On 25 March 2024, the Luxembourg Tax Authorities (“LTA”) published their first FAQ regarding the law of 22 December 2023 on the minimum effective taxation transposing Council Directive (EU) 2022/2523 of 15 December 2022 (the “Pillar Two Law”). For further insights into the Pillar Two Law, please consult our newsletter.
Clarification on Transition Rules
In this FAQ, the LTA focus on queries regarding Chapter 11, particularly article 53 addressing the tax treatment of deferred tax assets, deferred tax liabilities and transferred assets upon transition. For the purposes of Transition Rules, taxpayers may assess deferred tax assets and liabilities as of the fiscal year-end preceding the “transition year”.
The LTA brought the following clarifications in their FAQ:
- The financial accounts referenced in Article 53 for transitional benefits encompass those of the constituent Luxembourg entity and/or the consolidated financial accounts of the ultimate parent company. Where the latter are used, according to the LTA it is important that the information can be reliably and consistently traced back to the relevant Luxembourg constituent entity. Additionally, the LTA referred to "Q&A 24/032" of the Luxembourg Accounting Standards Commission regarding the “option of presenting deferred tax assets and liabilities in the notes to the annual accounts for the fiscal year 2023”.
- The term “reflected” in the context of financial accounts pertains to the balance sheet, whereas “disclosed” refers to notes appended to the financial statements. Merely disclosing deferred taxes in the notes appended to the financial statements suffices to meet Article 53(2) requirements.
- The initial effects of transitional measures commence from the “transition year” as defined in the Pillar Two Law (the first fiscal year in which a Multinational Enterprise group or a large-scale domestic group falls within the scope of this law). The FAQ recommends reflecting or disclosing all deferred tax assets and liabilities in the financial statements for the financial year preceding the “transition year”.
Conclusion
The release of this first series of Q&A by the LTA brings a set of welcomed clarifications regarding the Pillar Two Law, helping taxpayers in comprehending and applying its provisions effectively.