Side-by-Side Safe Harbour

The Side-by-Side Safe Harbour (SbS SH) switches off the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) for MNEs whose ultimate parent entity is located in a jurisdiction with a “Qualified SbS Regime” – currently only the US. As a result, the SbS SH is currently available to US‑parented MNEs only.

For non‑US MNEs active in the US, this means that US low‑taxed profits can still trigger a Top‑up Tax (TuT) exposure under the IIR or UTPR.

In addition, where a non‑US MNE holds non‑US subsidiaries through a US (holding) company subject to net amount of income earned by non‑US controlled foreign corporations, NCTI) (formerly known as GILTI), the group may be subject to both NCTI and IIR or UTPR on the profits of those non‑US subsidiaries. Until the end of 2025, NCTI taxes could be allocated as relevant taxes for Pillar Two purposes to the non‑US subsidiaries, mitigating TuT exposure under the IIR or UTPR in respect of such subsidiaries. The temporary allocation expired in 2025 and is not extended as part of the SbS Package. This potential double exposure is a key attention point for non‑US MNEs with non‑US operations held by a US (holding) company, which would also include inverted US companies.

Simplified Effective Tax Rate Safe Harbour

The permanent Simplified ETR Safe Harbour (SE SH) provides for a simplified effective tax rate (ETR) calculation, allowing MNEs to avoid full Pillar Two calculations and aiming to reduce Pillar Two’s administrative burden in jurisdictions where the ETR is at least 15%.

As Pillar Two can still apply to US operations of non‑US MNEs, the SE SH may reduce compliance obligations for such groups in respect of their US operations.

Substance Based Tax Incentive Safe Harbour

The Substance Based Tax Incentive Safe Harbour (SBTI SH) allows groups to eliminate any TuT attributable to Qualified Tax Incentives, subject to a Substance Cap. This Substance Cap limits the benefit of the SBTI SH to (i) 5.5% of payroll costs or depreciation of tangible assets, or (ii) 1% of the carrying value of tangible assets.

The SBTI SH can be relevant for non‑US MNEs that benefit from tax credits qualifying as Qualified Tax Incentives in the US. This typically includes US R&D tax credits, which may otherwise reduce the Pillar Two ETR in the US below 15%.

Under the SBTI SH, the portion of TuT attributable to such incentives is deemed to be zero (unless the R&D tax credit exceeds the Substance Cap), which can materially reduce Pillar Two exposure on US profits for these groups.

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