New Draft Law introduces OECD Side-by-Side Package

On 17 July 2026, Bill 8795 was filed with the Luxembourg Parliament. The draft law incorporates the OECD’s Side-by-Side Package, released on 5 January 2026, into the amended Law of 22 December 2023 on minimum taxation for multinational enterprise groups and large-scale domestic groups (the “Pillar Two Law”). It also implements the OECD Administrative Guidance published on 18 May 2026 on the application of the transitional UTPR safe harbour to MNE groups with 52-53 week fiscal years.

The Side-by-Side (SbS) package introduces four new safe harbours and extends the Transitional Country-by-Country Reporting (CbCR) Safe Harbour by one year. To implement these changes, the draft law introduces two new chapters to the Pillar Two Law:

Chapter 5bis, covering permanent safe harbours, and
Chapter 5ter, covering the Simplified Effective Tax Rate (ETR) Safe Harbour.

The Luxembourg provisions are generally closely aligned with the OECD package. For an overview of the SbS package, please refer to this KPMG report.

New Chapter 5bis –

Permanent Safe Harbours

Chapter 5bis introduces the new Side-by-Side Safe Harbour (“SbS Safe Harbour”), the UPE Safe Harbour and the Substance-Based Tax Incentive Safe Harbour (“SBTI Safe Harbour”).

SBS Safe Harbour
UPE Safe Harbour
SBTI Safe Harbour

SBS Safe Harbour (Article 32bis)

The SbS Safe Harbour switches off the application of the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) for an MNE group whose ultimate parent entity (UPE) is located in a jurisdiction recognized by the OECD Inclusive Framework as having a qualified SbS regime.

To qualify for this exclusion, the qualifying jurisdiction must generally impose minimum taxation requirements on both domestic and foreign income of MNE groups headquartered there and provide a foreign tax credit for qualified domestic minimum top-up taxes (QDMTTs).

The OECD Central Record also currently identifies the United States as the only jurisdiction with such a regime.

The safe harbour does not affect the application of QDMTT in jurisdictions where the group operates.

UPE Safe Harbour (Article 32ter)

The UPE Safe Harbour reduces the UTPR top-up tax to zero in respect of the UPE and other constituent entities located within the UPE jurisdiction, provided that the jurisdiction has a qualified domestic tax regime recognized by the OECD Inclusive Framework.

Unlike the SbS Safe Harbour, the UPE Safe Harbour applies only to profits of entities located in the UPE jurisdiction and does not switch off the IIR or the UTPR in respect of entities located in other jurisdictions. It is intended to replace the current Transitional UTPR Safe Harbour.

The list of jurisdictions having a qualified UPE regime has not been published by the OECD Central Record yet.

SBTI Safe Harbour (Article 32quater)

Overview

The OECD Inclusive Framework recognizes that tax incentives are commonly used to promote investment and economic development. Under the existing rules, Qualified Refundable Tax Credits and Marketable Transferable Tax Credits already benefit from more favorable treatment.

The new SBTI Safe Harbour would extend relief to certain generally available incentives calculated by reference to:

Qualifying expenditure-based incentives, including tax credits and super deductions, or
Certain production-based tax incentives.

Where the SBTI safe harbour is elected, Adjusted Covered Taxes are increased by the lower of the qualified tax incentives used during the fiscal year and the applicable substance cap. This effectively eliminates the portion of top-up tax attributable to those incentives, subject to the cap.

Luxembourg considerations

It is important to note that the SbS Safe Harbour and UPE Safe Harbour do not affect the application of the Luxembourg QDMTT. MNE groups benefitting from these safe harbours remain liable to the Luxembourg QDMTT and any related filing obligations.

For avoidance of doubt, the SbS Safe Harbour does not apply to a non-U.S. parented MNE Group even if there is a U.S. intermediate parent entity in the group. This means that for this kind of groups, the IIR and UTPR will continue apply to the U.S. entity and its subsidiaries.

With respect to the SBTI Safe Harbour, the commentary to the draft law specifically refers to the Luxembourg investment tax credit (ITC) under Article 152bis of the Luxembourg Income Tax Law (LITL). One of the conditions for an incentive to qualify as a Qualified Tax Incentive (QTI) is that it must be generally available to taxpayers. The commentary clarifies that the fact that the ITC requires an administrative decision does not, in itself, prevent the incentive from qualifying as a QTI.

The three permanent safe harbours would apply to fiscal years beginning on or after 1 January 2026, hence no retroactive application for 2024 or 2025 is foreseen.

New Chapter 5ter –

Simplified ETR Safe Harbour

Overview

A new Simplified ETR Safe Harbour will permanently replace the current Transitional CbCR Safe Harbour, although both safe harbours will coexist during a transitional period as a result of the one-year extension of the Transitional CbCR Safe Harbour.

The draft law introduces this new permanent Simplified ETR Safe Harbour through 15 new articles: Articles 32quinquies to 32novodecies.

Under the new safe harbour, MNE groups would calculate a Simplified ETR for each tested jurisdiction by dividing Simplified Taxes by Simplified Income. The top-up tax for the tested jurisdiction would be deemed to be zero where:

The Simplified ETR is at least 15%, or
The tested jurisdiction has a Simplified Loss.

Access to the Simplified ETR Safe Harbour is subject to specific eligibility, entry and re-entry conditions (i.e., it will not operate on a “once-out, always out basis”, unlike the Transitional CbCR Safe Harbour), as well as integrity rules intended to ensure that income, expenses, losses and taxes are recognized once and allocated to the appropriate tested jurisdiction.

Unlike the Transitional CbCR Safe Harbour, the new regime would primarily rely on financial accounting information used to prepare the group’s consolidated financial statements, subject to specified adjustments, rather than on CbCR data.

Luxembourg considerations

The detailed Luxembourg provisions are closely aligned with the OECD guidance.

The OECD provides with an option for jurisdictions that use a local financial accounting standard for QDMTT purposes (like Luxembourg) to allow groups to calculate the Simplified ETR using the accounting standard applied in their consolidated financial statements. Luxembourg has not included this option in the draft law.

The draft law also introduces certain continuity rules to preserve the effect of certain elections and tax attributes when a group ceases to apply the Simplified ETR Safe Harbour and returns to the ordinary calculations.

The Simplified ETR Safe Harbour would generally be available for fiscal years beginning on or after 31 December 2026. However, the draft law permits early application for fiscal years beginning on or after 31 December 2025 where the specific conditions set out in the OECD package are met.

Other amendments

Extension of the Transitional CbCR Safe Harbour

(Article 59)

The draft law extends the Transitional CbCR Safe Harbour by one additional year. It would apply to fiscal years beginning on or before 31 December 2027 (instead of 31 December 2026 as per the current law), excluding fiscal years ending after 30 June 2029 (instead of 30 June 2028 as per the current law).

The transitional rate for the simplified ETR test would remain at 17% for fiscal years beginning in both 2026 and 2027.

This change would be applicable as from 1 January 2026.

Transitional UTPR Safe Harbour

(Article 58)

The draft law also implements the OECD Administrative Guidance published on 18 May 2026 for MNE groups with 52- or 53-week fiscal years (i.e. fiscal years comprising either 52 weeks or 53 weeks depending on the year). The relevant end date for the Transitional UTPR Safe Harbour would be extended to no later than 3 January 2027 (instead of 31 December 2026), allowing qualifying 53-week fiscal years (starting before 1 January 2026 and ending no later than 3 January 2027) to benefit from the safe harbour for FY 2025.

This change would be applicable as from 1 January 2026.

Read the OECD Administrative Guidance

Transitional deferred tax assets

(Article 53 and Article 44)

The draft law also updates certain aspects of Luxembourg’s implementation of the OECD Administrative Guidance published in January 2025 (and transposed into the Pillar Two law in 2025) concerning the transitional treatment of deferred tax assets.

It clarifies that a foreign jurisdiction’s application of the transitional rules allowing certain DTA reversals up to the 20% limit should not trigger the QDMTT Safe Harbour switch-off rule, provided that relevant conditions are met. A corresponding amendment is made to the Luxembourg QDMTT calculation.

This change would apply retroactively to fiscal years starting on or after 31 December 2023.

Extension of the Transitional CbCR Safe Harbour Transitional UTPR Safe Harbour Transitional deferred tax assets

Extension of the Transitional CbCR Safe Harbour

(Article 59)

The draft law extends the Transitional CbCR Safe Harbour by one additional year. It would apply to fiscal years beginning on or before 31 December 2027 (instead of 31 December 2026 as per the current law), excluding fiscal years ending after 30 June 2029 (instead of 30 June 2028 as per the current law).

The transitional rate for the simplified ETR test would remain at 17% for fiscal years beginning in both 2026 and 2027.

This change would be applicable as from 1 January 2026.

Transitional UTPR Safe Harbour

(Article 58)

The draft law also implements the OECD Administrative Guidance published on 18 May 2026 for MNE groups with 52- or 53-week fiscal years (i.e. fiscal years comprising either 52 weeks or 53 weeks depending on the year). The relevant end date for the Transitional UTPR Safe Harbour would be extended to no later than 3 January 2027 (instead of 31 December 2026), allowing qualifying 53-week fiscal years (starting before 1 January 2026 and ending no later than 3 January 2027) to benefit from the safe harbour for FY 2025.

This change would be applicable as from 1 January 2026.

Read the OECD Administrative Guidance

Transitional deferred tax assets

(Article 53 and Article 44)

The draft law also updates certain aspects of Luxembourg’s implementation of the OECD Administrative Guidance published in January 2025 (and transposed into the Pillar Two law in 2025) concerning the transitional treatment of deferred tax assets.

It clarifies that a foreign jurisdiction’s application of the transitional rules allowing certain DTA reversals up to the 20% limit should not trigger the QDMTT Safe Harbour switch-off rule, provided that relevant conditions are met. A corresponding amendment is made to the Luxembourg QDMTT calculation.

This change would apply retroactively to fiscal years starting on or after 31 December 2023.

Next steps

The draft law must now follow the ordinary Luxembourg legislative process and may therefore be amended before it is adopted.

Subject to enactment, the provisions would apply from different dates:

the SbS, UPE and SBTI Harbours would apply to fiscal years beginning on or after 1 January 2026;
the Simplified ETR Safe Harbour and related provisions could apply to fiscal years beginning on or after 31 December 2026, or alternatively on or after 31 December 2025, subject to early application conditions; and
the amendments relating to the OECD Administrative Guidance issued in January 2025 (with respect to transitional deferred tax assets) would apply to fiscal years beginning on or after 31 December 2023.