LUXEMBOURG Trends and Developments Contributed by: Diogo Duarte de Oliveira, Antonio Weffer, Amar Hamouche and Olivier Dal Farra, Baker McKenzie Luxembourg
Permanent and transitional safe harbours: where computations can be simplified Following the release of the “side‑by‑side” package, a new permanent (“simplified ETR”) safe harbour has been introduced. This safe harbour is intended, over time, to replace the transitional CbCR safe harbour and to provide a more permanent simplification mech - anism for jurisdictions that are expected to remain consistently taxed at or above the 15% minimum rate. While conceptually designed as a significant simpli - fication, the simplified ETR safe harbour is complex and requires computations beyond what is required for the transitional CbCR safe harbour. The “side‑by‑side” package also extends the applica - tion period of the transitional CbCR safe harbour, by one additional year. The transitional safe harbour rules temporarily exempt groups operating in certain low- risk jurisdictions that fall in scope of Pillar Two from the detailed GloBE rules calculations and from any top-up taxes. As a result, subject to local implementa - tion of the side-by-side package, the transitional safe harbour should apply for fiscal years beginning on or before 31 December 2027. A group with a calendar accounting year may therefore potentially benefit from the transitional safe harbour in respect of Luxembourg entities in 2024, 2025, 2026 and, subject to domestic implementation, also 2027. The package also addresses the treatment of tax incentives through a Substance‑Based Tax Incentive (SBTI) safe harbour. Reporting and governance: the GIR becomes a management project In 2026, Pillar Two reporting is as significant as com - putation. Groups making the side‑by‑side election still need to file a GloBE Information Return (GIR), but the GIR may be simplified to minimise required informa - tion, with only certain sections required for electing groups. This confirms a broader trend: the Inclusive Framework is willing to simplify reporting for certain cases, but the reporting obligation remains a central compliance deliverable. Luxembourg’s approach to Pillar Two in 2026 illus - trates the same shift toward operational readiness. Luxembourg transposed DAC9 into domestic law on
International tax in 2026 is defined less by new con - cepts and more by operationalisation. The OECD/G20 Inclusive Framework’s global minimum tax has moved from negotiation into routine compliance, and the practical focus has shifted to safe harbours, informa - tion returns and data governance. In parallel, the Euro - pean Union is re‑orienting its direct tax agenda toward simplification and consolidation, while continuing to implement multi‑year digital projects in VAT and with - holding tax relief. Luxembourg sits at the intersection of these developments: it is implementing Pillar Two and DAC9 in a way that emphasises administrative readiness, while delivering targeted domestic clarifica - tions and reforms that matter for cross‑border invest - ment funds, financing structures and internationally mobile workforces. Pillar Two Moves From Design to Execution The “side‑by‑side” package reshapes the compliance landscape A central international trend for 2026 is the stabilisa - tion of the Pillar Two architecture through the Inclusive Framework’s “side‑by‑side” package. The package is designed to reduce the compliance burden and to accommodate the concerns of the United States by introducing a safe harbour mechanism that should, in practice, exempt US‑parented multinational groups from Pillar Two top-up taxes (except Pillar Two local top-up tax), while attempting to preserve the over - all integrity of the Pillar Two framework. For Luxem - bourg‑centred groups, the package matters because it influences the extent to which full computations are needed in certain jurisdictions, the sequencing of elections, and the content of reporting. A new UPE safe harbour may apply for periods begin - ning on or after 1 January 2026. This safe harbour effectively replaces the existing transitional UTPR safe harbour rule, which expired at the end of 2025, although the jurisdictions covered may be significantly narrower. Domestic top-up taxes (QDMTT) remain fully appli - cable, including for groups eligible for side‑by‑side or UPE safe harbours. In practice, this means that Lux - embourg groups should treat the QDMTT analysis as the starting point and should not assume that a safe harbour election removes local top‑up tax exposure.
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