Luxembourg Issues Bill No. 8795 to Implement the OECD’s Side-by-Side Pillar Two Package

Luxembourg has published draft legislation that would implement the OECD’s January 2026 Side-by-Side package, introduce the permanent Simplified ETR Safe Harbour and extend the Transitional CbCR Safe Harbour.

Bill No. 8795 was deposited in the Luxembourg Chamber of Deputies on July 17. 2026. It would amend the Law of 22 December 2023 on minimum effective taxation, which implemented the EU Pillar Two Directive and introduced Luxembourg’s income inclusion rule, undertaxed profits rule and QDMTT.

The bill will give domestic legal effect to the principal safe harbours agreed by the OECD/G20 Inclusive Framework on 5 January 2026, as well as providing the detailed domestic rules needed to operate the permanent Simplified ETR Safe Harbour, including its accounting basis, elections, entry restrictions and interaction with the ordinary GloBE calculation.

Relationship with the OECD package and EU law

The bill is intended principally to implement the OECD Side-by-Side package of 5 January 2026. That package contains:

-the Side-by-Side Safe Harbour;

-the UPE Safe Harbour;

-the Substance-based Tax Incentive Safe Harbour;

-the permanent Simplified ETR Safe Harbour; and

-a one-year extension of the Transitional CbCR Safe Harbour.

The Luxembourg explanatory memorandum also relies on Commission Notice C/2026/253. In that notice, the European Commission confirmed that the January 2026 safe harbours constitute qualifying international agreements on safe harbours for the purposes of Article 32 of the EU Pillar Two Directive. Luxembourg therefore proposes to incorporate the operative rules into domestic legislation and to interpret them, where appropriate, in light of the OECD Administrative Guidance. 

Overview of the proposed changes

Side-by-Side Safe Harbour

Proposed Article 32bis would introduce the Side-by-Side Safe Harbour. Following an annual election by the filing constituent entity, the jurisdictional top-up tax would be reduced to zero for Luxembourg IIR and UTPR purposes where the MNE group’s UPE is located in a jurisdiction recognised by the Inclusive Framework as having a Qualified Side-by-Side Regime.

The protection would extend to joint ventures and JV subsidiaries to the extent of the qualifying MNE group’s interest in them.

Recognition would depend on the UPE jurisdiction satisfying several cumulative conditions. It must have:

-a qualifying domestic tax system, including a generally applicable nominal corporate tax rate of at least 20%;

-a QDMTT or financial-accounting-based alternative minimum tax imposed at a nominal rate of at least 15% over a substantial proportion of domestic MNE income;

-no material risk that domestic profits are taxed at an effective rate below 15%;

• a broad worldwide tax regime covering active and passive branch and controlled foreign company income;

• substantial anti-BEPS protections;

• no material risk that foreign profits are taxed below 15% overall; and

• equivalent foreign tax-credit treatment for other jurisdictions’ QDMTTs.

The final condition is formal recognition by the Inclusive Framework for the relevant fiscal year. Consequently, eligibility will depend on the OECD’s dynamic central record rather than on a group making its own assessment that the UPE jurisdiction has an equivalent regime.

At the date the Luxembourg bill was deposited, the United States was the only jurisdiction recognised as having a Qualified Side-by-Side Regime. The OECD’s Central Record for purposes of the Global Minimum Tax should therefore be checked for each relevant fiscal year.

The Side-by-Side Safe Harbour does not disapply QDMTTs. Luxembourg’s domestic minimum top-up tax would continue to apply to low-taxed Luxembourg entities in a US-parented group. The relief concerns IIR and UTPR liabilities; it is not a complete exemption from Pillar Two or from associated reporting obligations.

The relief would also apply only from fiscal years beginning on or after 1 January 2026. It would not retrospectively eliminate any 2024 or 2025 IIR or UTPR  exposure.

Qualified UPE Safe Harbour