Luxembourg Pillar 2: new legislation implementing OECD side-by-side package

On 17 July 2026, the Luxembourg government submitted bill of law 8795 (Bill) to Parliament, which implements the agreed administrative guidance of 5 January 2026 adopted by the OECD/G20 Inclusive Framework, known as the “side-by-side” package, into the Pillar 2 law of 22 December 2023 (Pillar 2 Law).

The main measures are summarised below.

Side-by-side safe harbour

The Bill introduces a safe harbour which applies where the ultimate parent entity (UPE) of an MNE group is located in a jurisdiction recognised by the OECD/G20 Inclusive Framework as having a qualified side-by-side regime. Where applicable and subject to an election by the filing constituent entity for the relevant fiscal year, the IIR and UTPR top-up taxes are reduced to zero for all constituent entities of the MNE group. The safe harbour also extends to joint ventures and joint venture affiliates where the UPE is located in a qualifying jurisdiction. The side-by-side safe harbour does not modify the domestic minimum top-up tax (QDMTT) rules, which remain applicable in Luxembourg.

A jurisdiction qualifies if it has:

1. an eligible domestic tax system including a nominal corporate tax rate of at least 20% (after preferential adjustments), a QDMTT or income-based alternative minimum tax at a nominal rate of at least 15% applicable to a substantial portion of the group’s in-jurisdiction revenues, and no material risk of an effective rate below 15% on domestic profits;
2. an eligible worldwide tax system including a broad-based foreign income tax regime extending to both active and passive income of foreign branches and CFCs (with only limited, minimum-tax-compatible exclusions), substantial BEPS protection mechanisms, and no material risk of an effective rate below 15% on foreign profits;
3. a credit system for QDMTT of other jurisdictions; and
4. an Inclusive Framework recognition that it meets conditions (i) to (iii) for the relevant fiscal year.

At the time of submission of the Bill, the US is the only jurisdiction recognised as having a qualified side-by-side regime.

UPE safe harbour

The Bill introduces a UPE safe harbour for groups whose UPE is located in a jurisdiction recognised by the OECD/G20 Inclusive Framework as having a qualified UPE regime. A jurisdiction may qualify if it has an eligible domestic tax system that meets the same requirements as those applicable to the side-by-side safe harbour, was adopted and in force by 1 January 2026, and is recognised by the Inclusive Framework for the relevant fiscal year.

Where these conditions are met, and subject to an annual election, the UTPR top-up tax is reduced to zero for the UPE and all other constituent entities located in the UPE jurisdiction. At the time the Bill was submitted, no jurisdiction had been recognised as having a qualified UPE regime.

Qualified tax incentive safe harbour

Under this safe harbour, subject to an election by the filing constituent entity for the relevant fiscal year, the portion of top-up tax for a given jurisdiction that is attributable to qualified tax incentives is reduced to zero. A qualified tax incentive is a benefit generally available to taxpayers whose amount is determined by reference to eligible expenditure incurred, or to the volume of tangible goods produced, in the jurisdiction. Qualified refundable tax credits and marketable/transferable tax credits may also be brought within the regime by election.

The portion of top-up tax corresponding to qualified tax incentives is capped by a substance-based limit. This limit is equal to 5.5% of the higher of: (i) eligible payroll costs for employees performing activities in the jurisdiction; or (ii) the depreciation and amortisation charged in respect of eligible tangible assets located in the jurisdiction. As an alternative, the filing constituent entity may elect to apply a 1% limit based on the book value of eligible tangible assets (excluding land and non-depreciable assets).

Simplified effective tax rate safe harbour

Subject to an election, the top-up tax for a tested jurisdiction is reduced to zero where the tested jurisdiction has a simplified effective tax rate (ETR) equal to or above the 15% minimum rate, or where it has a simplified loss.

The simplified ETR is computed by dividing simplified taxes by simplified profit or loss, both of which are derived from the financial accounting data used for the preparation of the consolidated financial statements of the MNE group (or qualifying local financial statements where applicable). For the calculation of the simplified ETR, the starting point is the determination of the jurisdictional pre-income tax profit as well as the income tax charge that are then subject to a reduced number of adjustments, with the aim of avoiding the full GloBE computations for jurisdictions that clearly meet the minimum tax threshold under the simplified methodology.

The Bill introduces the concept of a tested jurisdiction, defined as a constituent entity, permanent establishment, joint venture or joint venture affiliate, or group of such entities, for which the ETR calculation is performed separately under the Pillar 2 Law. This definition allows subgroups that calculate their ETR separately under the Pillar 2 rules to be treated as located in the same tested jurisdiction for the purposes of the simplified regime.

The regime includes specific rules for inter alia investment entities located in the same jurisdiction, joint ventures and joint venture affiliates, M&A transactions, optional adjustments to simplified profit/loss and simplified taxes, post-year-end adjustments, transfer pricing adjustments, permanent establishments, flow-through entities and tax neutral UPEs.

This safe harbour may only be exercised for a tested jurisdiction for the first time in a fiscal year if no top-up tax was determined for that tested jurisdiction in any fiscal year beginning during the 24-month period preceding the first day of that fiscal year. A corresponding re-entry condition applies if the group exits and subsequently seeks to re-enter the regime.

Extension of transitional CbCR safe harbour

The Bill also extends the existing transitional country-by-country reporting (CbCR) safe harbour by one additional year, so that it can be applied for fiscal years beginning on or before 31 December 2027. This transitional safe harbour, which uses simplified data from country-by-country reports to test whether top-up tax may be owed, facilitates the initial phase of Pillar 2 implementation for the groups concerned.

Next steps and entry into force

The Bill will now follow the normal legislative process.

Once enacted, the proposed measures will apply for fiscal years beginning on or after 1 January 2026, subject to two exceptions:

• the provisions introducing the simplified ETR safe harbour will apply for fiscal years beginning on or after 31 December 2025; and
• the provisions implementing the OECD guidance of January 2025 will apply for fiscal years beginning on or after 31 December 2023, in alignment with the original entry into force of the Pillar 2 Law.