Pillar Two: Side-by-Side and other OECD updates
Groups with consolidated group revenue above €750 million in at least two of the previous four accounting periods must consider Pillar Two ‘top up’ taxes. Over 140 countries have adopted the rules, but the US, China and India have remained outside the rules.
However, in January 2026, the Organisation for Economic Co-operation and Development (OECD) released guidance on its Side-by-Side (SbS) agreement as part of a broader package of administrative guidance on the Global Anti-Base Erosion (GloBE) Model Rules (or Pillar Two).
The SbS System introduces two new Pillar Two safe harbours: (i) the Side-by-Side Safe Harbour (SbS SH) for MNE groups headquartered in jurisdictions with both eligible domestic and worldwide tax systems; and (ii) the Ultimate Parent Entity Safe Harbour (UPE SH) for MNE groups with an ultimate parent entity (UPE) located in a jurisdiction that has an eligible domestic tax system but not an eligible worldwide tax system.
Side-by-Side Safe Harbour (SbS SH)
- From 1 Jan 2026, US-headed groups benefit from being excluded from both the IIR and UTPR, and will no longer need IPE filings in non-US territories.
- No changes to requirements for 2024 and 2025 – all groups must continue complying with existing Pillar Two rules ahead of the first 2026 filings.
- Groups with a UPE in a Qualified SbS Regime may elect a nil IIR/UTPR topup tax across domestic and foreign operations. But QDMTTs remain fully applicable and unaffected.
UPE Safe Harbour (UPE SH)
- From 1 January 2026, UPE SH applies where the parent jurisdiction meets domestic but not worldwide minimum tax requirements.
- UTPR topup tax for the UPE jurisdiction is deemed zero. Replaces the Transitional UTPR Safe Harbour from 2026.
Transitional and permanent Safe Harbours
- The Simplified ETR CbCR Safe Harbour is extended through 2027, easing compliance during transition. (Routine profit/de minimis tests will also be integrated shortly.)
- ETR calculations from 1 January 2026 will be made before qualified tax incentives, reducing failures driven solely by incentives.
Side-by-Side Safe Harbour – 1 January 2026
The SbS system is intended to reduce the duplication of compliance and mitigate double minimum taxation where the headquarter jurisdiction meets defined minimum taxation standards. US multi-nationals will benefit from the SbS SH that implements the G7’s June 2025 political agreement to exclude US-parented multi-national groups from the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR). In addition:
- Other jurisdictions may be added but US agreement was reached on the grounds that the existing US law is sufficiently robust in its taxation of domestic and foreign profits, such as through US NCTI – which predates Pillar Two and to some extent may have inspired it.
- The new SbS SH operates by allowing MNE groups with a UPE located in a jurisdiction with a “Qualified SbS Regime” to elect a deemed liability of nil under both the IIR and UTPR across all domestic and foreign operations.
- Qualifying Domestic Minimum Top-up Taxes (QDMTTs) are unaffected by the new guidance and, where implemented in relevant jurisdictions, will continue to apply to US-parented groups. While the US is the only jurisdiction with a Qualified SbS Regime as of 1 January 2026, the package contemplates that other countries may request the Inclusive Framework to assess their tax regime against the eligibility criteria.
This applies from 1 January 2026 and recognises the special status of pre-existing minimum tax regimes, with its own eligibility criteria. QDMTTs remain unaffected and are credited under the Eligible SbS regime. The US is now the only jurisdiction listed on the Central Record as having an Eligible SbS Regime.
UPE Safe Harbour – 1 January 2026
Alongside the SbS Safe Harbour, the package introduced a new UPE Safe Harbour for jurisdictions that meet the minimum taxation requirements with respect to domestic income, even if they do not do so with respect to foreign income. The UPE Safe Harbour allows MNE groups parented in the qualified jurisdiction to exclude the UPE jurisdiction profits from the application of the UTPR. There must be no material risk that the effective tax rate could drop below 15%.
Where an election is made, this will be a separate safe harbour for groups headquartered in jurisdictions that meet the domestic eligibility criteria but do not meet the full SbS criteria (i.e., no eligible worldwide tax system), with the following impact:
- For UTPR purposes, top-up tax for the UPE jurisdiction is deemed to be zero (for constituent entities located in the UPE jurisdiction).
- Timing: applies from 1 January 2026 and effectively replaces the Transitional UTPR Safe Harbour, which expires at the end of 2025.
It has eligibility criteria relating to domestic tax system, limiting the application of UTPR in respect of the UPE jurisdiction.
One year extension of the simplified ETR transitional CbCR Safe Harbour
A welcome extension of the transitional Safe harbour rules has been made, meaning that groups can continue to benefit from these calculations and filing simplifications into 2027. They will also overlap more closely with the permanent Safe Harbour rules:
- From 2027 (2026 by election), a permanent Simplified Effective Tax Rate (ETR) Safe Harbour is intended to substantially simplify compliance for non-US-parented MNEs that remain fully subject to the GMT rules, and extends the transitional country-by-country (CbCR) Safe Harbour by one year.
- The routine profits and de minimis tests will also be integrated into permanent safe harbours in due course.
- From 1 January 2026, the ETR will be calculated before Qualified Tax Incentives (QTIs), which promises to help groups where legitimate incentives are the only reason the ETR fails this safe harbour.
Future monitoring
QDMTTs remain unaffected, with conditional taxes not recognised as covered taxes. There were some simplifications of administration, and there is ongoing commitment to address risks to the level playing field for BEPS.
What next?
SbS must now be legislated domestically by each Inclusive Framework (IF) member. IFRS and FRS102 will consider the effects of a change in tax law to be accounted for in the period in which the law is substantively enacted. Once this happens, groups with US UPEs will not need to file Intermediate Parent Entity (IPE) filings in non-US territories for relevant periods (i.e. 2026 onwards).
FY2024 – FY2025
In the meantime, groups affected by Pillar Two must continue to comply with all countries’ rules for the FY2024 and FY2025 years. There is no change in requirements for US-headed multi-nationals or other groups for these years. The ‘Side-by-Side’ system began on 1 January 2026.
As the first deadline is 30 June 2026, all affected groups need to continue their Pillar Two implementation journey with sufficient time to meet the deadlines, as penalties can apply for late filings, depending on the territory.
Contact us to find out how our international tax team can help you navigate Pillar Two with practical, clear advice tailored to your group.
