Luxembourg Parliament enacts changes to Pillar Two Law

• On 19 December 2024, the Luxembourg Parliament approved a legislative proposal¹ that will amend the law dated 22 December 2023 (Pillar Two Law). 
• While there are still some formal legal steps that need to be taken before the proposals become law, these steps are expected to occur before year-end.

Discussion

On 19 December 2024, the Luxembourg Parliament adopted legislation amending the Pillar Two Law. The new legislation aims to incorporate, with effect for financial years starting from 31 December 2023, clarifications and additional provisions of the Organisation for Economic Co-operation and Development (OECD) Guidance issued in February 2023, July 2023, December 2023 and June 2024, without going beyond the guidance.

Among other things, the new legislation extends the scope of Excluded Entities, adapts certain provisions related to the Qualified Domestic Top-up Tax (QDMTT) and clarifies the application of the Transitional Country-by-Country Reporting (CbCR) safe harbor. Additionally, it outlines Luxembourg’s choice on the Pillar Two treatment of securitization entities. Furthermore, the legislation implements guidance on the allocation of profits and taxes involving Flow-through Entities and provides a framework for a more detailed implementation (through decrees that still need to be issued) of the OECD Guidance on deferred tax liability recapture, divergence between Global Anti-Base Erosion (GloBE) and accounting carrying values and the allocation of cross-border current and deferred taxes. 

Earlier in the year, Luxembourg government issued two draft decrees implementing the OECD Guidance on tax credits and on functional currency to be used for the Pillar Two computations. These two draft decrees have also passed the necessary legislative steps in Luxembourg and are expected to be signed and published before the end of the year.

Next steps

The final law and decrees are expected to be published in the Official Gazette before year-end, with entry into effect for tax years starting on or after 31 December 2023. 

Taxpayers potentially affected by the new legislation should consult with their tax advisors to fully understand how the change in law could affect them.