Luxembourg updates draft legislation amending Pillar Two Law reflecting June 2024 OECD guidance

In brief

• The Luxembourg government has tabled several amendments (Amendments) to a legislative proposal that modifies the Pillar Two Law transposing the Minimum Tax Directive. 
• The Amendments aim to incorporate, with effect for financial years starting from 31 December 2023, clarifications and additional provisions agreed by the OECD/G20 Inclusive Framework through Agreed Administrative Guidance on the GloBE Model Rules in June 2024¹ (June Guidance). 
• Among other items, the Amendments lay down Luxembourg’s choice in respect of the Pillar Two treatment of securitization entities.

Executive summary

On 31 October 2024, the Luxembourg government transmitted to Parliament several amendments (Amendments) to the legislative proposal (Draft Law) that modifies the Pillar Two Law transposing Council Directive 2022/2523² on minimum taxation (Minimum Tax Directive), which is currently running through the legislative process. The Draft Law aims to incorporate the clarifications and additional provisions of the Organisation for Economic Co-operation and Development (OECD) Guidance issued in February 2023,³ July 2023⁴ and December 2023.⁵ The Amendments aim to incorporate the June Guidance without going beyond the guidance. 

Among other things, the Amendments aim to implement the guidance on allocation of profits and taxes involving Flow-through Entities and provide the framework for a more detailed implementation (through decrees that still need to be issued) of the June Guidance on deferred tax liability recapture, divergence between Global Anti-Base Erosion (GloBE) and accounting carrying values, and allocation of cross-border current and deferred taxes. Regarding the guidance on securitization vehicles that qualify as “Securitization Entities,” Luxembourg chooses the option to allocate any Qualified Domestic Top-up Tax (QDMTT) in respect of the income of such entities to other constituent entities of the group.

The Amendments and the Draft Law are intended to become effective for financial years starting from 31 December 2023.

Detailed discussion

Securitization Entities

The June Guidance gives participating jurisdictions three options for dealing with Securitization Entities that are part of a group. In addition to the option of treating securitization entities like any other Constituent Entity for QDMTT purposes, the guidance allows jurisdictions adopting a QDMTT to exclude Securitization Entities from QDMTT or impose the top-up-tax liability relating to Securitization Entities on other Constituent Entities (if any) within the jurisdiction without forfeiting the Consistency Standard required for a jurisdiction to be eligible for the QDMTT Safe Harbor. Where Securitization Entities are excluded from QDMTT, the group will have to apply the Switch-off Rule with respect to the jurisdiction where the Securitization Entity is located, meaning that the QDMTT Safe Harbor cannot be applied to the jurisdiction. If a jurisdiction opts for the inclusion of Securitization Entities within the scope of its QDMTT but decides to impose any top-up tax liability on other Constituent Entities of the group in the jurisdiction (or the Securitization Entity in absence of any other Constituent Entity), the Switch-off Rule will not apply and the group would be allowed to apply the QDMTT Safe Harbor for the QDMTT jurisdiction. These options are designed to prevent levying top-up-tax on Securitization Entities themselves, which could undermine the viability of securitization transactions and potentially affect the solvency and credit rating.

Luxembourg chooses the third option, under which any QDMTT relating to the income of a Securitization Entity will be imposed on other Constituent Entities located in Luxembourg and, only if there is no such Consituent Entity, is the QDMTT imposed on the Securitization Entity itself. With this choice, Luxembourg secures the application of the QDMTT Safe Harbor for Luxembourg as the QDMTT jurisdiction. 

The definition of "Securitization Entity" is in line with the June Guidance and refers to an entity that participates in a Securitization Arrangement (as defined) and satisfies certain conditions, such as carrying out activities that facilitate one or more Securitization Arrangements, granting security over its assets in favor of its creditors, paying out all cash received from its assets to its creditors on an annual or more frequent basis, and only having negligible profits compared to its revenues.

Flow-through Entities

The Amendments implement aspects of the June Guidance that clarified specific issues pertaining to  applying the GloBE Model Rules to Flow-through Entities and Hybrid Entities; specifically, the Amendments provide guidance intended to ensure profits and taxes are allocated appropriately and consistently between jurisdictions. This helps ensure that tax the owners pay on the entity's profits is allocated to the entity for GloBE purposes, maintaining the principle of matching taxes with the income to which they relate.

Next steps and implications

The Amendments and the Draft Law will now go through the legislative process, which involves the analysis of the text by a dedicated parliamentary commission, the collection of opinions from different advisory bodies (most importantly, the Council of State), discussion of and vote on the text in a parliamentary session and finally its publication in the Official Gazette (Memorial). The entire process may take several weeks but is expected to be completed by year-end.

Taxpayers potentially affected by the Draft Law should remain aware of its progress through Parliament and consult with their tax advisors to fully understand how it could affect them.

Endnotes:

1. OECD (2024), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), June 2024, OECD/G20 Inclusive Framework on BEPS, OECD, Paris.
2. 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.
3. OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), OECD/G20 Inclusive Framework on BEPS, OECD, Paris.
4. OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), July 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris.
5. OECD (2023), Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two), December 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris.