Luxembourg Financial Institutions Must Prepare for Pillar Two Compliance Challenges

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The European Union has introduced the Pillar Two Directive to tackle international tax avoidance by setting a minimum effective taxation rate of 15% for large multinational enterprises and domestic groups with annual revenues exceeding €750 million. This directive will significantly alter the global tax landscape, imposing additional compliance burdens on affected financial institutions in Luxembourg.

Preparing for the Impending Changes

As Luxembourg begins to transpose the directive into national law, banks and insurance companies operating in the country must take immediate action to prepare for the impending changes. A recent draft law has been published, with an amended version expected to become law by 2024.

Key Questions to Address

To ensure compliance, financial institutions should perform a readiness exercise, addressing key questions such as:

Are we ready to comply with Pillar Two standards?
What specific rules apply to our sector?
How will we define our working assumptions and calculation methods for the top-up tax payable from 2024?

Data Collection and Governance

In addition, institutions must collect data for calculating prospective effective tax rates, provision for QDMTT tax charges, and establish internal Pillar Two governance frameworks.

The Implementation Challenge

The implementation of Pillar Two presents a significant challenge, with complex modalities and stringent requirements. However, it also offers an opportunity to:

Improve data collection and analysis
Enhance tax integrity and alignment
Develop more flexible and adaptable tax functions by upskilling data knowledge within tax teams

Preparing for the First Verifications

Financial institutions must be aware that the first verifications will be made as part of the 2023 audit, making it essential to have knowledgeable resources and robust data mapping tools in place. With careful planning and preparation, Luxembourg-based banks and insurance companies can navigate the Pillar Two compliance landscape successfully.

By following these steps, financial institutions can ensure compliance with the Pillar Two Directive and take advantage of the opportunities it presents for improving tax integrity and alignment.