Proposed Amendments to Pillar Two Law in Luxembourg

Background

On 12 June 2024, Luxembourg published a bill of law amending the law of 22 December 2023 (the Pillar Two Law^[1]) implementing EU directive no. 2022/2523, largely known as the “EU Minimum Tax Directive” or “Pillar Two Directive.”

The Pillar Two Directive, to be effective on 23 December 2023, ensures a minimum global effective tax rate of 15% for the global activities of large multinational groups and large-scale domestic groups in the European Union. The Pillar Two Directive comes directly from the OECD’s Pillar Two model rules of the OECD/G20 Inclusive Framework on BEPS.

This new bill of law introduces certain elements of the OECD administrative guidance not yet incorporated by the initial Pillar Two Law.

New Clarifications for Investment Funds

The new bill of law brings important clarifications on the scope of the Pillar Two Law in the context of investment funds.

Firstly, there was still uncertainty regarding the special purpose vehicles (SPVs) owned by an investment fund in determining whether they were to be considered excluded entities for the application of Pillar Two rules. In principle, an SPV owned at least 95% (or 85% in the case of equity investments) by an excluded entity can also qualify as an excluded entity. Pillar Two rules state that investment funds qualify as excluded entities if they are the ultimate parent entity (UPE) of the group. However, if the investment funds do not have consolidation obligations, they do not qualify as UPEs of a group, which created uncertainty for SPVs held by investment funds. In this context, the new bill of law clarifies that an investment fund or real estate investment vehicle — which is not a UPE solely because the relevant applicable financial accounting standard does not require it to prepare consolidated financial statements — is to be treated as an excluded entity. According to the parliamentary comments of the bill of law, this means that Luxembourg SPVs owned by such an investment fund or vehicle and meeting certain criteria will be considered excluded entities for the purposes of the Pillar Two Law.

Moreover, the new bill clarifies the “deemed consolidation” test. As a background, the deemed consolidation test implies that the entities that do not prepare consolidated accounts on a line-by-line basis may nevertheless be considered to form a group with their subsidiaries and therefore be in the scope of Pillar Two. The new bill of law clarifies that the “deemed consolidation” test does not change the rules that apply under the applicable financial accounting standard, which implies that if an entity, such as an investment fund, is not required to consolidate on a line-by-line basis under the qualifying financial accounting standard that is or would be applicable to it, then the “deemed consolidation” rule does, in principle, not require line-by-line consolidation.

In addition, certain laws applicable to investment funds may contain legal exemptions from the obligation to consolidate companies held as investments (e.g., for reserved alternative investment funds, specialized investment funds, or companies in risk capital), so entities benefiting from such exemptions from the consolidation obligation can generally not be considered to meet the “deemed consolidation” test. This clarification provides legal certainty for the Luxembourg investment fund vehicles.

What’s Next?

The new provisions will be discussed in the Luxembourg Chamber of Deputies over the coming months and should apply to tax years starting on or after 31 December 2023.

It is important for taxpayers to assess the potential impact of these new rules on their business structures. Asset managers should examine how their structures, investments, and returns could be affected by Pillar Two and whether they could be out of scope of the rules.

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[1] Please see our previous article in relation to Pillar Two Law: Bastien Voisin, Yann Ricard, and Olha Polishchuk, “Pillar Two Implementation in Luxembourg,” Goodwin Alert, October 25, 2023.

 

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.