Global minimum taxation (Pillar 2) in Luxembourg: implementation of June 2024 OECD guidance

The June 2024 Guidance allows jurisdictions that have introduced a qualified domestic top-up tax (QDMTT) to take account of the specific situation of securitisation vehicles (SVs) in the context of the Pillar 2 rules.

As the Amendments quite rightly state, an SV will only be affected by the QDMTT if it falls within the scope of Luxembourg’s Pillar 2 law of 22 December 2023 (Pillar 2 Law) in the first place. This will not be the case if the SV is not subject to accounting consolidation within the meaning of the Pillar 2 rules.

Of the three options in the June 2024 guidance, the Luxembourg government proposes to adopt the third. This is to keep SVs within the scope of the Pillar 2 Law, but to provide that the amount of top-up tax due by the SV is imposed on another constituent entity located in the same jurisdiction and forming part of the same MNE group.

The Amendments also exclude SVs from the application of the joint and several liability mechanism. However, if there are no other constituent entities of the MNE group in Luxembourg, the amount of top-up tax remains allocated to the SV.

This option allows the MNE group to continue to invoke the QDMTT safe harbour in Luxembourg.

Intermediate flow-through entities

In line with the June 2024 Guidance, the Amendments clarify how to determine whether a flow-through entity is a tax-transparent entity or a reverse hybrid entity. This will be done by reference to the laws of the entity’s closest owner in the ownership chain (the reference entity) that is not itself a flow-through entity, unless it is the ultimate parent entity.

The Amendments also clarify the position of intermediate flow-through entities held by owners that are not group entities, how to allocate their qualifying net income among the owners, and how to allocate the amount of taxes in specific cases.

Grand Ducal regulations to implement technical aspects

Finally, the Amendments insert into the Pillar 2 Law the legal bases for Grand Ducal regulations to implement the relevant technical parts of the June 2024 Guidance (chapters 1 to 4).

The proposed Amendments are welcome as they provide legal certainty and will help Luxembourg taxpayers to implement and apply the complex Pillar 2 provisions. In line with bill of law 8396 generally, they will apply to tax years starting on or after 31 December 2023.

The Amendments will follow the usual legislative process through Parliament.