International: Pillar Two Side-by-Side Package released

In brief

Yesterday, the OECD Inclusive Framework published the long-awaited Pillar Two Side-by-Side Package. Baker McKenzie is hosting a client webinar later today, in which members of our Pillar Two Steering Committee will focus on their initial impressions of the Package and its implications. Please register here.

Key components

At a high level, the Package contains the following key components:

• First, the Package contains the long-awaited “Side-by-Side Safe Harbour,” which allows MNE groups whose ultimate parent entities are based in jurisdictions with sufficiently robust domestic and worldwide tax regimes to elect to exempt group members from the IIR and the UTPR in fiscal years beginning on or after 1 January 2026. According to the Central Record for purposes of the Global Minimum Tax | OECD, US-parented groups fall within this Safe Harbour. The package also introduces a separate UPE Safe Harbour for a jurisdiction that has a sufficiently robust tax system but does not qualify for the Side-by-Side Safe Harbour. The UPE Safe Harbour protects a qualifying MNE from the imposition of the UTPR on earnings sourced in the ultimate parent entity jurisdiction but does not prevent other jurisdictions from applying the IIR or UTPR to the ultimate parent entity’s subsidiaries outside of the UPE jurisdiction.
• Second, the Package introduces a “Substance-based Tax Incentive Safe Harbour,” which aims to prevent expenditures associated with Qualified Tax Incentives that do not satisfy the criteria for Qualified Refundable Tax Credits (such as the US R&D credit) from reducing Covered Taxes, up to a specified cap.
• Third, the Package extends the Transitional CbCR Safe Harbour for another year. The Safe Harbour rate for this additional year remains 17%.
• Fourth, the Package introduces a complex, permanent Simplified ETR Safe Harbour that also applies to QDMTT jurisdictions. This Safe Harbour is therefore also relevant to MNE groups whose ultimate parents are located in Side-by-Side Safe Harbour jurisdictions.
• Fifth, the Package promises an evidence-based stocktake process to ensure a level playing field is maintained for all Inclusive Framework Members. The stocktake process emphasizes that QDMTT regimes remain the principal Pillar Two mechanism for ensuring the protection of local tax bases, particularly in developing countries.

Important to note

• Timing: As noted above, the Side-by-Side Safe Harbour generally applies for fiscal years starting in 2026 or later. This means that for FY 2024 and 2025, jurisdictions across the globe may still apply the IIR and the UTPR to in-scope groups including US-parented MNEs.
• Pillar Two remains relevant for all MNEs, including US-parented MNEs: the Package emphasizes that QDMTTs (where applicable) will continue to apply, e.g., where a group qualifies for the Side-by-Side Safe Harbour, QDMTTs continue to apply in all QDMTT jurisdictions.

What’s next

Baker McKenzie is hosting a webinar this afternoon for an initial discussion on the Package and its implications, please register here: Webinar Invitation: Pillar Two | Top-Up Talks with Baker McKenzie: Life in a Side-by-Side World | Tuesday, 6 January 2026. We will also be preparing a detailed written assessment of the Package in the very near term.