The provisions contained within the OECD’s Side-by-Side Package are designed to reduce compliance burdens for jurisdictions that already impose a minimum level of taxation on domestic and foreign income of Multi National Enterprise (MNE) Groups headquartered within their borders. To achieve this, the framework introduces two Safe Harbors, among other measures.
The SbS Safe Harbor
The SbS Safe Harbor applies to jurisdictions that have both an eligible domestic tax system and an eligible worldwide tax system. When an MNE Group elects the SbS Safe Harbor, no constituent entities of the MNE Group are subject to the Income Inclusion Rule (IIR) or the Undertaxed Profits Rule (UTPR).
The UPE Safe Harbor
The Ultimate Parent Entity (UPE) Safe Harbor applies where a jurisdiction has only an eligible domestic tax system. If elected, the MNE Group is not subject to the UTPR on profits earned in the UPE jurisdiction.
QDMTT Applicability and Prerequisites for Qualified Tax Regimes
All MNE Groups, regardless of qualification for the safe harbors listed above, remain subject to Qualified Domestic Minimum Top-Up Taxes (QDMTTs) in all applicable jurisdictions in which they operate. In addition to having an eligible domestic and worldwide tax system, a Qualified SbS Regime must also have a foreign tax credit available for QDMTTs (may be subject to foreign tax credit limitations) on the same terms as other creditable covered tax and must have enacted its eligible domestic and worldwide tax systems prior to January 1, 2026.1
The Inclusive Framework Review Process
Upon request by a member jurisdiction, the OECD’s Inclusive Framework will evaluate a jurisdiction’s pre-existing tax system against eligibility criteria for a qualified SbS or UPE regime by the end of the first half of 2026. Qualifying jurisdictions will be listed on the Central Record. As of January 7, only the United States has been listed as a jurisdiction with a qualifying SbS regime. Following the initial evaluation, additional jurisdictions may request assessment for eligibility in 2027 or 2028.
Qualifying jurisdictions listed on the Central Record are required to notify the Inclusive Framework if material amendments are made to a Qualified SbS or UPE regime within three months of the change.
Criteria for Eligible Tax Systems
While the Side-by-Side package makes clear that the OECD’s Inclusive Framework will ultimately determine if a jurisdiction’s tax system is a qualifying SbS or UPE regime, it does outline the criteria that the Inclusive Framework will use in evaluating those systems.
Eligibility Requirements for a Domestic Tax System
A qualifying domestic tax system must meet all of the following requirements:
- At least a 20% statutory nominal corporate income tax rate, adjusted for preferential rules and sub-national taxes. The statutory rate may be adjusted for deductions, exclusions, or credits that taxpayers may be entitled to. Additionally, in the case of jurisdictions with differing sub-national rates, the lowest sub-national tax rate should be applied in calculating the statutory nominal rate.
- A QDMTT or Corporate Alternative Minimum Tax (CAMT) that is based on financial statement income, with certain adjustments to align with the global minimum tax (GMT) policy of minimum taxation at a rate of 15%. A CAMT may meet this requirement although it may fail to qualify as a QDMTT.
- There is no material risk that foreign operations will be taxed below 15% on an effective basis, considering certain incentives currently addressed in the GloBE Rules. Overall operation of the applicable tax system, including availability and treatment of tax credits and incentives, is considered.
Eligibility Requirements for a Worldwide Tax System
A qualifying worldwide tax system must meet all of the following requirements:
- Apply comprehensively to foreign income, including active and passive income of foreign branches and controlled foreign companies, regardless of the distribution of such income. Limited exclusions are allowed consistent with policy objectives of GMT, such as high-tax exclusions.
- Include anti-BEPS (base erosion and profit shifting) mechanisms, such as preventing foreign tax credits on highly taxed active income from offsetting the tax liability from low-taxed passive income.
- There is no material risk that foreign operations will be taxed below 15% on an effective basis, considering certain incentives currently addressed in the GloBE rules. Like the requirements for a qualifying domestic tax system, overall operation of the applicable tax system is considered.
Operating Mechanics and How to Make the Election
When a filing Constituent Entity elects the SbS or UPE Safe Harbor, the top-up tax for a jurisdiction is deemed to be zero for purposes of the IIR and UTPR, or UTPR only, respectively. This treatment extends to Constituent Entities that are determined to be stateless entities or minority-owned constituent entities of the MNE Group.
Impact to MNE Groups with Joint Ventures
The Safe Harbor Elections extend to joint venture (JV) and JV Subsidiaries of the MNE Group; however, they do not extend with respect to other MNE Groups’ interest in the same JV. A JV that is itself a UPE in a non-qualifying jurisdiction also does not benefit from the Safe Harbor if it is not located in a qualifying jurisdiction, even if 50% owned by an MNE Group that is located in a qualifying jurisdiction.
Making the Election
The Safe Harbor Elections apply to fiscal years beginning on or after January 1, 2026. Therefore, MNE Groups may still need to compute applicable IIR and UTPR top-up tax liability, as applicable, for FY24 and FY25. Moreover, while the Safe Harbor Elections offer meaningful simplification in applying the GloBE Rules, in‑scope MNE Groups should carefully assess the composition of their group (including confirming the appropriate UPE and Constituent Entities) before applying the Safe Harbors to ensure efficiencies in GloBE Information Return (GIR) compliance.
MNE Groups with UPEs in qualifying jurisdictions will still be required to file a GIR and can make the SbS or UPE Safe Harbor Election on their GIR in a new field in Section 1. Future GIR updates will clarify which fields are necessary to complete for MNE Groups making either of the SbS or UPE Safe Harbor Elections.
An MNE Group that qualifies for the SbS Safe Harbor will limit their GIR filing obligations to QDMTT sections only for fiscal years beginning January 1, 2026.
How Forvis Mazars Can Help
Click here for more information on Pillar 2 compliance Fiscal Years 2024 and 2025. If you would like to explore how these developments may impact your organization, please reach out to a Forvis Mazars tax professional.
- 1Procedures contained in Paragraph 27 of the Side-by-Side Package may permit exceptions to this rule for tax systems enacted after January 1, 2026.