OECD blesses exemption of qualified "side-by-side" regimes from the application of Pillar 2's IIR and UTPR taxes

OECD blesses exemption of qualified “side-by-side” regimes from the application of Pillar 2’s IIR and UTPR taxes

January 6, 2026

Yesterday, January 5, 2026, the OECD announced several revised safe harbors, including one that reflects an agreement to allow multinational entity groups (“MNEs”) with ultimate parent entities (“UPEs”) that are tax resident in countries with certain “side by side” tax regimes (“Qualified SbS Regimes”) to elect out of the application of the “income inclusion rules” (“IIRs,” analogous to the US GILTI and subpart F rules for US CFCs) and “undertaxed profits rules” (“UTPRs”) (a similar rule and backstop to the IIR) enacted in line with the OECD’s Pillar 2 initiative (the “SbS Safe Harbor”). Of significant importance is that any qualified domestic minimum top-up taxes (or “QDMTTs”) are outside of this safe harbor provision and may still be imposed by local jurisdictions even when the exception is applied. The announcement and guidance is linked as follows: Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package: Inclusive Framework on BEPS

In short, to elect out of IIRs and UTPRs (i.e., to be able to elect into the “SbS Safe Harbor”), the UPE must be located in a jurisdiction that (a) has both an eligible domestic tax regime and an eligible worldwide tax regime that “effectively achieve a minimum level of tax” on the group’s domestic and foreign income and that (b) will provide a credit for QDMTTs imposed in a jurisdiction on the same terms as any other creditable tax under US law. Of important note, the IRS has already indirectly indicated that QDMTTs will not be denied creditability under a notice indicating that some other Pillar 2 “final top up taxes” will not be creditable in whole or in part. See Notice 2023-80 (N-2023-80).

While the OECD’s guidance states that tax regimes will only be eligible “if they effectively achieve a minimum level of taxation of MNE Groups’ domestic and foreign operations,” it does not appear to be driven by a case-by-case assessment of the level of actual tax imposed but rather the design of the tax regime. The general criteria required for the taxation of domestic and foreign profits to qualify as a Qualified SbS Regime (e.g., a 20% statutory tax rate under local law and a 15% corporate AMT based on financial statement income like our regime) suffice on a surface level without testing actual effective results. See pages 79-80 of the linked OECD guidance above. Further, it indicates that qualification as a Qualified SbS Regime of an OECD member (which includes the US) will be assessed upon request “by the end of the first half of 2026.”

Given that the SbS Safe Harbor was designed as a result of US pressure on the OECD and, based upon the articulated criteria required to be treated as a Qualified SbS Regime, the US will presumably be named a Qualified SbS Regime upon assessment. All in all, after years of discussion and concern, this appears to be a win for US multinationals.