Executive summary

On 25 March 2024, the Luxembourg tax administration published FAQs clarifying certain questions relating to the required disclosure for certain deferred tax assets (DTAs) and deferred tax liabilities (DTLs).

In December 2023, Luxembourg transposed into domestic law Council Directive 2022/25231 of 14 December 2022 on minimum taxation (Minimum Tax Directive) with effect for financial years starting on or after 31 December 2023 (Pillar Two Law). (For details, see EY Global Tax Alert, Luxembourg Parliament adopts law implementing the EU Minimum Tax Directive, dated 21 December 2023.)

The Pillar Two Law includes transition rules that allow for certain DTAs and DTLs to be taken into account when determining the effective tax rate of the first year of application of the law (Transition year) and subsequent years.

Detailed discussion

Based on the Pillar Two Law transition rules, and in line with the Minimum Tax Directive and the Organisation for Economic Co-operation and Development (OECD) Model rules, certain DTAs and DTLs that are "reflected or disclosed in the financial accounts of all the constituent entities in a jurisdiction for the transition year" may be taken into account when determining the effective tax rate of the Transition Year and subsequent years.

The FAQs clarify that "reflected" refers to "recognition" of a DTA or DTL in the balance sheet, while "disclosed" refers to "disclosure" in the notes to the accounts. They also clarify that there is no requirement for DTAs/DTLs to be recognized in the accounts and that disclosure in the notes should be sufficient. The FAQs repeat the statements in the OECD commentary that the relevant DTAs/DTLs need to be disclosed in the financial statements of the year immediately preceding the transition year (i.e., if the transition year is 1 January 2024 — 31 December 2024, disclosures need to be made in the financial statements for the financial year ending on 31 December 2023).

Moreover, the FAQs clarify in which financial statements the disclosure should be made. Based on the FAQs, the disclosure can be made in the financial statements of the constituent entities and/or the consolidated financial statements of the ultimate parent entity (UPE). If the disclosure is made in the consolidated financial statements of the UPE, the information must be traceable to the Luxembourg constituent entity concerned in a reliable and coherent manner. The FAQs also refer to a question and answer issued by the Luxembourg Accounting Standards Board (CNC) in this regard.

Implications

It is essential that DTAs are correctly presented in the financial statements of the MNE or large-scale domestic group to preserve the possibility of using such DTAs in the future. Timing will be key, as this needs to be applied in the financial statements established for the year before the transition year (which will be 2023 for many taxpayers). Taxpayers should liaise with their tax professional to assess the requirements that apply to their specific case and to analyze potential implications on their tax position.