United Kingdom – Amendments to Pillar Two Regulations

His Majesty’s Revenue and Customs (HMRC) has published the draft legislation to amend Pillar Two rules in UK. The amendment implements the changes made by OECD to PillarTwo Model rules in the Side-by Side package published in January 2026. The amended rules are expected to take effect from financial year starting on or after 31st December 2026.

1. Simplified ETR Safe Harbour (SESH)
   The safe harbour will allow for simplified ETR computation where GloBE rule taxes will be assumed to be zero if the ETR as per SESH is at or above 15%. SESH is expected to replace Transitional CbCR Safe Harbour. Unlike TSCH, opting out of SESH for a year will not disqualify MNE group from using SESH in future years.
2. Qualifying Tax Incentives
   Certain tax incentive based on actual substance such as expenditure on employment or production-based tax incentives will be treated as Qualified Tax incentives (QTI) and the value of such incentives can be added to the adjusted covered tax for ETR calculation.
3. Side by Side Safe Harbour
   SidebySide Safe harbour is safe harbour which will zero out all IIR and UPTR tax obligations for UK subsidiaries of MNE groups with UPE located in a jurisdiction with a qualifying side by side system. Currently, United States is the only qualified side by side jurisdiction.
4. Extension of Transitional CbCR Safe Harbour (TSCH)
   Transitional Safe Harbour (TSCH) will be extended to FY 2027 and will be applicable for financial year beginning on or before 31st December 2027 and ends on or before 30th June 2029.
5. Ultimate Parent Entity Safe Harbour
   In cases where the UPE is located in a jurisdiction with Qualified UPE regime, The UTPR for the jurisdiction will be zero. A central record of qualified UPE regime will be maintained by OECD.
6. Minor Technical changes
   The amendment also includes clarifications that ‘discontinued operations’ is subject to same treatment as entities which are ‘held for sale’, amendments to ensure pre-pillar two periods are excluded for de-minimis election and clarification on cross-border tax allocation.

The draft legislation majorly implements the side-by-side package, which introduced significant simplification in terms of computation and is expected to reduce compliance burden. Jurisdiction may enact the side-by-side package at varying pace and thus it is important for MNE groups to track implementation of side-by-side in jurisdictions it operates in.