OECD Pillar 2 developments: Side-by-Side Package explained

Why it matters

The SbS package introduces several welcome simplifications and clarifications to the GloBE Rules, and it also introduces new safe harbours. These measures could significantly influence future exposure of Multinational Enterprise (MNE) Groups under the global minimum tax rules. MNE Groups should carefully review these safe harbours and assess their potential impact.

SbS package summarized

The SbS package introduces and extends several Safe Harbour rules as listed below:

• SbS system is introduced, potentially exempting qualifying (MNE Groups from Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) (as of 1 January 2026). Two safe harbours are introduced in this regard: the SbS Safe Harbour and the Ultimate Parent Entity (UPE) Safe Harbour.
• A permanent Simplified Effective Tax Rate (ETR) Safe Harbour will be introduced as of 2027, with an optional early application in 2026.
• The Transitional Country‑by‑Country Reporting (CbCR) Safe Harbour is extended by one year, now including fiscal years beginning on or before 31 December 2027.
• As of 1 January 2026, the Substance Based Tax Incentive (SBTI) Safe Harbour is introduced for incentives linked to real economic activities.

SbS package explained

SbS Safe Harbour and UPE Safe Harbour

The SbS package introduces two safe harbours designed for MNE Groups headquartered in jurisdictions with tax regimes that meet the eligibility standards set by the OECD/G20 Inclusive Framework on BEPS.
The SbS Safe Harbour can only be applied by an MNE Group whose Ultimate Parent Entity (UPE) is located in a jurisdiction with both an eligible domestic minimum tax regime and an eligible worldwide minimum tax regime called an SbS regime. These regimes must ensure a minimum level of taxation on domestic and foreign income. The US appears as the only qualified SbS regime (effective 1 Jan 2026) as per the Central Record for purposes of the Global Minimum Tax | OECD. Where an MNE Group chooses SbS Safe Harbour, it is exempt from top-up taxation under the IIR and the UTPR across the entire group, including any intermediate parent entities and joint ventures.

The UPE Safe Harbour applies only to the domestic profits of MNE Groups located in jurisdictions with a pre‑existing eligible domestic minimum tax. If the UPE Safe Harbour is applied, the group will not be liable to UTPR charges on profits generated in the UPE jurisdiction.

Interaction with QDMTTs and Filing Obligations

Regardless of whether a group relies on the SbS or UPE Safe Harbour, it remains fully subject to Qualified Domestic Minimum Top‑up Tax (QDMTT) in all jurisdictions that have implemented these safe harbours. Additionally, the safe harbours relieve certain GloBE top‑up taxes, they do not fully remove the GloBE Information Return filing requirements as only the high-level GloBE summary (Section 1.4) can be omitted.

Permanent Simplified ETR Safe Harbour

Under the Simplified ETR Safe Harbour, an MNE Group may determine its effective tax rate for the jurisdiction for which the MNE is performing the ETR calculation (Tested Jurisdiction) using a streamlined calculation based largely on the income and tax information contained in the group’s financial reporting. If this Simplified ETR Safe Harbour reaches at least 15%, the jurisdiction’s Top‑up Tax is deemed to be nil, and no detailed GloBE computation is required.

The Simplified ETR Safe Harbour is based on financial accounting data prepared for the UPE’s consolidated financial statements, subject to the adjustments specified in this Safe Harbour. Where a QDMTT jurisdiction requires the Local Financial Accounting Standard, the MNE Group must use that local standard for determining the Simplified ETR for QDMTT purposes.

The Simplified ETR Safe Harbour includes specific rules for the first year an MNE Group elects to apply it, as well as conditions for re‑entry if the group steps out in a later year. Unlike the Transitional CbCR Safe Harbour, it does not include a “once out, always out” restriction.

The Simplified ETR Safe Harbour will apply for fiscal years beginning on or after 31 December 2026, with the option for jurisdictions to allow earlier application for fiscal years beginning on or after 31 December 2025.

Transitional CbCR Safe Harbour extension

To facilitate the shift from the Transitional CbCR Safe Harbor to the Simplified ETR Safe Harbor, the use of the Transitional CbCR Safe Harbor will be extended by one year. This extension applies to fiscal years starting on or before 31 December 2027 but excludes any fiscal year ending after 30 June 2029. Furthermore, the transition rate required to satisfy the Simplified ETR Test for fiscal year 2026 (set at 17%) will also be applicable for the fiscal year 2027.

Substance Based Tax Incentives Safe Harbour

The Substance Based Tax Incentive (SBTI) Safe Harbour enables MNE Groups to continue benefiting from tax incentives that are closely linked to real economic activity in a jurisdiction. It does so by allowing Qualified Tax Incentives (QTIs) to be added to a Constituent Entity’s Covered Taxes, subject to limits designed to preserve the integrity of the global minimum tax.

A QTI includes incentives that are broadly available and tied either to expenditures incurred in the jurisdiction or to the production of tangible property. The amount that can be treated as a QTI is capped based on local substance: the cap equals the greater of 5.5% of payroll or 5.5% of depreciation on tangible assets, with an optional alternative cap of 1% of the carrying value of tangible assets.

QTIs are excluded from GloBE Income, which can make their treatment more favourable than that of Qualified Refundable Tax Credits (QRTCs) or Marketable Transferable Tax Credits (MTTCs). An annual election allows an MNE Group to reclassify certain QRTCs or MTTCs as QTIs—removing them from GloBE Income and instead treating them as reductions to Adjusted Covered Taxes before the QTI adjustment is applied. The Substance Cap applies to the total amount of QTIs recognized under this mechanism.

A Filing Constituent Entity may elect the SBTI Safe Harbour for a Tested Jurisdiction for fiscal years beginning on or after 1 January 2026.

EU Implementation of the SbS package

At the end of 2022, the EU adopted the Pillar Two Directive, which forms the basis for the implementation of the GloBE Rules across EU Member States. The SbS package followed Pillar Two Directive, meanings the EU Member States may decide to propose amendments to their national laws based on the SbS package. Therefore, MNE Groups should monitor how relevant jurisdictions will incorporate the SbS package into their domestic legislation.

Implementation of the SbS package in the Netherlands

The State Secretary of Finance informed the House of Representatives in a letter about the SbS package. It is expected that the Law implementing SbS package will be submitted to the House of Representatives before summer 2026.

Next steps

If you would like to analyze your structure in light of the new SbS package and assess any potential impact on your business, please contact us to discuss next steps.