Pillar 2: latest OECD and EU developments

The new safe harbours will be available for use from 2026 or later, depending on local implementation.

Below, we briefly summarise the individual safe harbours from the new Side-by-Side Package (which also includes other simplifications) and upcoming legislative developments with regard to the published Commission Notice.
 

Simplified Effective Tax Rate (ETR) Safe Harbour

A new permanent safe harbour is being introduced to simplify the calculation of the jurisdictional effective tax rate. The calculation will be based on the ratio of an entity’s tax liability (including deferred tax) to its profit in the financial statements for consolidation (if the jurisdiction has decided to use these statements to determine the domestic top-up tax, which is the case of the Czech Republic). Both tax and profit will be adjusted for several fixed or optional items.

If the effective tax rate calculated in this way in a jurisdiction exceeds 15 percent, the top-up tax in relation to that jurisdiction will be considered zero. Unlike the temporary safe harbour based on country-by-country reporting, the new safe harbour rules can be suspended and resumed again in subsequent years. This safe harbour will be applicable for the first time for reporting periods beginning on 1 January 2027, or possibly a year earlier (depending on local implementation).
 

Extension of the Transitional Country-by-Country Reporting (CbCR) Safe Harbour

The transitional CbCR Safe Harbour (a safe harbour based on certain conditions such as the routine profits, de minimis and the effective tax rate tests) will also be available for reporting periods beginning after 31 December 2026. For example, for the 2027 calendar year, it will be possible to choose between a transitional safe harbour based on an effective rate of more than 17 percent determined on the basis of a country-by-country report, or a permanent safe harbour of a simplified effective tax rate of more than 15 percent determined on the basis of financial statements for consolidation (see above).
 

Substance-Based Tax Incentive Safe Harbour

This new safe harbour will allow the value of the substance-based tax incentive to be added to the value of the taxes included in the calculation of the effective tax rate for a given jurisdiction. However, this must be a generally available tax incentive whose amount is calculated based on expenses incurred or the value of tangible fixed assets produced in the jurisdiction. Each country will therefore have to assess whether the tax incentive meets the safe harbour’s conditions.

From the perspective of Czech tax incentives, it will be necessary to assess, in particular, research and development allowances and tax credits under investment incentives, both in terms of their calculation and their availability to all entities. According to the definition of tax incentives, it can be expected that the Czech research and development allowance could qualify as a substance-based incentive, which would have a positive impact on the resulting effective tax rate for Czech companies applying research and development allowances.

However, the value of the annual tax incentive that can be taken into account when calculating the effective tax is limited to 5.5 percent of wage costs or depreciation of tangible fixed assets in a given period in a given jurisdiction, or 1 percent of the residual value of tangible fixed assets if the group makes a decision for a five-year period for that jurisdiction.

This safe harbour will be available for the first time for the reporting period beginning on 1 January 2026.
 

Side-by-Side (SbS) Safe Harbour

This safe harbour will prevent the application of GloBE rules (the application of both the Income Inclusion Rule and the Undertaxed Profits Rule) to all constituent entities of a group if the ultimate parent entity is from a jurisdiction that imposes minimum tax requirements on both domestic and foreign income and at the same time provides foreign tax credit for qualifying domestic minimum top-up taxes (qualifying SbS regime).

According to the OECD's Central Record, only the US tax system currently qualifies as such a tax regime. The OECD will also assess other tax systems. This safe harbour does not apply to qualifying domestic top-up taxes that are levied on constituent entities under the rules of the countries in which the individual constituent entities are located. It will be applicable for periods beginning on or after 1 January 2026.
 

Ultimate Parent Entity (UPE) Safe Harbour

This safe harbour will replace the existing Transitional Undertaxed Profits Rule Safe Harbour and protect the jurisdictional profits of ultimate parent entities not implementing the Income Inclusion Rule from being taxed by other constituent entities in the group under the Undertaxed Profit Rule.

Unlike the Side-by-Side Safe Harbour, however, the Ultimate Parent Entity Safe Harbour will not protect the profits of foreign subsidiaries or permanent establishments. Like the Side-by-Side Safe Harbour, it will not apply to qualifying domestic top-up taxes imposed on constituent entities under the rules of the countries in which the individual constituent entities are located. As with the Side-by-Side Safe Harbour, the OECD will assess existing tax regimes by the end of the first half of 2026. Currently, no jurisdiction is listed in the OECD's Central Record as eligible for this safe harbour. It will be applicable for periods beginning on or after 1 January 2026.
 

Further legislative developments

Immediately after the publication of the package, the European Commission issued a notice confirming that the use of these safe harbours will be in line with the Global Minimum Tax Directive. It can be expected that the package will also be implemented into the legislation of individual states.