With recent developments in the US, there is some uncertainty as to whether Pillar 2 will achieve the global reach the OECD initially intended.
However, the UK government has enacted Pillar 2 legislation, with the first filings having been due on 30 June 2025.
To ease the administrative burden in the early years, Transitional Safe Harbours have been introduced for the first three year (i.e. FY24 – FY26).
These provide simplified tests, largely based on “qualified” Country-by-Country Reporting (CbCR) data. Where a safe harbour is met, the UK Domestic Top-up Tax is deemed to be £nil.
Three safe harbours
The three safe harbours are as follows:
De minimis test:
This will be met where the revenue in the UK is less than €10 million and profit before tax in the UK is less than €1 million.
Effective tax rate test:
The UKs simplified effective tax rate is at least 15% (increasing to 16% and 17% for FY25 and FY26 respectively).
Routine profits test:
The UKs profit before tax is equal to or less than the substance-based income exclusion (which are based on a simplified percentage of payroll and tangible assets). This safe harbour should be met where the UK is in a loss-making position.
Groups should also be aware of the “once out, always out” rule whereby if the UK fails to qualify for a safe harbour in one year, it cannot return to safe harbour status in later years, even if it would otherwise meet the criteria.
Key considerations
These safe harbours are all dependent on data from a qualified CbCR. If the CbCR is not qualified, the safe harbours cannot apply, which may result in an additional compliance burden in the UK. It is therefore important to consider this condition when preparing CbCRs, which must be filed before any Pillar 2 filings are made. If the first years CbCR is not qualified, this would prevent safe harbours from applying in future years.
Our expert specialist concludes
"Our Pillar 2 specialists are working with multinational groups to navigate the new compliance framework which includes advising and assessing what constitutes a ‘qualified’ CbCR, safe harbour eligibility, filing requirements, and long-term readiness planning."
How can we help
If you would like to discuss how the transitional safe harbours could apply to your group, please Contact Us, or email Chris Danes, Steve Davies or Alex Lubbock from our team:
Chris Danes, Tax Partner: [email protected]
Steve Davies, Tax Director: [email protected]
Alex Lubbock, Senior Tax Manager: [email protected]
