Pillar 2 - How this law will affect the annual accounts 2023 of Luxembourg companies?

The Pillar 2 law in Luxembourg raises questions about its impact on the notes to the stand-alone and consolidated annual accounts prepared in accordance with LUX GAAP^[1] or LUX GAAP-FV^[2]  for financial years starting before 30 December 2023. It could affect the 2023 annual accounts of Luxembourg companies and groups within the scope of the Pillar 2 Law.

In this context, the Luxembourg Accounting Board (CNC) issued two recommendations:

I. Q&A CNC 24/031: Impact of the Pillar 2 Law on the Notes to the 2023 Annual and Consolidated Accounts under Lux GAAP or Lux GAAP-FV (Published in February 2024)

As a reminder, according to article 26 paragraph 3 of the Luxembourg Accounting Law^[3] and Commercial Law^[4], the standalone and consolidated annual accounts must give a fair view of the financial position and results of the company's operations. If the legal provisions are insufficient to provide a true and fair view, additional information should be disclosed in the notes to the annual accounts.

The CNC recommends that companies and groups within the scope of Pillar 2, preparing their annual accounts in Lux GAAP or Lux GAAP-FV, provide both qualitative and quantitative information on the tax impact resulting from the Pillar 2 law in their stand-alone and consolidated annual accounts.

This information could be presented as a range. However, if the information is not known or cannot be reasonably estimated, Luxembourg companies should indicate this fact and provide details about the progress of their exposure analysis.

The CNC suggests that the notes to the annual accounts could include:

• Qualitative Information: Description of how the Pillar 2 law affects them, identifying potential tax exposures in the main countries where the Luxembourg company or group could be exposed due to the application of the Pillar 2 law.

• Quantitative Information: Estimates or ranges showing what portion of their profits may be subject to additional taxes under Pillar 2, and how this could affect their average effective tax rate. Additionally, a "what-if" scenario for the 2023 year, as if Pillar 2 were already in place, indicating how it might have impacted their overall effective tax rate.

II. Q&A CNC 24/032: Pillar 2 Law and the Option to Disclose Deferred Tax Assets and Liabilities in the 2023 Annual Accounts (Published in March 2024)

According to Article 53, paragraph 2, of the Pillar 2 law, when determining the effective tax rate, multinational groups or significant large domestic groups should consider the deferred tax assets and deferred tax liabilities reflected or disclosed in the financial statements of all constituent entities located in a jurisdiction.

In this context, to ensure a true and fair view of the information disclosed in the annual accounts, the CNC recommends including a disclosure of the deferred tax assets and deferred tax liabilities for the financial year preceding the first application of Pillar 2 (i.e., annual accounts 2023). According to the CNC, mentioning the deferred tax assets and liabilities in the standalone annual accounts provides better traceability compared to disclosing this information only in the consolidated annual accounts.

Regarding the computation methods of deferred tax assets and liabilities to be disclosed in the 2023 annual accounts, the CNC recommends they should be based on the gross values of tax attributes or temporary differences. In cases of deferred tax assets resulting from carried forward tax losses, the CNC notes it is not necessary to assess their recoverability.

Should you have any questions about the impact of the Pillar 2 Law, do not hesitate to reach out to our tax experts at Grant Thornton Luxembourg: