Pillar Two Tax in 2026

For US multinational groups, and indirectly also for Israeli companies that operate within such groups or alongside them, the main change is the introduction of a new Organization for Economic Co-operation and Development (OECD) mechanism. This mechanism provides a certain level of relief from exposure under the Pillar Two rules, but it does not eliminate all related charges and obligations. Therefore, to understand what has changed in Pillar Two in 2026, it is important to distinguish between a reduction of part of the exposure and a situation in which mapping, reporting, and an examination of local tax charges are still required.

The main challenge today is that the public discussion around the new rules tends to oversimplify the picture. In practice, even when a US corporate group can benefit from the new relief mechanism, local tax charges may still arise, reporting obligations may still apply, and structured preparation is still required at the level of data, documentation, and the operating structure. In other words, Pillar Two tax in 2026 may look simpler on paper, but in practice it requires no less attention – only of a different kind.

What Is Pillar Two?

To understand the picture, it is necessary to start with the basics. Pillar Two is the mechanism designed to ensure that large multinational groups are subject to a minimum effective tax rate of 15% in each jurisdiction in which they operate, subject to the relevant threshold conditions. In general, this refers to groups with consolidated revenue of at least 750 EUR million in two of the four preceding fiscal years. Therefore, the first question every group should ask is not whether it is American, Israeli, or European, but whether it falls within the scope of the regime at all.

The regime is built around three main mechanisms.

• The first is the Qualified Domestic Minimum Top-up Tax (QDMTT), meaning a local top-up tax that a jurisdiction imposes on profits arising within its territory when the effective tax rate is below the prescribed threshold.
• The second is the Income Inclusion Rule (IIR), which allows the parent jurisdiction to impose a top-up tax on low-taxed foreign income.
• The third is the Undertaxed Profits Rule (UTPR), which is intended to serve as a backstop where the top-up tax has not been collected through the other rules.

Not every jurisdiction has adopted all layers of the mechanism. However, many jurisdictions have chosen to adopt the QDMTT specifically, because it allows them to retain the tax revenue locally rather than leave it to another jurisdiction.

Side-by-Side Safe Harbor

The significant change in 2026 is the Side-by-Side Safe Harbor mechanism. This is a relief mechanism published by the OECD, which applies to groups whose Ultimate Parent Entity (UPE) is located in a jurisdiction recognized as a Qualified SBS Regime. Where the eligibility conditions are met and a valid election is made, the top-up tax under the IIR and UTPR is treated as zero. On its face, this is a very important relief, because it changes the level of exposure for certain groups for fiscal years beginning on or after January 1, 2026.

As of the date of this article, the United States is the only jurisdiction recognized under this framework. Therefore, Pillar Two tax in 2026 has become a particularly important question for US groups, but also for subsidiaries, business partners, and advisers in other jurisdictions, including Israel, that need to understand how this relief affects the group as a whole.

It is important to note that Safe Harbor does not eliminate all exposure. It addresses two mechanisms – the IIR and the UTPR – but does not apply to QDMTT. This means that even if substantial relief applies at the parent jurisdiction level, a local tax charge may still arise in the operating jurisdictions. For groups with broad operations in Europe, Asia, or other markets that have adopted QDMTT, this is not a side note but a key point. In some cases, it is the core of the risk.

In simple terms, a group can benefit from relief on one side and still pay top-up tax on another. Therefore, when management or a controlling shareholder hears that “the OECD has granted relief to US groups,” the right question is not whether the group is eligible for relief, but what exactly is included in it – and what remains outside it. This is a critical distinction in any QDMTT exposure review for US groups.

Reporting Obligations

Reporting obligations also do not disappear. One common mistake is to assume that substantive relief also eliminates the need for operational work, but that is not the case. Global Anti-Base Erosion (GloBE) reporting may still be required, and there remains a need to manage data, review results, coordinate among group entities, and ensure that appropriate internal documentation is in place. From a practical perspective, the company may save part of the direct tax exposure, but not necessarily all compliance and control costs.

This is also where the comparison between Pillar Two and the updated US regime becomes relevant. In the United States, an important change occurred when Global Intangible Low-Taxed Income (GILTI) was given a new name – Net CFC Tested Income (NCTI) – alongside certain changes to the charging structure. However, even if from a US perspective this is a regime intended to address the taxation of foreign income, its approach is not identical to Pillar Two. One important point is that Pillar Two applies on a jurisdictional basis, meaning that each jurisdiction is examined separately, while the US regime is based more on a global approach. As a result, a situation in which high tax in one jurisdiction “covers” low tax in another may look very different under each of the regimes.

From a practical review perspective, tax authorities and advisers do not settle for a general statement such as “the group is American, so there is relief.” They examine whether the group is within the scope of Pillar Two, where the Ultimate Parent Entity is located, whether formal eligibility for the mechanism exists, in which jurisdictions the group operates, which jurisdictions have adopted a QDMTT, what the effective tax rate is in each of them, and which reporting and documentation obligations remain in place. At the same time, it is important to check whether the domestic law in each jurisdiction has already been adjusted to the new guidance, because there is sometimes a gap between an international announcement and binding application under local law.

An Example

Assume that a US group holds subsidiaries in Germany, the Netherlands, and Singapore.

Assume also that the group meets the threshold conditions, is eligible for the relief mechanism, and elects to apply it for 2026. In that situation, it can be assumed that the exposure under the IIR and UTPR is significantly reduced. However, if in one of the operating jurisdictions the local effective tax rate is below the threshold required under the GloBE rules, and that jurisdiction applies a QDMTT, a local top-up tax may still arise. From the chief financial officer’s perspective, this is exactly the gap between relief at the group level and a charge at the jurisdictional level.

From our professional experience, this is also where the most common mistakes arise. One group may focus too heavily on the question of formal eligibility and neglect the jurisdictional map. Another group may invest in a sophisticated legal model but leave the documentation and data framework behind. There are also cases in which reporting is supposed to come from several different entities, but no one in the organization has been given clear responsibility for connecting the full picture. The result is not always additional tax, but it sometimes creates uncertainty, delays decision-making, and leads to unnecessary costs.

How Should Companies Prepare?

First, scope should be examined accurately. Then, the group structure and the identity of the Ultimate Parent Entity should be mapped. At the next stage, each operating jurisdiction should be reviewed to determine whether a QDMTT exists, how it operates, and what the status of local implementation is. From there, the company should move to operational work: collecting data, creating an orderly documentation file, defining internal responsibility, and coordinating among legal, tax, and accounting functions. Proper preparation for Pillar Two in 2026 is not based on one document or one opinion, but on a continuous and controlled work process.

For Israeli companies with a connection to US groups, the message is especially important. Even if the Israeli company itself is not the Ultimate Parent Entity, it may be an integral part of the group’s data framework, documentation, or local tax exposure. In some cases, the company in Israel is the one that holds profitable activity, key functions, or material contracts, and therefore it cannot assume that the matter is handled entirely “at headquarters abroad.” The more sophisticated the group, the more precise the coordination that is often required between Israel and the other jurisdictions.

To conclude, Pillar Two tax in 2026 marks a new phase: less room for general headlines, and a greater need for an accurate understanding of the details of the arrangement. The Side-by-Side Safe Harbor is an important relief, but it is not the end of the story. Groups that correctly examine the limits of the relief, the QDMTT exposure, and the reporting requirements will be able to manage the risk more carefully. Groups that assume the issue has been “resolved” may discover that exposure has simply taken a different path.

Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is composed of professionals with years of experience at the Israel Tax Authority, alongside experience at leading firms and law offices, bringing a combination of legal and economic perspective. We advise private and public companies, Israeli and foreign companies, global venture capital funds, and clients seeking focused advice in clear and accessible language. We also work with a professional network of accounting firms and law firms around the world in order to provide a full framework of support in cross-border matters.

If your group is examining the implications of Pillar Two tax in 2026, the applicability of the Safe Harbor, or local exposure to QDMTT, it is advisable to conduct an early strategic review rather than rely on general assumptions. An orderly review of the group structure, the relevant jurisdictions, and the reporting obligations can help reduce uncertainty, sharpen priorities, and build proper preparation for the coming years.

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