The Draft Law aims at implementing the Pillar Two Global Minimum Tax rules as laid down in Council Directive 2022/25231 (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 €750 million in at least two of the last four fiscal years. It sets forth a system consisting of two interlocked rules — the primary IIR and the secondary 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 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.
The Draft Law also contains temporary safe harbor rules in line with the guidance released by the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on 15 December 2022.
In line with the Minimum Tax Directive, the Draft Law proposes that the IIR and the UTPR become effective for fiscal years starting on or after 31 December 2023 and 31 December 2024 (respectively). If an MNE's Ultimate Parent Entity (UPE) is in a jurisdiction that, pursuant to the Minimum Tax Directive, delays implementation of the IIR, the UTPR will apply for fiscal years starting on or after 31 December 2023. The QDMTT will become effective for fiscal years starting on or after 31 December 2023.
The Draft Law is structured as a separate tax law that is not intended to be embedded in the existing Luxembourg Corporate Income Tax Law. The Direct Tax administration is responsible for the calculation of the tax base, control, determination, collection and recovery of the IIR and UTPR top-up taxes as well as the QDMTT.
Detailed discussion
General provisions of the Draft Law
According to the Draft Law, and in line with the Directive, Luxembourg parent companies of an MNE or large-scale domestic group must pay an IIR top-up tax calculated according to their allocable share in every entity of the group that is low-taxed (including itself), whether the entity is located within or outside the European Union (EU). If the entity has been subject to a qualifying QDMTT in its country of location, the amount of QDMTT paid will reduce the amount of the IIR top-up tax at the level of the Luxembourg UPE. The Draft Law requires certain criteria to be met for a QDMTT to be considered a qualifying QDMTT.
The UTPR acts as a backstop to the IIR. Where the UPE of an in-scope group is located in a low-taxed third-country jurisdiction or in a third-country jurisdiction that does not apply a qualified IIR (i.e., a set of rules equivalent to, and administered consistently with, those in the Minimum Tax Directive or the OECD Model Rules2), the Draft Law foresees that a Luxembourg entity belonging to the same group will be subject to an additional tax equal to the UTPR top-up tax amount allocated to Luxembourg for the fiscal year. The UTPR top-up tax amount allocated to Luxembourg is determined based on the top-up-tax attributed to the group's low-taxed entity/ies that is not collected under an IIR. A pro-rata formula is applied that considers the number of employees and value of tangible assets in Luxembourg compared to the number of employees and value of tangible assets in all UTPR jurisdictions.
As per the Draft Law, a Luxembourg entity of an in-scope group that has an effective ETR of less than 15% in a given fiscal year will be subject to QDMTT, meaning that it will have to pay top-up tax in Luxembourg to achieve the required minimum 15% ETR, rather than the additional tax being collected through IIR at the level of one or more parent entities or through the UTPR at the level of other group entities. The ETR is determined following the same rules that apply for purposes of the IIR. In line with the Directive, the Draft Law foresees a substance-based income exclusion amount, calculated as a percentage mark-up on tangible assets and payroll costs, that is deducted from the amount of qualifying income on which the QDMTT is calculated.
Safe harbor provisions
In line with the Minimum Tax Directive, the Draft Law includes the safe harbor rules contained in the guidance released by the OECD/G20 Inclusive Framework on 15 December 2022.3
Transitional Country-by-Country Reporting (CbCR) safe harbor
For fiscal years beginning on or before 31 December 2026, but ending before 1 July 2028 (i.e., the years 2024 to 2026 if the fiscal year corresponds to the calendar year), a transitional CbCR safe harbor is foreseen that relies on CbCR data as the basis for calculating an MNE's revenue and income on a jurisdictional basis.
To qualify for the transitional CbCR safe harbor, one of the three tests must be met for a given jurisdiction:
· De minimis test — the MNE group declares total revenue of less than €10 million and qualifying income before tax of less than €1 million
· Simplified ETR test — the MNE's ETR is equal to or greater than 15% for fiscal years starting in 2023 or 2024, 16% for fiscal years starting in 2025, and 17% for fiscal years starting in 2026
· Routine profits test — qualifying income before tax is equal to or less than the substance-based income exclusion amount
If one of the three tests is met, the top-up tax is set at zero for a period covering fiscal years beginning on or before 21 December 2016 but not including a fiscal year that ends after 30 June 2026. If the MNE group does not file an application for a fiscal year during the transitional period or does not meet the test in a fiscal year in a jurisdiction, the Transitional CbCR safe harbors will not be available for any subsequent fiscal years.
Permanent safe harbor
The Draft Law also introduces a permanent QDMTT safe harbor rule that permanently reduces the top-up tax for a specific jurisdiction to zero, provided the jurisdiction has levied a qualifying QDMTT based either on the UPE's authorized financial accounting standard or on International Financial Reporting Standards.
Initial phase of exclusion
In line with the Minimum Tax Directive, the Draft Law provides for an exclusion for up to five years for MNE groups during their initial phase of international activity. According to this provision, MNE groups will be exempt from minimum tax during this period, if (i) they have constituent entities in no more than six jurisdictions and (ii) the net book value does not exceed €50 million for the tangible assets of all the MNE group's constituent entities located in all jurisdictions, other than the reference jurisdiction.
Filing and reporting
Any Luxembourg-based constituent entity must register with and provide comprehensive information to the Direct Tax Authorities at the latest 15 months after the last day of the reporting fiscal year (or at the latest 18 months after the last day of a transition year (i.e., the reporting fiscal year during which an MNE or domestic group first falls within the scope of the Draft Law or a Luxembourg constituent entity becomes part of an in-scope group). The information must be updated within determined deadlines. The Draft Law also imposes an obligation to deregister if the group is no longer in-scope or the entity no longer belongs to the group. Noncompliance triggers a fine of €5,000.
In principle, each Luxembourg-based constituent entity must file a top-up tax information return based on a standard model with the Luxembourg Direct Tax Authorities no later than 15 months after the last day of the reporting fiscal year (or 18 months after the last day of a transition year). However, a filing exemption applies if a local designated entity has filed the relevant return with the Luxembourg authorities. Also, no information tax return is required in Luxembourg if a foreign UPE or designated filing entity has filed the information return and there is a Qualifying Competent Authority Agreement in effect between the UPE's residence state and Luxembourg. In such case, the Luxembourg-based constituent entity or the designated local entity acting on its behalf must inform the Direct Tax Authorities of the identity and country of residence of the entity filing the information return. Noncompliance with this notification requirement triggers a fine of €5,000. Where a constituent entity located in Luxembourg has a UPE located in a third-country jurisdiction that applies rules assessed equivalent by a delegated act adopted by the EU Commission, the constituent entity or the designated local entity shall file a top-up tax information return containing specific information. Monetary penalties for Luxembourg-based constituent entities or designated local entities not exceeding a maximum amount of €250,000 will be imposed for failure to timely file an accurate top-up tax information return.
Similar obligations apply to Luxembourg joint venture entities and their Luxembourg subsidiaries.
Entities to which IIR, UTPR top-up tax and/or QDMTT tax are allocated in accordance with the provisions of the Draft Law must file a specific IIR, UTPR and/or QDMTT tax return stating the amount of top-up tax. The deadline for filing the return is 15 months after the end of the fiscal year, respectively 18 months after the last day of a transition year, and the tax must be paid within one month after the return is filed. The UPE or all Luxembourg-based constituent entities of the in-scope group can designate a Luxembourg-based constituent entity that will be responsible for filing the tax return and paying the tax, but all Luxembourg-based constituent entities will be jointly liable for the tax, interest for late payment, expenses and penalties.
The Direct Tax Authorities are in charge of verifying compliance with the filing and notification obligations and may request any relevant information or documentation from the relevant entities. Their powers of investigation are subject to a 10-year statute of limitation.
Information and tax returns must be filed electronically via a secure platform.
Timing
Under the Draft Law, the IIR applies for fiscal years starting on or after 31 December 2023 and the UTPR applies for fiscal years starting on or after 31 December 2024. If an MNE's Ultimate Parent Entity (UPE) is in a jurisdiction that, pursuant to the Minimum Tax Directive, delays implementation of the IIR, the UTPR will apply for fiscal years starting on or after 31 December 2023. The QDMTT will become effective for fiscal years starting on or after 31 December 2023.
Implications
The Minimum Tax Directive marks a milestone in the harmonization of direct taxation within the EU that has wide-ranging implications that taxpayers need to review and be prepared to address. While the Draft Law runs through the legislative process, it is important for taxpayers to evaluate the potential impact of these new rules on their business structures and internal processes.
1 Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the European Union.
2 Tax Challenges Arising from the Digitalisation of the Economy Global Anti-Base Erosion Model Rules (Pillar Two).
3 OECD (2022), Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris
