AGEFI Luxembourg - avril 2024

AGEFI Luxembourg 24 Avril 2024 Fonds d’investissement O n 20 December 2023, the Luxembourg Parliament voted to approve the draft Law n°8292 transposing the EU Council Directive 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multina- tional enterprise groups and large-scale domestic groups in the European Union, known as the EU Pillar 2 Directive or the GloBE (Global anti-Base Ero- sion) Directive. The Law enters into force as fromfiscal years starting on or after 31 December 2023 and targets groups having a con- solidated revenue of at least EUR 750 million in at least two of the four fiscal years preceding the tested fiscal year. The Pillar 2 Law is a separate law from the Luxembourg Income Tax Law. It is composed of 61 articles divided over 12 chapters. The Law foresees the im- plementation of three new taxes in Luxembourg, an Income Inclusion Rule tax (hereafter IIR, or in French impôt relatif à la règle d’inclusion du revenue, RIR), an Undertaxed Profits Rule tax (hereafter UTPR, or in French impôt relatif à la règle des bénéfices insuffisamment imposés, RBII) and a Qualified Domestic MinimumTop-up Tax (hereafter QDMTT, or in French impôt national complémentaire ). The IIR and the QDMTT are set to be- come effective for fiscal years starting on or after 31 December 2023, whereas the UTPR would become effective for fiscal years starting on or after 31 De- cember 2024. Based on the preliminary impact as- sessment and discussions with local clients, it can be anticipated that sev- eral of the insurance groups having Luxembourg operations would have to pay top-up tax as from financial year 2024. Pillar 2 and the Luxembourg funds: What are the challenges? One of the main drivers for top-up tax would relate to funds (including UCITS) which are consolidated with insurance groups (e.g. UCITS in- vestors are exclusively or mainly in- surance companies of the same group, or single investor insurance invest- ment entities). Similar situation is ob- served with UCITS funds being consolidated into one single investor or in a fund of fund consolidation sit- uation. It is not widely impacting the UCITS industry but we noticed some Pillar 2 impacts with some German, French or UK asset managers. If an entity is consolidated on a line- by-line basis, the entity would fall within the scope of the Pillar 2 mini- mum taxation rules. In this respect, it should be reviewed in detail which in- come the entity derives (dividends, eq- uity capital gains, interest income, gains from bonds, etc.). This income would need to be divided into different tranches to apply the cor- rect Pillar 2 treatment for such income (e.g. dividend income derived from shareholdings held for more/less 10%, dividend income from shareholdings held for more/less than 12months, cap- ital gains derived from shareholdings held for more/less 10%, etc.). As part of this analysis, an entity could elect to apply for the realisation prin- ciple under Pillar 2 (Art. 3.2.5 OECD rules /Art 16 §6 of Pillar 2 Law). This election allows for assets which are recorded at fair value for accounting purposes to be recorded at historic cost for Pillar 2 purposes (until the date the asset is disposed - hence potentially mitigating top-up tax impact for fair value fluctuations). With respect to investment entities (in- cluding insurance investment entities), contrary to countries like Ireland, the Law provides that those entities are excluded from the application of the Luxembourg QDMTT. A similar ex- clusion is foreseen for IIR and UTPR purposes. This ensures that those en- tities keep their tax neutral character and external investors are not (indi- rectly) impacted by top-up tax to be potentially paid by those entities. This however requires that the entities qualify either as an Investment Entity or an Insurance Investment Entity within the meaning of the definitions foreseen in the Pillar 2 rules. Further- more, it does not prevent another ju- risdiction applying the IIR or the UTPR with respect to the income of such entities if the entities formpart of a Pillar 2 group. In addition, the equity gain or loss in- clusion election as foreseen by theAd- ministrative Guidance of February 2023 (Art. 2.9 of the Administrative Guidance of February 2023/ Art 16 §15 of Pillar 2 Law) has been included in the Law. The election allows to a certain extent, to align Pillar 2 treatment of income/gains and charges/losses on equity participations with local tax treatment. The election is a jurisdic- tional election, applicable to all share- holdings held by constituent entities located in Luxembourg and applies for five years (with automatic renewal, unless revoked). From a compliance perspective, this new Law comes not only with the re- quirement to be registered for Pillar 2 purposes with a dedicated tax office (separate from the corporate tax regis- tration) but also has an impact on the preparation of the annual accounts. Finally, the Luxembourg Accounting Standard Board (Commission des Normes Comptables) issued two rec- ommendations, the Q&A 24/31 on the impact of the Pillar 2 Law on the notes to the annual and consolidated ac- counts under LuxGAAP or Lux- GAAP-FV and the Q&A 24/32 on the Pillar 2 Law and the option to disclose deferred tax assets and liabilities in the notes to the 2023 annual accounts. The first recommendation foresees adding a Pillar 2 disclosure to the notes to the annual accounts for Lux- embourg companies and groups af- fected by the Pillar 2 Law who establish and publish their annual ac- counts and/or their consolidated ac- counts under Lux GAAP regimes. More specifically, the Pillar 2 disclo- sure should include qualitative infor- mation, in particular on how the Luxembourg company and/or group would be affected by the Pillar 2 Law and the main countries where the Lux- embourg company and/or group could be exposed to income tax arising from the Pillar 2 Law; and quantitative information such as an indication of the fraction of their profits that might be subject to income taxes arising from the Pillar 2 Law and the average effec- tive tax rate applicable to these profits or an indication of how the Pillar 2 Law, if it had been in force in 2023, would have changed their overall ef- fective tax rate. The second recommendation foresees adding a disclosure on tax attributes and temporary differences in the Lux GAAP accounts. These recommenda- tions are critical to minimise the risk for companies to be challenged on the future use of tax attributes / de- ductible temporary differences for Pil- lar 2 purposes. How can PwC help you? In order to try and fix potential Pillar 2 exposure, we would generally rec- ommend starting with the definition of Perimeter at group perspective by trying to identify the funds which are consolidated. The said review needs to be subject to a local assessment at a second stage. This would allow avoiding discrepancies between the IIR and local rules mainly related to fund compartment, funds of funds or umbrella funds. For consolidated funds, strategies or al- ternatives can be defined such as an al- ternative we are looking into with groups on how to divide the tranches of income for Pillar 2 purposes, review the potential application of the realisa- tion principle. By default, review on how the group could potentially opti- mise the data gathering for future years in this respect, should be envisaged. At this stage, PwC Luxembourg and the PwC network firms provide tailor- made solutions to prepare groups for their Pillar 2 obligations, including es- timating potential top-up tax impact, preparing systems for data gathering and automation, upskilling teams and assisting groups with the Pillar 2 com- pliance process. Take a look at PwC’s Pillar 2 training pro- gramme, a customised training course to upskill your teams, adapted to the needs of your organi- sation and business industry: https://www.pwc.lu/en/tax/docs/pwc-pillar-2.pdf Géraud De BORMAN Tax Partner- Insurance tax Leader Sidonie BRAUD Tax Partner – AWM tax Leader Philippe GHEKIERE Tax Director – Pillar 2 Expert Halima TORCHI Senior Tax Manager – Pillar 2 Expert PwC Luxembourg Insights into Insurance and Asset Management: Exploring Pillar 2 Perspective F or the seventh time since 2017, the Luxembourg Stock Exchange (LuxSE) has been named ‘Exchange of the Year’ at Environmental Finance’s Sustainable Debt Awards 2024. This year, the exchange was recognised for its trailblazing work in emerg- ing markets and gender finance through its leading platform for sustainable finance, the Lux- embourg Green Exchange (LGX). On 8 April 2024, marked the release of Environmental Fi- nance’s Sustainable Debt Awards winner's list for 2024. Previously known as the Environ- mental Finance Bond Awards, every year, this initiative seeks to recognise institutions that excel, innovate, and contribute to the successful development of the sustainable debt market. The winners of the different categories are recog- nised for their thought-leadership, best practice, and innovative initiatives in the field of sustain- able finance throughout 2023. After an important year of strengthening sus- tainable finance in emerging markets and ad- vancing financing for gender equality, LuxSE was named ‘Exchange of the Year’ for its work in these important areas of sustainable develop- ment. This makes the exchange a 7-time winner of Environmental Finance’s debt-related ‘Ex- change of the Year’ title since 2017. “Contributing to closing the gaps in fi- nancing for sustainable development in emerging markets and gender equality were key drivers for the Luxembourg Stock Exchange in 2023, shaping many of the initiatives we implemented, the securi- ties we displayed and cooperations that we entered into. Addressing these gaps will play a key role in defining whether the goals set out in the Paris Agreement and by the UN SDGs are met or missed and so it is an honour to have our efforts in these areas recognised once more by Environmental Finance,” said Julie Becker (portrait), CEO of LuxSE. Advancing financing for women Throughout 2023, LuxSE continued to foster awareness of the importance of gender finance and gender-lens investing by releasing a number of important resources in the market – including a market study entitled ‘Linking gender and fi- nance: An overview of the gender-focused bond market’ and a 2-hour LGXAcademy module on ‘How capital markets contribute to the growth of gender finance’. In the module’s first session in the summer of 2023, 50 participants gained a deeper under- standing of the scope and state of the gender-fo- cused bond market and how they can contribute to improving gender equality through their fi- nancial strategies and investment decisions. LuxSE continues to flag gender-focused bonds displayed on LGX, to make it easier for investors to identify investment opportunities which con- tribute to gender equality goals. At year end, there were more than 60 gender-focused bonds on LGX, including the first gender bond from Sub-Saharan Africa issued by NMB Bank Plc in Tanzania, providing up to 3,000 women in Tan- zania with access to the financing needed to start or grow their own business. Focus on emerging markets In 2023, LuxSE entered into new and comple- mentary cooperation agreements with counter- parts in emerging markets such as Chongwa (Macao) Financial Asset Exchange Co., Ltd (MOX), China Everbright Bank, the Abu Dhabi Exchange, and Bolsa de Valores de Cabo Verde (BVC) to advance the sustainable finance agenda in new regions. Education also remained a key focus for LuxSE’s sustainable finance experts, with LGX Academy trainings taking place in China, the Ivory Coast and Sri Lanka. LuxSE also co-organised the In- ternational Finance Corporation (IFC)’s 3-day Green Bond Technical Assistance Programme (GB TAP) named Green, Social and Sustainability (GSS) Bonds Executive Programme in Luxem- bourg in November 2023, which gathered almost 30 senior bankers from about 20 different emerg- ing economies with the objective of fostering the supply of sustainable bonds in new markets. The LGX DataHub, LuxSE’s sustainable bond database, also continued to gain international recognition and was used as a data source by leading institutions such as the International Capital Market Association (ICMA) and the Or- ganisation for Economic Co-operation and De- velopment (OECD). Reaching the first trillion As of 31 December 2023, LGX encompassed 1,874 green, social, sustainability and sustain- ability-linked (GSSS) bonds from 309 issuers in 59 countries, totalling EUR 977+ billion in fund- ing for sustainable development throughout the world. This included a total of 554 new GSSS bonds on LGX in 2023, raising a total of EUR 207 billion. In February 2024, LGX reached its largest milestone to date – counting EUR 1 trillion worth of outstanding GSSS bonds on the platform. 7th Exchange of the Year title awarded to LuxSE