New Pillar 2 Q&A issued by the Luxembourg Accounting Standards Board

On 22 March 2025, the Luxembourg Accounting Standards Board (CNC) released a new Q&A (No. 25/035) containing valuable information on the impact of the Pillar 2 rules on (consolidated) financial statements of Luxembourg entities and groups for financial years preceding and starting from the transition year.

The new Q&A (No. 25/035) supplements two Q&As published by the CNC in February and March 2024 (No. 24/031 and No. 24/032), which provide guidance on how the law of 22 December 2023 implementing Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union (Pillar 2 Law) may impact financial disclosures and the disclosure of deferred tax expenses in the notes to the 2023 (consolidated) financial statements.

Pillar 2

The Pillar 2 Law applies to constituent entities located in Luxembourg that are members of an MNE group or a large-scale domestic group which had an annual revenue equal to or above EUR 750 million, including the revenue of excluded entities, in its ultimate parent entity’s (UPE) consolidated financial statements for at least two of the four fiscal years immediately preceding the tested fiscal year. In-scope MNE groups and large-scale domestic groups will pay a top-up tax whenever the effective tax rate (ETR) of constituent entities determined on a jurisdictional basis is below the minimum rate of 15%. Top-up taxes apply according to an Income Inclusion Rule (IIR), an Undertaxed Payments Rule (UTPR) and a qualified domestic minimum top-up tax (QDMTT) rule. Deferred tax assets and liabilities are considered in the ETR calculation, provided that they are reflected or disclosed in the financial accounts of the constituent entities in the relevant jurisdiction. The provisions apply to tax years starting on or after 31 December 2023.

CNC’s latest Q&A (No. 25/035)

The new Q&A provides guidance for the tax years preceding and starting from the transition year, i.e. the year during which an MNE group comes within the scope of the Pillar 2 rules for the first time. It only concerns Luxembourg entities and groups that prepare their annual and consolidated financial statements under the Lux GAAP or Lux GAAP with Fair Value option (Lux GAAP-FV) regime.

In the interests of a level playing field, the new Q&A draws on the solutions recommended by IAS 12 Income Taxes, as amended by the IASB on 23 May 2023 to take account of the implementation of the OECD’s model rules on Pillar 2 and as adopted by the EU Commission on 8 November 2023 in accordance with the adoption procedure (known as endorsement) set out in the EU’s 2002 IAS regulation.

Building on the above, the aim of the new Q&A is to provide technical clarifications to those preparing accounts on the topics below as regards the information to be provided in the notes to the accounts or included in the accounts in the context of the Pillar 2 Law, prior to the transition year (section 1) and then with effect from the transition year (section 2).

Note: the new Q&A is without prejudice to the rules for calculating the taxes resulting from the Pillar 2 Law as set out in the Pillar 2 Law. In particular, the latter determines the specific conditions for taking deferred taxes into account for the purposes of its proper application.    

1. Pillar 2 disclosure – financial years preceding the transition year

• From which financial year?
  
  Luxembourg companies or groups within scope of the Pillar 2 Law should assess when it is likely to apply based on internal indicators, such as exceeding the EUR 750 million consolidated turnover threshold. When application appears likely, they may include relevant information in the notes to the financial statements. Once the threshold is exceeded a second time, it is strongly recommended to do so.
• Which information?
  
  Before the transition year, Luxembourg companies or groups subject to Pillar 2 may disclose in the notes to their financial statements any known or reasonably estimable information about their exposure to taxes arising from the Pillar 2 Law (Q&A No. 24/031). This may include qualitative details on how this law impacts them and key jurisdictions of exposure, as well as quantitative insights such as the proportion of profits likely to be subject to Pillar 2 taxation. If exact figures are unavailable, companies should disclose this and outline the status of their assessment.
• Which deferred tax assets (DTAs) disclosure/recognition for Pillar 2?
  
  Luxembourg companies subject to the Pillar 2 Law may disclose DTAs in the notes to their annual accounts under LUX GAAP or LUX GAAP-FV, offering better granularity and traceability than a disclosure in the consolidated accounts alone. While not mandatory, this disclosure helps provide a true and fair view of the financial position.
  
  At the consolidated level, DTAs (e.g. DTAs computed on carry forward tax losses) may be recognised in financial statements under LUX GAAP or LUX GAAP-FV if their recovery is highly probable, or alternatively disclosed in the notes. The calculation of DTAs should be based on the gross amount of tax attributes (including e.g. carry forward tax losses, exceeding borrowing costs and carry forward tax credits) or temporary differences using the applicable income tax rate (e.g. in the case of DTAs included in the 2024 financial accounts, an income tax rate of 23.87% applicable for Luxembourg City in 2025). This rate may vary over time and should be adjusted accordingly. Companies are not required to analyse recoverability of DTAs in relation to tax attributes, but if they choose to recognise DTAs in the financial statements (and not in the notes), an analysis must be conducted, and only assets whose recovery is highly probable may be recognised in the consolidated accounts under LUX GAAP or LUX GAAP-FV.
  

2. Pillar 2 disclosure – financial years from the transition year

• Which information?
  
  Luxembourg companies or groups that are subject to the Pillar 2 Law and prepare financial statements under LUX GAAP or LUX GAAP-JV must comply with the disclosure requirements under the Pillar 2 Law from the transition year.
  
  They must report the actual tax impact in their (consolidated) financial accounts. Qualitative and quantitative prospective information to assess the potential impact of the Pillar 2 Law is no longer sufficient.
  
  If the tax impact is insignificant or non-existent, no specific disclosure is required unless management considers it relevant for users of the financial statements. However, if the tax impact is significant, additional information must be provided in the notes to ensure a true and fair view of the financial position. The content of these disclosures is not legally defined, leaving management responsible for determining the appropriate level of detail. The CNC suggests that a separate presentation of the current tax charge arising from the Pillar 2 Law could be included in the notes to the (consolidated) financial statements.
• Which DTAs disclosure for Pillar 2?
  
  Luxembourg companies or groups subject to the Pillar 2 Law are not required to recognise or disclose DTAs and deferred tax liabilities (DTLs) related to Pillar 2, in line with IAS 12 principles. IAS 12 states that entities shall not recognise or disclose DTAs and DTLs associated with income taxes arising from Pillar 2 rules, but must disclose that they have applied this exception.
  
  However, companies that choose to disclose DTAs in the notes to their (consolidated) financial statements should ensure proper monitoring of tax attributes to maintain traceability and provide a true and fair view of their financial position. The recognition of DTAs in the consolidated financial statements remains possible under LUX GAAP or LUX GAAP-JV, provided their recoverability is highly probable. Once this option is exercised, companies must consistently continue recognising and tracking these DTAs in their financial statements.
• What is the accounting treatment of Pillar 2 top-up taxes in Luxembourg?
  
  The Standard Chart of Accounts does not currently include specific accounts for recording tax charges and liabilities related to the Pillar 2 rules, including QDMTT, IIR and UTPR.
  
  The CNC recommends recording these tax charges under account 688 “Other taxes”, with possible internal subdivisions (e.g. 6881 for QDMTT, 6882 for IIR and 6883 for UTPR). These amounts should ultimately be reported under “Income tax” (item 15) in the profit and loss account.
  
  For tax liabilities, the CNC suggests using account 46128 “Other payables”, with optional subdivisions (e.g. 461281 for QDMTT, 461282 for IIR and 461283 for UTPR). These liabilities will be reported under “Tax debts” in the balance sheet.
  

Conclusion

The new Q&A issued by the CNC is welcome as it provides useful information to entities and groups in scope of the Pillar 2 Law on how to reflect Pillar 2 top-up taxes and deferred tax expenses related to Pillar 2 in their (consolidated) financial statements or the notes to the (consolidated) financial statements for the financial years preceding and starting from the transition year.

Luxembourg companies or groups that are subject to the Pillar 2 Law are advised to consider adapting their accounting processes to ensure compliance with Pillar 2 requirements.