UK publishes draft legislation to implement the OECD’s Side-by-Side Pillar Two package

On July 13, 2026, the UK government published draft Finance Bill 2026–27 legislation implementing the OECD’s January 2026 Side-by-Side package. The proposals introduce the permanent Simplified ETR Safe Harbour, extend the Transitional CbCR Safe Harbour, provide special treatment for qualifying substance-based tax incentives and implement both the Side-by-Side and Ultimate Parent Entity Safe Harbours.

The package is significant given, firstly, several provisions would apply retrospectively to accounting periods beginning on or after 1 January 2026, and secondly, the Side-by-Side Safe Harbour would materially alter the UK Pillar Two position of US-parented groups, while leaving UK Domestic Top-up Tax and foreign QDMTTs intact.

The legislation is not yet enacted and the government states that the final contents of the Finance Bill remain subject to a decision by the Chancellor. 

Background

The UK implemented the Income Inclusion Rule through its Multinational Top-up Tax and its QDMTT through its Domestic Top-up Tax in Part 3 and Part 4 respectively of the Finance (No. 2) Act 2023. The UTPR subsequently took effect for accounting periods beginning on or after 31 December 2024.

On 5 January 2026, the OECD Inclusive Framework published its Side-by-Side package. The package comprises:

-the Simplified ETR Safe Harbour;

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

-the Substance-based Tax Incentive Safe Harbour;

-the Side-by-Side Safe Harbour; and

-the Ultimate Parent Entity Safe Harbour.

The UK confirmed on 7 January 2026 that it would implement the package for accounting periods beginning on or after 1 January 2026 (UK ministerial statement; OECD Side-by-Side package).

The new draft Schedule would amend the Finance (No. 2) Act 2023 as follows.

These dates are contained in paragraphs 14 and 27 of the draft Schedule.

The Simplified ETR Safe Harbour

Paragraph 2 of the draft would insert a new Part 4 into Schedule 16A to the Finance (No. 2) Act 2023.

Under new paragraph 16, the filing member could make an annual election for a territory. Where the conditions are satisfied, the standard members in that territory would be treated as having no top-up amounts or additional top-up amounts. Through the proposed domestic application of Schedule 16A, the safe harbour would be relevant to both MTT and DTT calculations.

The 15% test

The central condition is that the simplified ETR of the relevant members must be at least 15%. The simplified ETR starts from the ordinary UK GloBE ETR calculation under section 132 but applies the modifications and additional adjustments in new paragraphs 21 to 49.

The proposed calculation is therefore simpler than a full GloBE calculation, but it is not merely an accounting ETR or a CbCR safe-harbour calculation. The draft addresses matters including:

-revaluation gains and losses;

-prior-period errors and changes in accounting policy;

-tax credits;

-domestic and cross-border intragroup transactions;

-permanent establishments;

-hybrid and flow-through entities;

-international shipping;

-deferred tax assets and liabilities;

-restructurings;

-negative covered taxes;

-unmatched income and expenses;

-double deductions; and

-duplicated covered taxes.

A number of these treatments depend on separate annual or long-term elections. Groups will therefore need an election framework as well as a simplified ETR calculation.

Separate tested subgroups

The election is not necessarily made for every entity in a jurisdiction as a single population. New paragraph 16 permits separate elections for:

-standard members;

-minority-owned subgroups; and

-standalone minority-owned members.

Investment entities can be brought into the standard-member population through a separate annual election where all group members holding interests in the investment entity are located in the same territory and no tax-transparency or taxable-distribution-method election applies.

Accordingly, one subgroup in a jurisdiction may qualify while another subgroup must perform the full GloBE calculation.

Entry and re-entry condition

New paragraph 19 introduces a 24-month look-back requirement. Broadly, the safe harbour is available if, for every relevant accounting period ending during the preceding 24 months:

-the Simplified ETR Safe Harbour election was made; or

-the relevant members did not have a top-up amount under UK or equivalent foreign Pillar Two rules.

This is intended to prevent groups moving repeatedly between the simplified and full calculation where a jurisdiction has recently generated top-up tax. A period covered by the Transitional CbCR Safe Harbour should generally count as a period without a top-up amount for this purpose.

The safe harbour is also unavailable where a deemed-distribution-tax election applies and a positive recapture amount remains at the beginning of the period.

Early access for 2026 periods

The permanent rule applies to periods beginning on or after 31 December 2026. However, new paragraph 18 allows an election for a period beginning on or after 31 December 2025 but before 31 December 2026 where any one of the following applies:

1. the QDMTT Safe Harbour has been elected for the relevant jurisdiction;
2. only one jurisdiction has Pillar Two taxing rights over the tested members; or
3. an equivalent Simplified ETR Safe Harbour election has been made in every jurisdiction with Pillar Two taxing rights over those members.

For a calendar-year group, this potentially makes the Simplified ETR Safe Harbour available for FY2026. The third route nevertheless requires coordinated implementation and elections across every relevant IIR jurisdiction. It is not enough for the UK alone to have introduced the early-access rule (Draft Schedule, paragraph 2, new Schedule 16A paragraphs 16–20).

Extension of the Transitional CbCR Safe Harbour