EU Proposal for global minimum Taxation Directive: scope and related considerations for the Luxembourg investment funds’ space

In response to the financial crisis of 2008, the Organisation for Economic Co-Operation and Development ( OECD - OCDE ) and the #G20 countries adopted in 2013 an action plan composed of 15 points to address Base Erosion and Profit Shifting (so-called #BEPS).

This action plan was consolidated into the issuance of a report in 2015. Based on this foundation, the OECD and the G20 developed an inclusive framework on BEPS, established to ensure that interested countries and jurisdictions can participate on an equal basis to BEPS related issues, which has, in turn, led to a two-pillar solution addressing the tax challenges arising from the digitalisation of the economy.

The OECD Secretariat published in October 2020 the Global Anti-Base Erosion report for a minimum taxation (the #GloBERules or #PillarTwo”) designed to impact highly digitalized business and to ensure that large multinational enterprises (#MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate.

“Pillar Two introduces new global minimum tax rules for MNEs with an agreed minimum effective tax rate (ETR) of 15% on worldwide income, which would generally apply to MNE Groups with an annual revenue of EUR 750 million or more.”

On 20 December 2021, the OECD released detailed model rules to assist on the implementation of the landmark reform to the international tax system, to ensure that such MNEs will be subject to the minimum tax rate as of 20233 (the “Model Rules”).

Two days later, the #EuropeanCommission issued a proposal to transpose the Model Rules into #EU law, which mainly follows the Model Rules and introduces a complex system of top-up taxes, i.e., an income inclusion rule (#IIR) and an undertaxed profit rule (#UTPR) aiming to bring the total amount of taxes paid on a MNE’s excess profit in a jurisdiction up to the agreed minimum tax rate of 15%.

On 14 March 2022, the OECD published its long-awaited technical commentary together with illustrative examples on the Model Rules and opened at the same time a public consultation on the implementation of these rules, seeking input from interested parties on the implementation of the GloBE Rules. Meanwhile, the EU Council has issued a compromised text (the “Directive”) of the EU draft proposal introducing certain changes such as inter alia an extension of the deadline for transposition of the rules to 31 December 2023 (the IIR would in principle enter into effect for fiscal years starting on or after 31 December 2023 and the UTPR on or after 31 December 2024), and the option for Member States in which there are fewer than 10 parented inscope Groups to elect not to adopt the IIR and the UTPR until 2025.

The aforementioned EU proposal requires an anonymous decision for adoption, which remains to be achieved, thus bringing the project at a standstill. In September 2022, the governments of France, Germany, Italy, Spain and the Netherlands issued a joint statement to express their determination to implement the GloBE Rules unilaterally if no anonymous agreement is reached due to a country’s veto. The Directive generally mirrors the Model Rules which have been agreed at global level. However, numerous technical issues regarding the expected implementation into domestic laws and the interaction of these new rules with the relevant financial markets remain outstanding. In particular, the scope and expected impact of the Directive in Luxembourg, as a major financial center, remain to be ascertained.

The scope of the Directive is crucial as it determines which entities would, in principle, be subject to the GloBE Rules. The general scope provision is set out in Article 2, 1. of the Directive states that the rules shall apply to “constituent entities located in a Member State of the European Union that are members of an MNE or a large-scale domestic group which has an annual revenue of EUR 750 000 000 or more […] in its ultimate parent entity’s consolidated financial statements in at least two of the four fiscal years immediately preceding the tested fiscal year”.

To assess whether an entity would fall within the scope of the Directive, one should examine the concepts of MNE Groups or large-scale domestic groups, constituent entities and ultimate parent entities within the meaning of the Directive, and how the monetary threshold is supposed to work.

In addition, it would be appropriate to examine any potential exclusions, as further elaborated in an article published in N° 2022/2 “Revue générale de fiscalité luxembourgeoise”, edited by Larcier-Intersentia > Revue générale de fiscalité luxembourgeoise (R.G.F.L.) (larcier.com)

This article, contributed by Luis Mu?oz and Cyril Poels , intends to focus on the scope of the Directive to be implemented into #Luxembourg’s domestic law and provide a preliminary view on the situations where players in the Luxembourg #investmentfunds space may, in the author’s views, be captured by the rules.