On 28 July 2023, the Grand Duchy of Luxembourg announced that it had given its assent to the bill aimed at transposing the directive 2022/2523 of 14 December 2022 (the « Directive ») commonly known as "Pillar 2" into its national law. The Directive introduces new tax measures establishing a worldwide minimum level of taxation, as desired by the OECD.
The bill n°8292 was therefore submitted to the Chambre des Députés on 4 August 2023. This bill, which transposes Pillar 2, aims to limit competition based on corporate income tax rates by introducing a worldwide minimum tax rate of 15%. In order to achieve this ambitious objective, Pillar 2 proposes two elements, (i) global anti base erosion rules ("GloBE") and (ii) the qualified domestic top-up tax.
A) Global anti base erosion rules ("GloBE")
The GloBE rules can be subdivided into two rules. On one hand, the income inclusion rule ("IIR") and on the other hand, the rule relating to undertaxed profit rule ("UTPR"). These two rules are interdependent and will apply to the constituent entities (directly or indirectly owned) of a multinational enterprises group («MNE») or a large-scale domestic group whose consolidated revenue is equal to or greater than 750,000,000 euros, it being noted, however, that notably pension funds and investment funds are excluded.
Concerning the IIR, this is applied by the parent entity in relation to a top-up tax amount. This amount will have to be established in advance by determining the effective tax rate of a group of MNEs or a large-scale domestic group in relation to each jurisdiction in which, the constituent entities of these groups are located. In fact, some entities are considered to be low-taxed because they are located in a jurisdiction (with a low tax rate) other than the one applying the IIR or UTPR. Once the effective tax rate has been established, it is compared with the minimum tax rate of 15%. The difference between the two is what constitutes the top-up tax.
The UTPR can be seen as a safeguard of the IIR. The possibility cannot be ruled out that a constituent entity of a group may be located in a jurisdiction that does not apply the IIR and therefore still benefits from a low tax rate (below 15%). In this case, the residual amount of the total top-up tax will be reallocated, on the basis of a specific formula, for the purposes of applying the UTPR to an entity located in a jurisdiction that applies the IIR. In this way, no entity escapes the minimum tax rate of 15%.
B) A qualified domestic top-up tax
The Directive also allows EU Member States to introduce a qualified domestic top-up tax, which the Grand Duchy intends to do. This tax allows the jurisdiction in which the group's constituent entities are taxed at a low rate to tax these entities itself at the level of the top-up tax. The applicability of this tax therefore, leads to the non-application of the IIR and UTPR rules of other jurisdictions wishing to tax these entities by virtue of the fact that they are located in a jurisdiction which, without this qualified domestic top-up tax, could be considered a low-tax jurisdiction.
C) Conclusion
The Directive foresees the application of the majority of the provisions to be transposed from the tax years beginning on 31 December 2023. The bill also contains the administrative provisions needed to determine the entities responsible for paying these three new taxes.
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