On 5 January 2026, the OECD Inclusive Framework issued additional guidance on the application of the Global Anti-Base Erosion Model Rules (“Pillar Two” or the “GloBE Rules”). This guidance covers several topics, most notably the “Side-by-Side Safe Harbour”, which is currently applicable to US-parented multinational enterprises.
In addition to this considerable carve-out for US-parented multinational enterprises (“MNEs”), the new guidance includes the following measures:
Material simplifications
Simplified ETR Safe Harbour
Under this safe harbour, an MNE Group’s Effective Tax Rate (“ETR”) is determined pursuant to a simplified calculation based on income and taxes drawn from the MNE Group’s reporting packages, with minimal adjustments. The Simplified ETR Safe Harbour will be available to MNE Groups in all jurisdictions from the beginning of 2027, or from the beginning of 2026 in certain circumstances.
Extension of the Transitional CbCR Safe Harbour
The Inclusive Framework has agreed to a one-year extension of the Transitional CbCR Safe Harbour in order to allow sufficient time to implement the Simplified ETR Safe Harbour.
Substance-based Tax Incentive Safe-Harbour
The guidance introduces a safe harbour allowing taxpayers to benefit from certain tax incentives that are strongly connected to economic substance in the relevant jurisdiction. The Substance-based Tax Incentive Safe Harbour allows an MNE Group to be eligible where the Qualified Tax Incentive is generally available to taxpayers and is calculated based on expenditures incurred or on the amount of tangible property produced in the jurisdiction.
Side-by-Side Safe Harbours system
As of 1 January 2026, an MNE headquartered in a Qualified SbS Regime or Qualified UPE Regime (as defined in the guidance) may elect to have its Top-Up Tax deemed to be zero for the purposes of the Income Inclusion Rule (“IIR”) and the Under-Taxed Profits Rule (“UTPR”) for the entire group, including foreign entities.
The Side-by-Side ("SbS") Safe Harbour will only be available to an MNE Group whose Ultimate Parent Entity (“UPE”) is located in a jurisdiction that has both an eligible domestic tax regime and an eligible worldwide tax regime, meaning that the jurisdiction effectively achieves a minimum level of taxation on both domestic and foreign operations of MNE Groups.
The UPE Safe Harbour will apply to domestic profits of MNE Groups headquartered in jurisdictions with a pre-existing eligible domestic tax regime. Where an MNE Group elects to apply the UPE Safe Harbour, it will not be subject to the UTPR in respect of profits located in the UPE jurisdiction.
Jurisdictions meeting the criteria to be considered a Qualified SbS Regime or Qualified UPE Regime will be recorded in a Central Record of Jurisdictions. Currently, only the United States has been included as a Qualified SbS Regime, reflecting the US position that US-parented MNE Groups should not be subject to additional Top-Up Tax under the IIR or UTPR. Other jurisdictions may benefit from this designation in the future. This change represents a significant evolution in the scope of the Pillar Two Rules.
These changes will need to be reflected in the EU Pillar Two Directive adopted in 2022 and in Member States’ domestic legislation implementing the GloBE Rules. The exact legal mechanism for such amendments remains unclear, although the European Commission has previously stated that it could rely on Article 32, which allows Member States to apply safe harbour rules without formally amending the Directive.
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