates in Luxembourg. For instance, as of the end of the 2024 financial year, companies in Luxembourg City would apply a tax rate of 23.87% for their deferred tax assets, which corresponds to the income tax rate for the 2025 fiscal year. It is important to note that this rate may change over time or if the company redomiciles in another municipality, necessitating adjustments to the deferred tax asset amounts as tax rates change. 

Companies can disclose their DTAs in the appendix of their annual and/or consolidated financial statements, allowing for better monitoring and transparency. In that case companies are not required to perform a recoverability analysis for these tax attributes. Recoverability analysis refers to the assessment of whether it is probable that the DTA will be consumed in the future and involves evaluating the likelihood of generating sufficient taxable income to utilize the DTA before it expires.

If a Luxembourg group chooses to recognize DTAs directly in the financial statements, a recoverability analysis must be performed, ensuring that only assets with a high likelihood of recovery are recognized. It should be noted that the CNC is clear in respect that recognition of DTAs directly in the financial statements is only acceptable in the case of consolidated financial statements.

4. Accounting for Pillar Two Taxes – The CNC recommends using the "Other Taxes" account (688) in the Standard Chart of Accounts to recognize Pillar Two-related tax charges. Specific subdivisions can be created for different tax categories, such as:

• 6881: Qualified Domestic Minimum Top-up Tax (QDMTT)
• 6882: Income Inclusion Rule (IIR)
• 6883: Undertaxed Profits Rule (UTPR)

For tax liabilities, the CNC suggests using the "Other Debts" account (46128) with subdivisions for each tax category.

Practical implications for Luxembourg businesses

Luxembourg companies must review and potentially revise their accounting policies to align with the latest CNC’s guidance. This includes ensuring that Pillar Two tax liabilities are accurately recorded and that disclosures are made according to the applicable guidance for the relevant period (pre-transition vs. transition and later years).

Next steps for businesses

1. Impact Assessment: Companies should conduct a detailed assessment to determine their exposure to Pillar Two, calculate potential top-up tax liabilities, and identify necessary adjustments to financial reporting.

2. Compliance with Disclosure Requirements: Businesses must ensure that their annual accounts reflect the necessary Pillar Two disclosures, including for pre-transition years.

3. Expert Support: Given the complexity of Pillar Two reporting, companies should engage with experienced tax and accounting professionals to review their financial statement presentation and comply with the recommendations provided by the CNC guidance.

Conclusion

The CNC’s Q&A 25/035 provides essential guidance for Luxembourg companies on how to accurately incorporate the effects of this new set of rules into their financial reports. By distinguishing between the reporting requirements for pre-transition years and those for transition and subsequent years, companies can be better prepared for compliance and ensure transparency in their financial statements.