On 5 January 2026, the OECD published the long-anticipated “Side-by-Side Package” as part of its ongoing administrative guidance for Pillar Two. This package introduces several safe harbours aimed at simplifying Pillar Two compliance and resolving US concerns over the interaction of its own minimum tax with the OECD Pillar Two rules. The agreed measures include a:

1. new permanent Simplified ETR Safe Harbour;
2. one-year extension of the Transitional CbCR Safe Harbours;
3. new Substance-based Tax Incentive (SBTI) Safe Harbour;
4. Side-by-Side (SbS) Safe Harbour for US (and potentially other) headquartered MNE Groups;
5. Ultimate Parent Entity (UPE) Safe Harbour; and
6. commitment to review these measures in the future to ensure that substantial risks relating to the level playing field or BEPS are addressed.

This package – rooted in a G7 understanding from mid-2025 – allows the US global minimum tax regime to operate alongside Pillar Two, preventing the return of the US proposed Section 899 which could have led to substantial additional tax on certain US sourced income of investors from jurisdictions that implemented Pillar Two. The other safe harbours represent an initial delivery on the OECD’s previously announced commitment to simplify the Pillar Two framework.

Below, we summarize each new safe harbour and offer our observations on their practical impact. References to effective dates are based on the OECD guidance; however, the actual effective date may differ by jurisdiction depending on the timing of local implementation and whether (and to what extent) retroactive application is permitted under domestic law.

1. Simplified ETR Safe Harbour

The Simplified ETR Safe Harbour is a new permanent safe harbour replacing the temporary Simplified ETR test under the Transitional CbCR Safe Harbours. It deems the top-up tax for a jurisdiction to be zero if the MNE Group’s “Simplified ETR” in that jurisdiction is at least 15% or the MNE Group has a “Simplified Loss” in that jurisdiction.

The Simplified ETR is determined by dividing “simplified taxes” by “simplified income”, using the group’s financial accounting data with numerous adjustments and exceptions spelled out in the guidance. For example, excluded dividends and excluded equity gains or losses as defined under the GloBE Model Rules are removed from the simplified income, there are special provisions for mergers and acquisitions, and there are adjustments that are conditional, industry-specific (financial and shipping industries) and optional. Furthermore, the simplified calculations partly mirror the GloBE Model Rules for deferred tax accounting and the simplified taxes and simplified income can in principle be calculated on a jurisdictional basis (as opposed to an entity basis as required by the GloBE Model Rules).

According to the OECD guidance, the Simplified ETR Safe Harbour should apply for fiscal years starting on or after 31 December 2026 (typically FY2027), with an option for jurisdictions to make the safe harbour available one year earlier in limited cases. In any case, an MNE Group can only apply the safe harbour if it had no top-up tax liability in the jurisdiction in each of the preceding two years. If an MNE Group fails the safe harbour, it may re-enter once it has again had two consecutive fiscal years with no top-up tax liability in that jurisdiction.

Our observations: the introduction of a permanent ETR safe harbour is a welcome development, because many groups have been looking for a simpler alternative to a full Pillar Two (GloBE) calculation. At the same time, it remains to be seen to what extent this will materially reduce the compliance burden in practice. The reason is that the Simplified ETR Safe Harbour still contains many adjustments, elections and integrity requirements, and it still mirrors the application of certain GloBE Model Rules.

The OECD suggests that determining simplified income and simplified taxes directly at jurisdiction level should significantly reduce the compliance effort. We have some reservations on this point. In practice, many groups already manage their Pillar Two processes with a strong jurisdictional focus, because a jurisdictional outcome is ultimately required. In addition, the OECD only permits this approach where allocating income and taxes directly to jurisdictions (instead of entities) produces the same outcome as under the GloBE Rules. This may limit the practical usefulness of this approach.

A point we do consider a clear improvement compared to the Transitional CbCR Safe Harbours is that deferred tax expenses can be reflected without regard to any valuation allowances, or accounting recognition adjustments. This indeed addresses an issue that many businesses have seen under the Transitional CbCR Safe Harbour. It is also positive that the safe harbour does not follow a “once-out-always-out” approach, although it is debatable whether the two-year cooling-off period is really necessary.

Another practical upside is that, even if the safe harbour does not feel “simpler”, it provides an alternative computational pathway. Groups that will end up just below 15% (and therefore face top-up tax) may, due to certain simplifications included in this safe harbour, end up at or above the 15% threshold and therefore have no top-up tax under the safe harbour. For that reason, we recommend that in-scope MNE Groups model the potential impact of this safe harbour for their key jurisdictions as part of their Pillar Two planning.

Finally, the commitment by the OECD to continue exploring further simplifications suggests that the Simplified ETR Safe Harbour may be just an initial step, with potential future easing of Pillar Two’s complexity on the horizon.

2. Extension of the Transitional CbCR Safe Harbours to 2027

To ease the transition to the permanent safe harbours (in particular the permanent Simplified ETR Safe Harbour described above, with permanent De Minimis and Routine Profits safe harbours expected to follow), the OECD has extended the Transitional CbCR Safe Harbours by one year. As a result, the Transitional CbCR Safe Harbours can also be applied for fiscal years starting in 2027. The OECD also confirms that the ETR threshold for the extended year remains 17%.

Our observations: this extension is a pragmatic “breathing space” for groups that have depended on the Transitional CbCR Safe Harbour to keep early-stage compliance manageable. However, it is a short deferral, not a solution. Groups should use the additional year to strengthen data, systems and governance for either the Simplified ETR Safe Harbour or full Pillar Two computations once the transitional relief falls away.

3. Substance-based Tax Incentive (SBTI) Safe Harbour

This safe harbour eliminates top-up tax attributable to Qualified Tax Incentives (QTIs). It does so by treating the tax value of these incentives as an increase to Adjusted Covered Taxes in the relevant jurisdiction (subject to a cap, see below).

An incentive qualifies as a QTI where it is generally available and calculated directly by reference to either (i) expenditure incurred in the jurisdiction, or (ii) tangible property produced in the jurisdiction. The form of the incentive is not decisive: QTIs may take many forms, including tax credits, exemptions, enhanced allowances and “super deductions”. However, incentives that merely create timing differences (such as accelerated depreciation or immediate expensing) are excluded. In addition, the tax benefit should not exceed the amount of the underlying expenditure.

For production-based incentives, additional conditions apply. In broad terms, the incentive must be linked to the production of tangible property in the jurisdiction, be based on volume rather than value or revenue, and be based on units produced in that jurisdiction. QTIs must also relate to actual expenditure or production already incurred, meaning that incentives based solely on future commitments do not qualify.

The guidance further requires that QTIs are genuinely “generally available”, meaning that the incentives must not be effectively limited to in-scope MNE Groups and must not be dependent on discretionary governmental arrangements (e.g., rulings, bespoke grants or other negotiated outcomes).

The OECD also recognizes that treating an incentive as a QTI is more favourable than the existing Pillar Two treatment of Qualified Refundable Tax Credits (QRTCs) and Marketable Transferable Tax Credits (MTTCs). To address this potential difference, the rules allow an election to treat certain QRTCs and MTTCs as QTIs, where the relevant conditions are met.

Finally, to ensure that the favourable treatment is appropriately linked to genuine economic activity, the SBTI Safe Harbour includes a cap, applied on a jurisdiction-by-jurisdiction basis. For each jurisdiction, an MNE Group must choose between (i) a cap equal to 5.5% of the higher of eligible payroll costs or depreciation on eligible tangible assets in that jurisdiction, or (ii) a cap equal to 1% of the carrying value of eligible tangible assets in that jurisdiction. If the group opts for the second approach, that choice is locked in for a five-year period.

The guidance stipulates that the SBTI Safe Harbour is available for fiscal years beginning on or after 1 January 2026.

Our observations: the SBTI Safe Harbour is a welcome development, as it effectively provides a new carve-out from Pillar Two for certain substance-based tax incentives. At the same time, the regime is narrowly defined and highly conditional. As a result, many incentives that are economically aimed at stimulating tangible investment may still fall outside the QTI definition.

Against that background, we recommend that in-scope MNE Groups evaluate this safe harbour by (i) identifying all material tax incentives on a jurisdiction-by-jurisdiction basis, (ii) assessing which incentives may qualify as QTIs, and (iii) modelling the expected impact of the jurisdictional cap.

Finally, we would welcome further OECD work in this area. In our view, this is becoming increasingly important in light of the newly introduced Side-by-Side (and UPE) Safe Harbours (see below), to help maintain a level playing field between groups that can benefit from the Side-by-Side (and UPE) Safe Harbours and groups that cannot.

4. Side-by-Side (SbS) Safe Harbour

At the heart of the Side-by-Side Package is the SbS Safe Harbour, which addresses the treatment of groups headquartered in jurisdictions with their own minimum tax regimes. This safe harbour allows an MNE Group to be exempt from the Pillar Two top-up tax under both the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR), across all its worldwide operations, if its UPE is located in a jurisdiction with a Qualified SbS Regime. Put simply, where the group’s home country has a minimum tax regime that the OECD considers equivalent in effect to Pillar Two (i.e., ensuring a minimum level of taxation), other jurisdictions should not apply the IIR or UTPR to that group’s income.

Importantly, the SbS Safe Harbour does not prevent the operation of any Qualified Domestic Minimum Top-up Tax (QDMTT) – so if the group has low-taxed profits in a foreign country that has enacted its own 15% domestic top-up tax, that local tax would still apply. Qualifying groups are therefore only sheltered from any top-up being imposed by other countries’ IIR or UTPR.

To qualify as a jurisdiction with a Qualified SbS Regime, a jurisdiction must meet stringent conditions. Broadly, it must have (i) an eligible domestic tax system achieving effective minimum taxation for domestic operations and (ii) an eligible worldwide tax system achieving effective minimum taxation for foreign operations. Both systems must be enacted prior to 1 January 2026, or enacted later in accordance with the applicable OECD procedures. In addition, the jurisdiction must grant a foreign tax credit for QDMTTs paid to other jurisdictions. These criteria are evaluated by the OECD and the OECD will maintain a “Central Record” of jurisdictions that qualify for the SbS Safe Harbour. As of the release of the package, the OECD has identified only one jurisdiction as meeting the conditions: the US.

The SbS Safe Harbour applies for fiscal years commencing on or after 1 January 2026 (or a later year, if specified in the Central Record for the relevant jurisdiction).

From a reporting perspective, the SbS Safe Harbour does not change filing requirements for fiscal years starting before 1 January 2026. From 2026 onwards, filing remains relevant for QDMTT purposes, albeit in a reduced form.

Our observations: the SbS Safe Harbour is best understood as a political compromise intended to accommodate the US within the Pillar Two framework and to reduce the risk of conflict.

It is not a full carve-out from Pillar Two for qualifying groups (i.e., US MNEs). QDMTTs remain fully in scope and take priority (i.e., there is no “pushdown” of US CFC taxes). This means that a US-headquartered group will still be subject to Pillar Two in jurisdictions that have implemented a QDMTT. In addition, these MNEs will still need to prepare full GloBE Information Return (GIR) filings for jurisdictions where Pillar Two rules are already in effect in 2024 and 2025. Given that many jurisdictions have implemented a QDMTT, compliance with Pillar Two – and therefore compliance costs for US MNEs – will likely remain substantial (albeit in the future lower than for non-US MNEs, see below).

At the same time, the SbS Safe Harbour can be very beneficial for qualifying groups, because it removes exposure to foreign IIR and UTPR charges on worldwide operations. First, this means that qualifying groups should not face Pillar Two-type taxation in respect of profits derived from jurisdictions that have not implemented a (Q)DMTT. Second, where a jurisdiction has implemented a (Q)DMTT, the SbS Safe Harbour reduces the risk that groups need to perform multiple “parallel” computations for the same jurisdiction (for example, one under local DMTT rules and another under an IIR/UTPR regime of a different group jurisdiction). Although the OECD has introduced mechanisms and safe harbours intended to reduce double calculations, situations remain where such parallel calculations are needed. Finally, once the SbS Safe Harbour is actually available, it should allow qualifying groups to rely on more limited GIR filings, which reduces the compliance burden.

From a policy perspective, the SbS Safe Harbour inevitably raises “level playing field” questions, because it creates an asymmetry: qualifying regimes receive simplification and protection from IIR/UTPR exposure that other groups do not obtain. The OECD appears to address this concern by setting a high bar for a “qualifying” regime. In particular, one of the key conditions is that there should be no material risk that in-scope MNE Groups are subject to an effective tax rate on the overall profits of their domestic and foreign operations below 15%. The question, however, is whether this condition will in practice sufficiently prevent competitive distortions, given that “no material risk” is not the same as demonstrating the outcome through a full GloBE ETR computation in every case. Against that backdrop, the OECD has committed to undertake a stocktake by 2029 to assess any competitive impacts.

5. UPE Safe Harbour

The UPE Safe Harbour is a narrower provision, also effective for fiscal years from 1 January 2026, that complements the SbS approach. In essence, where the UPE jurisdiction meets the relevant standards, other countries should not impose a UTPR top-up tax on income arising in that jurisdiction.

The key difference compared to the full SbS Safe Harbour is scope. The UPE Safe Harbour protects only the income in the UPE’s jurisdiction from UTPR, whereas the SbS Safe Harbour can (for qualifying groups) protect the group’s worldwide income from both IIR and UTPR. Another important distinction is that, to qualify for this safe harbour, a jurisdiction needs to have only an eligible domestic tax system, and not necessarily an eligible worldwide regime. Furthermore, the domestic tax system must be enacted and in effect on 1 January 2026.

As with the SbS Safe Harbour, the OECD will maintain a list of Qualified UPE Regimes in its Central Record.

Our observations: the UPE Safe Harbour is intended to operate as the permanent successor to the Transitional UTPR Safe Harbour, which expires at the end of 2025. However, the permanent UPE Safe Harbour is subject to more conditions than the transitional version. We therefore recommend that MNE Groups currently relying on the Transitional UTPR Safe Harbour closely monitor whether they are expected to qualify for the permanent UPE Safe Harbour as well, and factor this into their Pillar Two compliance planning for 2026 and subsequent years.

Questions?

If you have any questions on the above, please don’t hesitate to contact Ilyas Benali of Svalner Atlas Netherlands. See below for his contact details.