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Pillar Two is designed to ensure that large multinational groups (with annual consolidated revenue of at least 750 million) pay a minimum effective tax rate of 15% on their profits, regardless of where they operate. The rules aim to curb profit shifting to low-tax jurisdictions and prevent a “race to the bottom” in corporate tax rates. While more than 65 jurisdictions have already implemented or committed to these rules, some major economies have not. The United States proposed retaliatory measures if Pillar Two rules would affect U.S. headquartered groups; thus, the Side-by-Side package provides certainty and mitigates the compliance burden for global businesses. For more background, see our previous article.
The side-by-side package consists of the following measures:
The Side-by-Side (SbS) Safe Harbour introduces a mechanism to recognise qualifying tax systems as equivalent to Pillar Two. This means that multinationals headquartered in qualifying jurisdictions will not face additional top-up taxes under the Income Inclusion Rule (IIR) or the Undertaxed Profits Rule (UTPR). As of January 1, 2026, only the U.S. tax system is considered a Qualified SbS Regime. The package, however, still allows jurisdictions to apply the Qualifying Domestic Top-up Tax (QDMTT).
To meet a qualifying tax system, a jurisdiction must meet technical criteria that demonstrate an equivalent standard to alternative minimum taxation of at least 15%, and furthermore a statutory corporate tax income rate of 20% or more. Additionally, foreign profits under the local laws of that jurisdiction also need to be included with regard to an equivalent standard of alternative minimum taxation at a minimum of 15%.
When the UPE is located in a jurisdiction with a Qualified SbS Regime, the IIR and UTPR charging rules do not apply to the group. The United States has already been confirmed as meeting these requirements, meaning US-headquartered multinationals will primarily benefit from this safe harbour. Other jurisdictions can apply for recognition in 2026, with further opportunities in 2027 and 2028.
Global businesses must still comply with detailed GloBE filings for jurisdictions that have already enacted domestic legislation for Pillar Two in 2024 and 2025. Global compliance is expected to require significant preparation.
The UPE Safe Harbour is similar to the SbS Safe Harbour but only exempts the application of the UTPR. When the jurisdiction of the Ultimate Parent Entity (UPE) has an eligible tax system but does not meet the foreign tax system criteria of the SbS Safe Harbour, the MNE could still apply a separate UPE Safe Harbour. This safe harbour applies to jurisdictions with a Qualified UPE Regime, under which the Top-up Tax under the UTPR for the UPE jurisdiction is deemed to be zero.
A jurisdiction qualifies for a UPE Safe Harbour if it meets the eligible tax system criteria as outlined under the SbS Safe Harbour. The eligible domestic system must have been enacted and effective as of 1 January 2026. Jurisdictions meeting the criteria request the Inclusive Framework (IF) to assess and confirm their regime as a Qualified UPE Regime. At present, it is unclear which jurisdictions will qualify for a UPE Safe Harbour.
The Side-by-Side Package introduces a permanent Simplified Effective Tax Rate (ETR) Safe Harbour, intended to reduce the global compliance burden in many jurisdictions and the application of the Pillar Two rules. Under this Safe Harbour, the Top-up Tax for a Tested Jurisdiction is deemed to be zero for a fiscal year where the relevant conditions are met.
An MNE Group may apply the Simplified ETR Safe Harbour for a Tested Jurisdiction where either (i) the jurisdiction has a ‘Simplified ETR’ of at least 15%, or (ii) the jurisdiction reflects a ‘Simplified Loss’. The Simplified ETR is calculated by dividing Simplified Taxes by Simplified Income, both of which are determined using financial accounting data, subject to a defined set of adjustments to align the outcome with the GloBE framework.
Although the Simplified ETR Safe Harbour reduces specific computational steps compared to the standard full GloBE calculation, its application continues to require substantial data collection and adjustments, including those related to deferred taxes, specific exclusions and transaction-driven items such as mergers and acquisitions (M&A), transfer pricing adjustments and cross-border tax allocations.
The Simplified ETR Safe Harbour will generally apply to fiscal years beginning on or after 31 December 2026 (i.e., the start of calendar year 2027). In limited cases, jurisdictions may opt for earlier application from fiscal year 2026, provided that all jurisdictions with taxing rights in respect of the Tested Jurisdiction have adopted this approach and a valid election by the MNE group is made.
To support the transition to the Simplified ETR Safe Harbour, the Inclusive Framework has agreed to a one-year extension of the Transitional Country-by-Country Reporting (CbCR) Safe Harbour. As a result, the Transitional CbCR Safe Harbour remains available for Fiscal Years beginning on or before 31 December 2027, excluding any Fiscal Year ending after 30 June 2029.
For this extended period, the 17% Simplified ETR threshold applicable for FY 2026 will also apply to FY 2027. During the transition period, MNE Groups may elect, on a jurisdiction-by-jurisdiction basis, whether to use the Transitional CbCR Safe Harbour or the Simplified ETR Safe Harbour, allowing flexibility in managing Pillar Two compliance during the phase-in of the permanent global framework.
The SbS package also addresses a new Safe Harbour in relation to the treatment of qualifying tax incentives (QTIs). Under the Substance-Based Tax Incentive Safe Harbour, specific tax incentives tied to real economic activity will receive more favourable treatment under Pillar Two, because an amount can be added to Covered Taxes (or Simplified Covered Taxes if Simplified ETR Safe Harbour is applied). The incentives include:
The calculated amount attributable to these tax incentives increases the amount of Covered Taxes but does not alter the amount of qualifying income. To ensure this applies only to businesses with real substance, a maximum cap applies per jurisdiction. Multinationals can choose the following two options per jurisdiction:
This approach to tax incentives acknowledges the role of tax policy in promoting innovation and sustainability while maintaining safeguards against abuse and the underlying objectives of Pillar Two.
The Netherlands announced that a legislative proposal to implement the Side-by-Side Package will be presented to Parliament by the summer of 2026. In the meantime, multinationals should assess how these developments affect their tax positions, particularly in relation to Safe Harbour eligibility and the treatment of incentives.
Beyond Safe Harbours, this agreement introduces simplification measures to ease compliance burdens. These include an extension of the transitional CbCR Safe Harbour by one year and the introduction of a permanent Simplified ETR Safe Harbour from 2027, allowing companies to calculate their effective tax rate using financial statements rather than complex adjustments. More detailed rules regarding the application of the Simplified ETR Safe Harbour are expected to be released in mid-2026. We note that further simplifications into the permanent global framework are likely, as this won’t be the last call for Safe Harbours and additional changes.
We can help you with the assessment of the precise impact the Global Minimum Tax will have on your company, as well as assist you with your compliance framework. We will keep you informed on any further developments on the Simplified ETR Safe Harbour and the Substance-Based Tax Incentives, and can help you in the complete process.
