Pillar Two: Substance-based Tax Incentives Safe Harbour – New York Office Snippet

This Snippet provides a high-level overview of the recently released Substance-based Tax Incentives Safe Harbour (SBTI SH) and its impact on the Pillar Two (P2) position of multinational groups (MNEs).

What does it do?

The optional SBTI SH allows groups to eliminate any Top-up Tax (TuT) related to Qualified Tax Incentives (QTIs), up to a Substance Cap. It applies for fiscal years starting as of 1 January 2026.

What is a QTI?

QTIs are tax incentives that are (i) generally available, (ii) reduce liability for a covered tax, and (iii) are either expenditure based (e.g., R&D incentives tied to incurred costs) or production based related to tangible assets (linked to physical output). Income‑based incentives and timing only benefits do not qualify and neither do government grants and subsidies. 

QTIs are limited to a Substance Cap of:

• 5.5% of the eligible payroll costs or depreciation of eligible tangible assets; or
• 1% of the carrying value of eligible tangible assets (five‑year election).

Difference with QRTCs/MTTCs

The P2 effective tax rate (ETR) is calculated by dividing P2 taxes by P2 income. P2 already includes favorable rules for Qualified Refundable Tax Credits (QRTCs) and Marketable Transferable Tax Credits (MTTCs) – tax incentives refundable in cash within a four-year period or transferable to a third party subject to limitations. QRTCs and MTTCs increase P2 income whereas all other tax credits reduce the amount of P2 taxes. While beneficial, this treatment still reduces the ETR and can trigger TuT.

QTIs, by contrast, do not impact the ETR calculation but fully remove the TuT caused by the tax incentive, subject to the Substance Cap.

Where a tax incentive qualifies as both a QRTC/MTTC and a QTI, groups may annually elect to treat all or part of the incentive as a QTI. This is most attractive where the jurisdiction has significant payroll or tangible assets (i.e., a high Substance Cap) or where the incentive is large enough to cause a (15% ETR. If the Substance Cap is low or the ETR is already at 15%, electing the SBTI SH may offer limited benefits.

When is the SBTI SH relevant?

For U.S.-parented MNEs, the SBTI SH still matters even though the SbS Safe Harbour (see our previous Snippet) switches off most P2 rules as of 1 January 2026. This is because Qualified Domestic Minimum Top-up Taxes (QDMTTs) still apply, and the SBTI SH could avoid TuT caused by QTIs in QDMTT jurisdictions.  

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.