On January 5, 2026, the OECD published the Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package (side-by-side package), following months of negotiations. The side-by-side package extends and introduces new safe harbors from application of Pillar Two Income Inclusion Rules (IIR) and Under Taxed Profits Rules (UTPR). These significant changes should provide immediate relief to US and non-US headquartered companies in 2026, and are designed to allow for an orderly transition to a simplified application of Pillar Two Rules in future years.
The most anticipated update is the adoption of a Side-by-Side Safe Harbor (SbS Safe Harbor). Currently, the SBS Safe Harbor is applicable only to US-headquartered MNEs. A new UPE Safe Harbor designed for non-US headquartered MNEs was also introduced. Together, the two safe harbors comprise a new Side-by-Side System that exempts qualifying companies from IIRs and UTPRs but, importantly, not qualified domestic minimum top up taxes (QDMTTs).
In addition, the side-by-side package includes:
- Extension of the Transitional CbCR (country-by-country reporting) Safe Harbor (TCSH) through tax years ending June 30, 2029;
- Adoption of a permanent Simplified Effective Tax Rate Safe Harbor (SESH) effective as of January 1, 2026, but intended to provide relief after the TCSH sunsets for those qualifying non-US-headquartered multinationals that cannot rely on the UPE Safe Harbor or choose not to rely on another available safe harbor; and
- A Substance-Based Tax Incentive (SBTI) Safe Harbor intended to better align treatment of nonrefundable and refundable tax incentives under the Pillar Two Rules.
We discuss how businesses may qualify for the safe harbors and the key issues that must now be addressed, including re-evaluating Pillar Two planning and compliance for 2026 and future years.
I. Side-by-Side System
The concept of a global minimum tax (GMT) based on a common approach underpinned the establishment of Pillar Two as the primary system for ensuring minimum taxation globally. The Inclusive Framework (IF), however, recognized tax regimes exist (such as the US worldwide tax system), or may be implemented in the future, that contain minimum taxation requirements for both domestic and foreign income of MNE Groups that choose to be headquartered in that jurisdiction. In such cases, those tax regimes should be considered to exist side-by-side Pillar Two’s GMT rules. The side-by-side package allows a tax regime that overlaps in scope with Pillar Two, maintains similar policy objectives and achieves a complementary impact as the GMT to qualify for one of two safe harbors if certain criteria are met.
The two safe harbors of the so-called Side-by-Side System are (1) the SbS Safe Habor, which provides relief from IIRs and UTPRs, and (2) the UPE Safe Harbor, which provides relief from UTPRs only. Regardless of the safe harbor, in all QDMTT jurisdictions, the QDMTT must be calculated (without the pushdown of taxes on CFCs or foreign branches).
a. SbS Safe Harbor
Currently, the IF has approved only the US tax system as a “Qualified SbS Jurisdiction” meaning that only US-headquartered MNEs may elect for the SbS Safe Harbor to apply to fiscal years beginning on or after January 1, 2026.
The SbS Safe Harbor election is made by the constituent entity on the Global Information Return (GIR). Once the election is made, the Top-up Tax for a jurisdiction for a fiscal year shall be deemed to be zero for purposes of the IIR and the UTPR. Because MNE Groups remain subject to QDMTTs, they accordingly remain subject to GIR filing obligations for QDMTT purposes.
Where an election for the SbS Safe Harbor is in place, the Top-up Tax arising with respect to any interest in a joint venture or JV subsidiary owned by a Constituent Entity of an MNE Group will also be deemed to be zero under the IIR and the UTPR if the UPE of that MNE Group is located in a Qualified SbS Jurisdiction.
A jurisdiction has a Qualified SbS Regime if it provides a foreign tax credit for QDMTTs and is comprised of both an eligible domestic and an eligible worldwide system enacted prior to January 1, 2026. Upon request, the IF will assess a member jurisdiction’s pre-existing tax regime by the end of the first half of 2026. Other IF jurisdictions may initiate requests in 2027 or 2028 (although it is noted that the GMT based on the common approach (including implementation of QDMTTs) should be the primary system).
To be considered an eligible domestic tax system, the tax regime must:
- Have at least a 20% statutory corporate income tax (CIT) rate taking into account sub-national CIT and any preferential adjustments;
- Have at least a 15% QDMTT or CAMT that is based on financial statement income applicable to a substantial portion of the aggregate income of in-scope MNE Groups’ operations in the jurisdiction; and
- Present no material risk that an ETR below 15% on overall domestic profits will result (taking into account incentives).
To be considered an eligible worldwide tax system, the tax regime must:
- Be applicable to all resident corporations on foreign income;
- Be imposed on a broad base that (i) includes the active and passive income of foreign branches and CFCs regardless of whether the income is distributed, (ii) is only subject to limited income exclusions which are consistent with the policy objectives of minimum taxation (for example, high taxed income exclusions);
- Incorporate substantial mechanisms which operate unilaterally to address BEPS risks; and
- Present no material risk of resulting in ETRs below 15% on overall foreign profits (taking into account incentives).
Where the IF determines that a jurisdiction is a Qualified SbS Regime, that jurisdiction shall be listed on the Central Record. An MNE Group with its UPE located in a jurisdiction that has a Qualified SbS Regime can elect for the SbS Safe Harbor for Fiscal Years commencing on or after January 1, 2026, or a later year as listed in the Central Record.
b. UPE Safe Harbor
Recognizing that many jurisdictions’ domestic tax regimes will meet the criteria to be considered a eligible domestic tax regime, but not an eligible worldwide system, the Side-by-Side System introduces a UPE Safe Harbor for those jurisdictions such that domestic profits of non-US headquartered MNE groups will not be subject to the UTPR if the UPE Safe Harbor election is made. The UPE Safe Harbor applies for fiscal years commencing on or after January 1, 2026, and effectively replaces the Transitional UTPR Safe Harbor, which expired at the end of 2025.
Where the IF has determined that a jurisdiction has a Qualified UPE Regime, that jurisdiction shall be listed as such on the Central Record. Currently, no jurisdictions are listed as Qualified UPE Regimes; however, if a jurisdiction has an eligible domestic tax system enacted and in effect on January 1, 2026, upon request, the IF will assess the member jurisdiction’s pre-existing domestic tax regime by the end of the first half of 2026.
The GIR will be amended to include an additional data point for the MNE Group to make an election for the UPE Safe Harbor. Because the general section of the GIR provides information on the corporate structure of the MNE Group, including identification of the UPE and the jurisdiction where it is located, MNE Groups will not be required to provide any additional information to demonstrate eligibility.
II. Extension of the Transitional CbCR Safe Harbor
In December 2025, the IF agreed to a SESH, discussed further below, that is designed to be the permanent replacement for the Simplified ETR Test in the TCSH. To allow for an orderly transition from the TCSH to the SESH, the side-by-side package extends the TCSH to fiscal years beginning on or before December 31, 2027, but not including a fiscal year that ends after June 30, 2029. The transition rate of 17% for 2026 fiscal years will apply to 2027 fiscal years. For most MNE Groups, the transition period will provide up to four fiscal years of compliance relief for IIRs and QDMTTs, and up to three fiscal years of compliance relief for UTPRs.
III. Simplified ETR Safe Harbor
For non-US headquartered MNEs, the new permanent SESH represents a significant first step towards simplification, but the IF recognizes that it needs to continue to provide clarifying guidance and simplification of the GloBE Rules. A particular focus will be on continuity issues to ensure that taxpayers can benefit from the simplifications under the SESH even where, in a subsequent year, they may not qualify and are required to calculate their ETR under the full Model Rules. Finally, work will include exploring whether the simplified calculations in the SESH can be integrated into the broader design of the Model Rules, beyond the context of safe harbors.
Under the SESH, if the simplified jurisdictional ETR meets or exceeds 15%, Top-up Tax for the relevant jurisdiction is considered zero. MNE Groups can generally elect this safe harbor for fiscal years beginning on or after December 31, 2026.
The calculation for the SESH primarily relies on financial accounting data from the group’s consolidated financial statements. Unlike the calculation under the full Model Rules and the previous version of the safe harbor, MNE Groups may now aggregate income and taxes of local entities at the jurisdictional level. This eliminates the need to perform calculations on an entity-by-entity basis, streamlining compliance and reporting.
The SESH should make it easier to calculate jurisdictional income during mergers and acquisitions by allowing MNE Groups to avoid the complex process of removing purchase price allocation adjustments from financial accounts, provided certain conditions are met, such as a requirement that assets have the same tax basis before and after the transaction.
The numerator of the SESH equation is derived from jurisdictional tax expense, subject to certain adjustments, and removes reference to complex recapture rules such that MNEs no longer have to monitor whether deferred tax liabilities reverse within five years. In addition, net deferred tax expenses are recast at the 15% minimum rate using a simplified formula rather than recasting each asset and liability individually. Calculations must also align with four core principles:
- Matching Principle: intragroup income must be recognized in the same fiscal year
- Full Allocation Principle: all profit/loss must be allocated to a Tested Jurisdiction
- Single Expense and Loss Principle: each expense/loss is deducted only once
- Single Tax Principle: taxes are recorded only once and in a single jurisdiction
If the MNE Group fails to qualify for the SESH or chooses not to elect in a given year, it may only re-elect the SESH if it demonstrates that it had no Top-up Tax liability for every fiscal year beginning within the 24 months preceding the first day of the year for which the re-election is sought. During this two-year probationary period, the absence of a Top-up Tax must be confirmed using either the full Model Rules or another available safe harbor.
IV. Substance Based Tax Incentive Safe Harbor
Non-US headquartered MNE Groups electing the SESH, or calculating their ETR under the full Model Rules, may elect the SBTI Safe Harbor to reduce Top-up tax in a jurisdiction in an amount that corresponds to tax incentives (such as the US R&D credit) provided in relation to substantive activities in that jurisdiction, so-called Qualified Tax Incentives (QTIs). US MNEs should also see benefits from this treatment of qualifying non-refundable credits in the calculation of QDMTTs.
A QTI is one that is generally available to taxpayers and is calculated based on expenditures incurred (an expenditure-based incentive) or based on the amount of tangible property produced in the jurisdiction (a production-based tax incentive). A substance cap limits the allowance for QTIs by reference to the amount of substance in the jurisdiction. The cap is equal to the greater of 5.5% of the payroll costs or depreciation of tangible assets in the jurisdiction. Alternatively, the MNE Group can make a 5-year election to use a cap which is equal to 1% of the carrying value of tangible assets in the jurisdiction.
QTIs are not included in GloBE income; therefore, an incentive treated as a QTI could be more beneficial than a qualified refundable tax credit or a marketable transferable tax credit. An election to treat such credits as QTIs is available to equalize treatment of the credits.
V. Looking Ahead
The side-by-side package provides significant relief to US-headquartered MNEs; however, given the optionality of the available safe harbors, US and non-US headquartered companies should review their structures to determine the impact of the GloBE rules and modify their current and future planning accordingly, not only in regards to UPE structure, but also qualification for incentives. In addition, companies need to continue to monitor adoption of safe harbors in 2026 in jurisdictions where they may be potentially subject to IIRs or UTPRs.
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