The Pillar Two "Side-by-Side" Safe Harbour: what it means for UK and EU business

This article was first published in Bloomberg Tax on 2 February 2026.

The OECD's “Side-by-Side” deal (published 5 January 2026) grants a significant exemption from much of the Pillar Two minimum tax rules to US-headquartered multinationals. The UK Government has announced that it will give effect to this deal through new domestic legislation (retroactive to 1 January 2026). The EU also plans to give the rules effect from 1 January 2026, likely through treating the new Safe Harbour as consistent with existing exemptions rather than trying to amend the EU Pillar Two Directive (which would be politically difficult).

In a sense the Side-by-Side deal is a classic compromise: it allows the Pillar Two project to keep going, with a reduced risk of US retaliation against implementing jurisdictions, while sparing US multinationals (who already file under a 15% domestic book minimum tax and assess low tax income of foreign subsidiaries under Global Intangible Low-Taxed Income (GILTI)/Net CFC Tested Income (NCTI)) from complying with a different set of rules that look to ensure profits are taxed at a minimum 15% rate worldwide. 

Given that pragmatism has trumped principle in reaching this deal, we see a number of policy and practical challenges for the UK and other European jurisdictions. 

The first and most direct consequence is a potential loss of tax revenue. The UK (like certain EU states) is a popular sub-holding company jurisdiction for US multinationals. Under Pillar Two as originally designed, the UK could top up any low tax profits in subsidiaries held beneath the UK (as an intermediate holding company jurisdiction, i.e. as a fallback when the US parent does not apply the Pillar Two income inclusion rule). The Side-by-Side deal reverses that outcome: there might be some level of pick up in the US (under GILTI/NCTI) but the UK cannot tax any shortfall. It will be interesting to see what impact that has on estimates of revenue generated for the UK under the Pillar Two rules (an early UK government estimate was £2bn+ in additional taxes per year for the entire Pillar Two package including the income inclusion rule and qualified domestic minimum top-up tax (QDMTT), before the Side-by-Side carve out). 

For non-US groups that are struggling under the burden of Pillar Two, a new opportunity arises: should they look to invert into the US, rather than (as has long been the trend) the other way round? We think there are enough factors that weigh against this to make it of interest only to a minority of multinationals: consider the notorious complexity of the US system or the fact that once established in the US it is said to be impossible for companies to leave. But if a group has other reasons for considering establishing in the US, like access to its capital markets and higher valuations for listed stocks, there is now one more pull factor: for a group with a US parent company, most of the complexity associated with Pillar Two will no longer apply.

For those members of the OECD Inclusive Framework who are keen to preserve the achievements of the Pillar Two project, there is one important set of rules from which US multinationals will not be exempted. Pillar Two was designed to incentivise low/no tax jurisdictions to bring in domestic corporate taxes at a minimum rate (QDMTTs). Many have done so, including jurisdictions in the Channel Islands or the Middle East that had not previously sought to tax multinationals at the 15% minimum rate. US groups will not be exempt from these new domestic taxes, so even with the Side-by-Side exemption there is an increase in foreign taxes collected from US-headquartered groups.

What the Pillar Two project has not done, however, is persuade the US to align aspects of its rules with minimum standards being adopted elsewhere. One example is GILTI/NCTI, which still allows US multinationals to “blend” their low tax overseas income with higher taxed profits in other jurisdictions. Pillar Two, in contrast, does not allow for this averaging effect, instead requiring that the profits of every jurisdiction are taxed at 15%. On this occasion, the UK and EU have decided not to let the perfect be the enemy of the good: it is a compromise, but one that they can accept to keep the Pillar Two project alive in a difficult international political environment.

The new agreement is unlikely to be the final chapter in this saga. It’s worth noting that all Inclusive Framework countries, including China and India, have signed this deal despite initial reservations. We therefore wait and see whether other jurisdictions’ tax system will be eligible for the Side-by-Side safe harbour. Other aspects of the Side-by-Side deal (not covered in this article) are also worth monitoring too. The introduction of the new safe harbour for certain tax incentives linked to real economic activity has the potential to re-introduce tax competition that the Pillar Two rules sought to contain. Finally, although the deal signals international tax cooperation remains possible, the resurging threat of tariffs may change this dynamic.