Luxembourg: Draft legislation introducing OECD side-by-side package
Bill 8795 would incorporate the OECD's side-by-side package and other administrative guidance into its Pillar Two minimum taxation law.
The Luxembourg Parliament on July 17, 2026, received the filing of Bill 8795, which would incorporate the OECD side-by-side (SbS) package, released on January 5, 2026, into the amended Law of December 22, 2023, on minimum taxation for MNE groups and large-scale domestic groups (the “Pillar Two Law”). The draft law would also implement OECD administrative guidance published on May 18, 2026, on the application of the transitional country-by-country (CbC) reporting safe harbor to MNE groups with 52-week or 53-week fiscal years.
Permanent safe harbors
To implement these changes, the draft law would introduce Chapter 5bis (covering permanent safe harbors) and Chapter 5ter (covering the simplified effective tax rate (ETR) safe harbor) to the Pillar Two Law.
Chapter 5bis would introduce the new SbS safe harbor, the ultimate parent entity (UPE) safe harbor, and the substance-based tax incentive (SBTI) safe harbor, applying to fiscal years beginning on or after January 1, 2026.
- The SbS safe harbor (Article 32bis) would switch off the application of the income inclusion rule (IIR) and undertaxed profits rule (UTPR) for an MNE group when its UPE is located in a jurisdiction recognized by the OECD Inclusive Framework as having a qualified SbS regime (currently, only the United States).
- The UPE Safe Harbor would reduce 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.
- The new SBTI Safe Harbor would extend relief to certain generally available incentives calculated by reference to: (1) qualifying expenditure-based incentives, including tax credits and super deductions, or (2) certain production-based tax incentives.
Simplified ETR safe harbor
Under Chapter 5ter, a new permanent simplified ETR safe harbor would replace the current transitional CbCR safe harbor, although both would coexist during a transitional period. Under the new safe harbor, 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 when the simplified ETR is at least 15% or when the tested jurisdiction has a simplified loss.
Other proposed amendments
The draft legislation also includes the following transitional and administrative updates:
Amendment | Article | Details | Proposed effective date |
Transitional CbCR safe harbor extension | Article 59 | Would extend the safe harbor by one year, applying to fiscal years beginning on or before December 31, 2027. The transitional rate for the simplified ETR test would remain at 17% | Applicable as of January 1, 2026 |
Transitional UTPR safe harbor | Article 58 | Would extend the relevant end date to no later than January 3, 2027, to allow qualifying 53-week fiscal years to benefit from the safe harbor for tax year 2025 | Applicable as of January 1, 2026 |
Transitional deferred tax assets | Articles 44 and 53 | Would clarify that a foreign jurisdiction's application of certain deferred tax asset (DTA) reversals up to the 20% limit would not trigger the qualified domestic minimum top-up tax (QDMTT) safe harbor switch-off rule | Retroactive to fiscal years beginning on or after December 31, 2023 |
Next steps
The draft law must now follow the ordinary Luxembourg legislative process and may therefore be amended before it is adopted.
Read a July 2026 report prepared by the KPMG member firm in Luxembourg