1. Introduction

In January 2026, the Organization for Economic Co-operation and Development (OECD) introduced a new Substance-Based Tax Incentive (SBTI) Safe Harbor as part of the Side-by-Side (SbS) package issued as administrative guidance under the Pillar Two Rules. This safe harbor allows certain tax incentives that meet the OECD’s definition of Qualified Tax Incentives (QTIs) to reduce the Top-up Tax (TuT) payable in a jurisdiction where, and to the extent, the TuT is attributable to the use of QTIs in that jurisdiction.

From January 01, 2026, a Multinational Enterprise (MNE) group may elect to apply the SBTI Safe Harbor. Where elected, any TuT attributable to QTIs in a jurisdiction is deemed to be zero,[1] which is achieved through a jurisdictional Effective Tax Rate (ETR) adjustment. Under the Safe Harbor, QTIs are added to Covered Taxes, subject to a Substance Cap, calculated as the greater of 5.5% of eligible payroll costs, or 5.5% of depreciation and depletion expenses on eligible tangible assets. Alternatively, a five-year election may be made, to apply a cap of 1% of the carrying value of tangible assets. Thus, the ETR adjustment will be lower of the QTI amount or the Substance Cap.

2. What Is Considered as a “Qualified” Tax Incentive?

To be treated as a “Qualified” Tax Incentive, incentives must meet the following requirements regarding:

A. Types of Incentives
B. Amount of Incentive and “Direct Link”
C. Timing
D. General Availability

A. Types of Incentives

The QTI definition covers two broad categories: (i) expenditure-based tax incentives, and (ii) certain production-based tax incentives.

Expenditure based incentives qualify as QTIs where the benefit is directly linked to actual qualifying expenditure. Examples include tax credits calculated as a percentage of eligible expenditure, super-deductions in excess of 100% of qualifying costs, enhanced capital allowances and expenditure linked Corporate Income Tax (CIT) exemptions.

Production based incentives can qualify as QTIs only where the benefit is tied to volume of tangible production within the jurisdiction. Examples include units produced, tonnes extracted, kilowatt-hours generated, or emission reductions. Incentives based on the value of production (e.g., credit based on percentage of revenue) are excluded from QTIs.

B. Amount of Incentive and “Direct Link”

A fundamental condition for QTI treatment is the “direct link” between the tax benefit and the underlying qualifying expenditure (or, for production-based incentives, qualifying output). In practical terms, the incentive amount must be calculated using a mechanical formula, for example, ‘10% of qualifying R&D spend’ or ‘a fixed amount for each unit produced’, ensuring a clear and traceable connection between the expenditure/production input and the incentive output.

To satisfy the direct link requirement, the process for determining the incentive amount must be objective and reproducible, with no governmental discretion determining the amount of the benefit. The qualifying expenditure (or output) must be the determinative base for the calculation. Incentives that are linked to income, profits, or revenue (rather than expenditure or output) do not meet the direct link requirement and therefore cannot be treated as QTIs.

C. Timing

The QTI rules also require that the incentive amount be determined with reference to the actual timing of expenditure incurred or output produced. An administrative process that confirms eligibility in advance, for example, project pre-approval does not, in itself, prevent an incentive from qualifying, provided the benefit amount is ultimately calculated only once the relevant costs have been incurred (or the output has been produced).

Pure timing advantages (for example, accelerated depreciation or immediate expensing) are excluded from QTI treatment, since these mechanics affect only the timing of deductions rather than increasing the overall amount of relief over the asset’s life. However, where an incentive creates a permanent benefit (a permanent difference), that permanent element may qualify as a QTI even if the incentive also accelerates the timing of deductions.

D. Meaning of “Generally Available”

One of the critical elements for QTIs is the requirement for the incentive to be generally available to taxpayers, meeting statutory objective and published criteria, without being restricted to a particular class of taxpayers or dependent on governmental discretion in selecting beneficiaries.

Under the SBTI Safe Harbor, an incentive fails the general availability test if:

i. Eligibility is limited to in-scope MNE Groups (first condition); or

ii. The incentive is granted through a discretionary government arrangement, for example, a ruling, agreement, decree, or grant (second condition).

The first condition appears to relate to already existing references on the qualified status of rules, such as the Domestic Minimum Top-up Tax (DMTT), the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR). In all these cases, the Commentary clarifies that a condition for the rules to be ‘qualified’ is that a jurisdiction does not provide any ‘related benefits.’[2] This approach is carried forward into the SBTI Safe Harbor, with the OECD indicating that additional clarification may be issued. In this context, ‘related benefits’ capture incentives that are limited to in‑scope MNE groups or otherwise intended to neutralize the impact of the TuT and, thus, would not qualify as QTIs.

The second condition focuses on transparency in the design and operation of a regime, which was already one of the four key factors used to determine whether a preferential tax regime is potentially harmful in the 1998 OECD report on harmful tax competition.[3] This was later incorporated into the preferential tax regimes assessment under BEPS Action 5.[4] Non‑transparency arises when a regime allows taxpayers to negotiate terms or obtain preferential treatment that is not grounded in statute. For an incentive to meet the “generally available” requirement, the eligibility conditions must be clearly prescribed in law and applied on an objective, non‑discriminatory basis. The mere fact that authorities verify compliance with these statutory conditions does not undermine transparency.

Administrative practices that are consistent with legislation and do not override statutory rules are acceptable. However, bespoke or discretionary incentives, such as individually negotiated tax holidays or concessionary rates, are not considered generally available. Sector specific incentives may still qualify, provided they are established in law and open to all taxpayers engaged in the relevant activity, rather than tailored to specific companies or groups.

3. Conclusions and Practical Considerations

The SBTI Safe Harbor is a significant enhancement to the Pillar Two framework, as it now allows non‑refundable, substance-based tax incentives to receive favorable treatment previously limited only to Qualified Refundable Tax Credits (QRTCs) and Marketable Transferable Tax Credits (MTTCs). It is critical that existing and future tax incentives meet the requirements to be treated as QTIs.

For MNE Groups, a qualifying incentive can increase Covered Taxes (rather than reducing them), which may reduce or eliminate TuT particularly where the jurisdictional ETR would otherwise fall below 15%. However, the benefit is limited by the Substance Cap, meaning the Safe Harbor is most effective in jurisdictions with significant payroll and tangible asset bases.

In light of the above, MNE Groups should consider the following practical next steps:

• Review existing incentives across jurisdictions and assess them against QTI criteria.
• Model the interaction between the QTI treatment and the Substance Cap.
• Consider whether re‑characterizing existing QRTCs/MTTCs as QTIs yields a more favorable GloBE outcome.

• Monitor local jurisdictions’ implementation timelines for applying the SBTI Safe Harbor.

  ---

[1] The Top-up Tax corresponding to QTIs equals the difference between: (i) the Top-up Tax for the jurisdiction as calculated following the QTIs treatment (i.e. the Top-up Tax calculated after the ETR adjustment to Covered Taxes and limited by the Substance Cap in the jurisdiction) and (ii) the Top-up Tax that would have been determined for the jurisdiction in case the SBTI Safe Harbor election had not been made.

[2] OECD (2025), Tax Challenges Arising from the Digitalization of the Economy – Consolidated Commentary to the Global Anti-Base Erosion Model Rules (2025): Inclusive Framework on BEPS, OECD/G20 Base Erosion and Profit Shifting Project, OECD Publishing, Paris, paras. 115, 123 and 141 to Article 10.1 available at: https://doi.org/10.1787/a551b351-en

[3] OECD (1998), Harmful Tax Competition: An Emerging Global Issue, OECD Publishing, Paris, pp. 27-28 available at: https://doi.org/10.1787/9789264162945-en

[4] OECD (2015), Countering Harmful Tax Practices More Effectively, Taking into Account Transparency and Substance, Action 5 - 2015 Final Report, OECD/G20 Base Erosion and Profit Shifting Project, OECD 
Publishing, Paris, p. 20 available at: http://dx.doi.org/10.1787/9789264241190-en