Executive summary

On 17 July 2026, the Luxembourg government transmitted to Parliament a draft law (Draft Law) that modifies the amended law of 22 December 2023 (Pillar Two Law) transposing Council Directive (EU) 2022/2523 of 14 December 2022¹ on ensuring a global minimum level of taxation for multinational enterprise (MNE) groups and large-scale domestic groups in the European Union (EU). The Draft Law aims to implement the additional guidance contained in the Organisation for Economic Co-operation and Development/Group of 20 (OECD/G20) Inclusive Framework's comprehensive package for a "side-by-side arrangement" (the Side-by-Side Package).² (For a comprehensive description of the Side-by-Side Package, see EY Global Tax Alert, OECD releases Side-by-Side Package on Pillar Two Global Minimum Tax: Detailed review, dated 16 January 2026.)

In line with the OECD guidance, the Draft Law would, among other things: introduce the Side-by-Side (SbS) Safe Harbour, Ultimate Parent Entity (UPE) Safe Harbour, and permanent Simplified Effective Tax Rate (ETR) Safe Harbour; extend the Transitional Country-by-Country Reporting (CbCR) Safe Harbour; and incorporate the Substance-based Tax Incentive (SBTI) Safe Harbour. The Draft Law would also incorporate the OECD Administrative Guidance, released in May 2026, on applying the existing Transitional Undertaxed Profits Rule(UTPR) Safe Harbour to MNE groups with 52- or 53-week fiscal years.³

The Draft Law provides for different effective dates depending on the measure concerned. While the SbS, UPE and SBTI Safe Harbours would generally apply to fiscal years beginning on or after 1 January 2026, the Simplified ETR Safe Harbour would generally apply from fiscal years beginning on or after 31 December 2026.

Detailed discussion

SbS Safe Harbour and UPE Safe Harbour

The Draft Law would introduce two safe harbors that are intended to recognize the interaction between the Global Anti-Base Erosion (GloBE) rules and certain existing domestic tax systems: the SbS Safe Harbour and the UPE Safe Harbour.

An MNE group with a UPE located in a jurisdiction with a Qualified SbS Regime may elect the SbS Safe Harbour. If the election applies, Top-up Tax under the Income Inclusion Rule (IIR) and the UTPR would be deemed to be zero for the group. A Qualified SbS Regime is a tax regime that the OECD Inclusive Framework has recognized as providing a level of minimum taxation broadly equivalent to the Pillar Two framework. The Draft Law also extends this treatment to joint ventures and joint venture affiliates, to the extent of the MNE group's interest. The safe harbor does not affect the application of Luxembourg Qualified Domestic Minimum Top-up Tax (QDMTT).

The UPE Safe Harbour is narrower. It applies to the domestic profits of MNE groups with a UPE located in a jurisdiction recognized for the relevant fiscal year as having a Qualified UPE Regime. A Qualified UPE Regime is a regime that the OECD Inclusive Framework has recognized as having an eligible domestic tax system that provides a sufficient level of minimum taxation for MNE groups headquartered in that jurisdiction. Where elected, Top-up Tax under the UTPR would be reduced to zero for Constituent Entities located in the UPE jurisdiction. The safe harbor does not affect the application of the IIR or UTPR to Constituent Entities located outside the UPE jurisdiction and does not affect Luxembourg QDMTT.

Eligibility for both safe harbors depends on the relevant UPE jurisdiction's being listed in the OECD Central Record as having a Qualified SbS Regime or a Qualified UPE Regime. At the time the Draft Law was published, only the United States was recognized as having a Qualified SbS Regime; no jurisdiction has been recognized as having a Qualified UPE Regime.

The SbS Safe Harbour and UPE Safe Harbour would be available in Luxembourg for fiscal years beginning on or after 1 January 2026, subject to an annual election.

Simplified ETR Safe Harbour

In line with the Side-by-Side Package, the Draft Law would introduce a permanent Simplified ETR Safe Harbour that allows MNE groups to determine ETRs under a simplified calculation based on the income and taxes reflected in the group's relevant financial accounts, subject to certain adjustments.

Under the Simplified ETR Safe Harbour, the Top-up Tax under the IIR, UTPR and QDMTT for a Tested Jurisdiction would be deemed to be zero for a fiscal year if, upon election, the Tested Jurisdiction has either a Simplified ETR of at least 15% or a Simplified Loss.

The Simplified ETR is calculated by dividing Simplified Taxes by Simplified Income, generally using financial accounting data drawn from the relevant financial statements, subject to adjustments required by the Draft Law. As Luxembourg has adopted rules for the use of local financial accounting standards for QDMTT purposes, the relevant financial statements will generally be those that would have to be used for full QDMTT calculations.

The safe harbor would apply on a jurisdictional basis and, in many cases, should allow groups to rely on jurisdictional accounting data rather than performing a full entity-by-entity GloBE computation.

The Simplified Income or Loss calculation would start from the Jurisdictional Profit (or Loss) before income tax and would be subject to certain adjustments, including the removal of Excluded Dividends and Excluded Equity Gains or Losses, and the add-back of certain Policy Disallowed Expenses such as bribes, kickbacks and fines or penalties exceeding the relevant threshold. Specific adjustments are also provided for certain industries, including financial services and shipping.

The Simplified Taxes calculation would start with the Jurisdictional Income Tax Expense determined for the Tested Jurisdiction and would be subject to adjustments to align the numerator of the ETR calculation with the income included in the denominator. The adjustments include any amount that is not a Covered Tax, taxes related to excluded income, uncertain tax positions, taxes not expected to be paid within three years and deferred tax items. The Draft Law also provides simplified approaches for deferred tax recasting, loss years, post-year-end tax adjustments and transfer pricing adjustments. The Draft Law further contains detailed provisions governing the application of the Simplified ETR Safe Harbour in a range of specific circumstances and for certain categories of entities, including investment entities, joint ventures, permanent establishments and mergers and acquisitions, in line with the Administrative Guidance.

The Simplified ETR Safe Harbour would generally be available for fiscal years beginning on or after 31 December 2026. It may be applied for fiscal years beginning on or after 31 December 2025 and before 31 December 2026 if one of the following conditions is met: the QDMTT Safe Harbour applies to the Tested Jurisdiction; only one jurisdiction has taxing rights with respect to that Tested Jurisdiction; or all jurisdictions with taxing rights have implemented, and allow for, the application of the Simplified ETR Safe Harbour for that fiscal year and the relevant election is taken for all such jurisdictions.

Extension of Transitional CbCR Safe Harbour

The Draft Law would also extend the application period of the Transitional CbCR Safe Harbour by one year. It would thus also apply to fiscal years beginning on or before 31 December 2027, provided that the fiscal year does not end after 30 June 2029.

For MNE groups with a calendar fiscal year, this means that the 17% transitional rate that applies for fiscal years beginning in 2026 would also apply for fiscal years beginning in 2027.

The general "once out, always out" rule would continue to apply, which means that for a jurisdiction to qualify for the Transitional CbCR Safe Harbour in this additional year, the safe harbor must have been applied in earlier years as well.

During the extended transition period, in-scope groups may need to assess, on a jurisdiction-by-jurisdiction basis, whether the conditions for applying the Transitional CbCR Safe Harbour or the new Simplified ETR Safe Harbour are met. Depending on their facts and circumstances, MNE groups may be able to rely on either regime for a particular jurisdiction.

SBTI Safe Harbour

In line with the OECD Side-by-Side Package, the Draft Law would introduce a SBTI Safe Harbour. This safe harbor may allow MNE groups to continue to benefit from certain tax incentives that are connected with substantive economic activity in a jurisdiction, while preserving the role of the Pillar Two rules as a minimum tax framework.

If the election is made, certain Qualified Tax Incentives (QTIs) would be treated as an addition to the Adjusted Covered Taxes of the Constituent Entities located in the jurisdiction. The increase would be limited to the lower of the amount of QTIs used in the fiscal year and a Substance Cap determined by reference to payroll costs and tangible assets in the jurisdiction.

A QTI refers to a tax incentive that is generally available to taxpayers and calculated by reference to expenditures incurred or to the amount of tangible property produced in the jurisdiction. The SBTI Safe Harbour regime may also apply to certain refundable and transferable tax credits that satisfy these conditions. By contrast, incentives that are not generally available, that do not relate to Covered Taxes, or that are not linked to qualifying expenditures or production activities would generally fall outside the scope of the regime. Based on these criteria, the Luxembourg investment tax credit appears to satisfy the main conditions for qualification as a QTI and is therefore expected to benefit from the SBTI Safe Harbour.

The Substance Cap would be equal to 5.5% multiplied by the greater of eligible payroll costs or depreciation and depletion relating to eligible tangible assets in the jurisdiction. Alternatively, an MNE group may make a five-year election to compute the cap as 1% of the carrying value of eligible tangible assets, excluding land and other non-depreciable assets.

The SBTI Safe Harbour would apply for fiscal years beginning on or after 1 January 2026.

Transitional UTPR Safe Harbour for 52- or 53-week fiscal years

The Draft Law would also update the Transitional UTPR Safe Harbour applicable to the UPE jurisdiction. Under the current Pillar Two Law, this safe harbor applies to fiscal years beginning before 1 January 2026, and ending before 31 December 2026. The Draft Law would replace the 31 December 2026 end date with 3 January 2027. This targeted amendment is intended to preserve the benefit of the Transitional UTPR Safe Harbour for groups with a fiscal year is based on whole-week accounting periods and may therefore comprise 52 or 53 weeks. In such cases, a fiscal year beginning before 1 January 2026 may end during the first days of calendar year 2027 solely because of the use of a 53-week reporting period.

The amendment reflects Administrative Guidance agreed by the OECD/G20 Inclusive Framework on 11 May 2026, and ensures that affected groups are not denied access to the safe harbor merely because their fiscal year ends on 1, 2 or 3 January 2027, rather than before 31 December 2026. (For background, see EY Global Tax Alert, OECD releases common understanding on GIR central filing and updates to Administrative Guidance under Pillar Two, dated 20 May 2026.)

Next steps and implications

The Draft Law will now proceed through the legislative process, including review by the relevant parliamentary commission, the issuance of opinions by different advisory bodies, parliamentary debate and voting, and publication in the Official Gazette.

Taxpayers potentially affected by the Draft Law should monitor its progress and assess how the proposed safe harbors may affect their Pillar Two calculations, data requirements, reporting obligations and election decisions. In particular, groups should evaluate whether the extension of the Transitional CbCR Safe Harbour and the introduction of the Simplified ETR, SBTI, SbS and UPE Safe Harbour may provide compliance relief and/or affect their expected Top-up Tax.

Groups should also monitor developments at the OECD level, including updates to the OECD Central Record, as eligibility for certain safe harbors depends on whether the OECD Inclusive Framework has recognized regimes as qualifying. In addition, even if a safe harbor applies, QDMTTs and related filing and reporting obligations continue to be relevant.

Endnotes

¹ Council Directive (EU) 2022/2523 of 14 December 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the European Union.

² OECD (2026), Tax Challenges Arising from the Digitalisation of the Economy — Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package: Inclusive Framework on Base Erosion and Profit Shifting (BEPS), OECD.

³ OECD (2026), Tax Challenges Arising from the Digitalisation of the Economy — Administrative Guidance on the Application of the Transitional UTPR Safe Harbour to MNE Groups with 52-53-Week Fiscal Years: Inclusive Framework on BEPS, OECD.