Pillar Two

What has changed since Budget 2027?

As expected, Finance (No. 2) Bill 2026 (the ‘Bill’), includes a number of amendments to Irish Pillar Two law, that were flagged as part of the recent Budget.

The Bill includes provisions to:

• Give effect to various safe harbours brought forward by the OECD side-by-side package that was released in January 2026;
• Amend the Irish Pillar Two law to reflect the OECD Administrative Guidance published in May 2026 and September 2026, which equally contain some important updates;
• Update the penalty and filing provisions, including a number of amendments to ensure that the Pillar Two legislation operates as intended.

Included in proposed amendments to accommodate the OECD side-by-side package are a number of safe harbours, including the side-by-side safe harbour. Put simply, where the conditions are met, and on the making of an election, the group’s top-up tax under the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) provisions of Pillar Two law would be treated as zero. The conditions include that the qualifying jurisdiction of the ultimate parent entity of the group must be recognised for the relevant fiscal year and listed on the OECD’s central record for qualified side-by side regimes, which currently only lists the United States.

It is important to note that the proposed safe harbour does not switch off qualified domestic top-up taxes (‘QDMTT’) and Irish constituent entities in eligible groups would remain subject to Ireland’s QDMTT, where applicable. As expected, the Bill provides for this to apply for fiscal years commencing on or after 1 January 2026.

In addition and in line with the OECD side-by-side package, the Bill also extends the transitional country-by-country reporting safe harbour for fiscal years beginning on or before 31 December 2027 and ending by 30 June 2029. Further, the Bill introduced a number of expected other enhanced safe harbour provisions including the Simplified Effective Tax Rate Safe Harbour, the Substance-based Tax Incentive Safe Harbour, and the Ultimate Parent Entity Safe Harbour.

The OECD Administrative Guidance published in May 2026 provides guidance on the application of the Transitional UTPR Safe Harbour to groups with 52-53 week fiscal years. The OECD Administrative Guidance published in September 2026 addresses the treatment of “explicitly conditional taxes”, the use of local financial accounting standards under a QDMTT, and the Global Minimum Tax: Terms of Reference and Assessment Methodology for the Full Legislative Review of jurisdictions’ implementing legislation.  

Who is affected, and when?

These changes will impact on both domestic and multi-national groups for whom Pillar Two is relevant.

While some of the changes will apply for accounting periods commencing on or after 1 January 2026 as noted above, it is important to note that this is not the date for all changes and some of the other Pillar Two changes may apply for different periods. Hence careful consideration of same is required.  

What does this mean for businesses?

For groups where Pillar Two is relevant, there are many updates that will need to be worked through.  

The first question for many groups will be is whether the ultimate parent’s jurisdiction qualifies for the side-by-side safe harbour. However, as noted, this will not remove all local Pillar Two requirements, even where applicable.   

Equally the clarification on the use of local financial accounting standards under a QDMTT, as per the September 2026 guidance noted above, may be particularly relevant for Irish constituent entities with non-coterminous accounting periods when determining what accounting standard is applicable for Irish QDMTT purposes.  Again, careful consideration of the updated provisions will be required by groups.    

Our view

The Bill largely delivers the detail signalled at Budget 2027 for Pillar Two. Adoption of the OECD side-by-side package and safe harbours is welcome, as is adoption of the side-by-side safe harbour for accounting periods commencing on or after 1 January 2026.

For the additional safe harbours introduced / extended, where applicable, it is hoped that the application of these safe harbours will reduce the compliance burden for groups within the scope of Pillar Two, albeit careful modelling of the application of the new provisions may be required.

While it is welcome to see some updates to the penalty provisions and other administrative provisions, it should also serve as a reminder to groups that the Pillar Two are complex and updates like those in the Bill require careful consideration.