Side-by-Side as discordant constitutional element: what can EU Member States do?

1. Introduction

After lengthy discussions at OECD/Inclusive Framework level, the Global Minimum Tax Rules – or Pillar Two rules – were adopted on 20 December 2021. Two days later, the European Commission published a proposal for a Global Minimum Tax Directive, aiming to implement the OECD rules in a harmonized way across the European Union.

Directive 2022/2523 was adopted on 14 December 2022.1Basically, multinational groups of companies of which the global turnover is at least EUR 750 million, are in scope of the rules. In case the effective tax rate, as generally determined over all companies within the MNE in a certain jurisdiction, is below 15%, an additional tax should be levied up to the minimum level of 15%, either by the jurisdiction itself (Qualified Domestic Minimum Top-up Tax or QDMTT), the jurisdiction of the (ultimate) parent company (Income Inclusion Rule or IRR) or the jurisdiction of sister or subsidiary companies (Under Taxed Profit Rule or UTPR).

The United States did not adopt the OECD/IF Global Minimum Tax Rules. Following the pan-European implementation of the Global Minimum Tax Directive, US based groups could face additional levies in EU Member States. Therefore, the G7 concluded on 28 June 2025 for the introduction of a ‘Side-by-Side solution’, following which, among others, US parented groups would be fully excluded from the UTPR and the IIR in respect of both their domestic and foreign profits.2

On 5 January 2026, the OECD included the Side-by-Side solution in the GloBE Implementation Framework’s Administrative Guidance.3On 12 January 2026, the European Commission published a notice in the Official Journal acknowledging and confirming that the Side-by-Side solution can be considered a safe harbor under article 32 of the Global Minimum Tax Directive.4

2. Side-by-Side as constitutional Trojan horse?

As indicated, the European Commission proposed the Global Minimum Tax Directive on 22 December 2021. At that moment, the proposal did not yet include any safe harbor exemption. That was only added to the proposal on 24 February 2022.5At that time, safe harbors were already being discussed at OECD level. As it was unclear whether they would be agreed before adoption of the Global Minimum Tax Directive and in which form, a more general approach was proposed by introducing the current article 32 of the directive.6

The safe harbor provision was introduced to make Pillar Two calculations easier. To that extent, Member States should ensure that the top-up tax due by a group in a jurisdiction shall be deemed to be zero for a fiscal year if the effective level of taxation of the constituent entities located in that jurisdiction fulfils the conditions of a qualifying international agreement on safe harbors, implicitly referring to the OECD’s GloBE Implementation Framework. By referring to an ‘effective level of taxation of the constituent entities located in that jurisdiction’, the safe harbor rules are applicable when within a certain jurisdiction the minimum level of taxation is 15%, based on simplified criteria, following which no extensive and more specific calculations are required anymore. In an EU Q&A,7it is explained that as all EU Member States except Cyprus8are members of the Inclusive Framework (IF), the safe harbors included in the IF’s Pillar Two Administrative Guidance are deemed to meet the standard of a ‘qualifying international agreement on safe harbors’ in the meaning of article 32 of the Global Minimum Tax Directive.

The Side-by-Side solution is now included in the IF Administrative Guidance. As such, and especially after Cyprus’ consent, it automatically forms part of the exceptions as accepted under a ‘qualifying international agreement on safe harbors’ which is effective in all EU Member States. Dennis Weber referred to this solution as a ‘Constitutional Trojan Horse’ in his contribution to this forum on 6 October 20259and expanded on that in his contribution of 8 January 2026.10Referencing the CJEU’s Meroni judgment of 1958, as confirmed in 2024, Weber summarizes that the European Commission is entitled to delegate certain executive powers, but cannot delegate discretionary powers involving political choices that would shift institutional responsibility.

This position can – to my opinion – be extended to other EU institutions, like the European Council adopting secondary legislation after a European Commission’s proposal. Article 32 of the Global Minimum Tax Directive runs the risk for such a delegation of discretionary powers. In essence, and if used wisely, the article can simplify the calculations for Pillar Two purposes in case a group of companies by jurisdictional blending can show that the 15% threshold is met for that jurisdiction. In that case, no additional levy would be required.

That is different for the Side-by-Side solution. It puts, for instance, the allowed ‘jurisdictional blending’ as implied in article 32 of the directive at par with the ‘global blending’ under the US tax system. Essentially, that is not in line with the aim of the Pillar Two system as a whole, as that is part of ‘a continued effort to put an end to tax practices of MNEs that allow them to shift profits to jurisdictions [italics, JK] where they are subject to no or very low taxation’.11Already from this perspective, it can be doubted whether including a system of global blending into the IF’s Administrative Guidance fits the substantive requirements as required under article 32 of the directive. Besides the fact that this Side-by-Side approach probably is substantively contrary to the text of the directive and as such should not be allowed, it also raises questions on whether it constitutionally would be possible.12The G7, only including three13EU Member States, decided that a substantively unmatching system can be out-scoped from a Directive. The IF follows this approach, and it is automatically applied in the EU by using article 32 of the directive. No influence of parliaments is possible anymore, because the EU Member States transferred powers to non-EU institutions to influence EU directives. Therefore, and agreeing with Weber, this approach is substantively incorrect and constitutionally dangerous, as it automatically incorporates non-EU agreements into EU law and transfers legislative powers to non-EU bodies. This could also set precedents in other fields of law. However, as the deadline for a direct appeal to the invalidity of the directive’s provision– i.e., two months from its publication date – has expired, other solutions – besides a preliminary ruling request questioning the validity of the provision – should be explored.

3. How to proceed?

The introduction of the Side-by-Side approach can be considered a discordant element. While it is – from an EU perspective – institutionally or EU constitutionally dangerous to accept, EU resident companies in MNEs with a US parent company probably like the concept of no longer being in scope of the Global Minimum Tax rules. For EU Member States, this might form an internal conflict on how to approach the issue: by accepting the out-scoping of US based groups to the benefit of a part of their taxpayers or by standing for the EU’s institutional framework?

If that – political – choice would be in favor of the EU’s perspective, that raises the question on how to proceed. Essentially, invoking the invalidity of article 32 of the Global Minimum Tax Directive appears to be a ship that has left port, as an action for annulment can only be initiated within two months from the publication of the legal act.14As the directive was published on 22 December 2022, that term has expired. Article 263 TFEU, however, is broader than entitling the CJEU to judge on the validity of directives and might still have a legal escape route using the EC’s recent notification. Article 263 TFEU extends to ‘acts of the Council, of the Commission and of the European Central Bank, other than recommendations and opinions’. An act in the meaning of this provision should be ‘an act of an institution intended to have legal effects […] irrespective of whether the act was adopted by the institution pursuant to Treaty provisions’.15Confirming this approach, the CJEU judged that published Council conclusions in the form of guidelines, as published in the Official Journal’s C-series, can also have legal effect.16As in the current situation the notice by the European Commission on the Side-by-Side approach in the Official JournalC-series  is an act – in the meaning of a measure or an activity – intending to have legal effect by formalizing the Side-by-Side solution’s status under article 32 of the Pillar Two Directive,17the notice goes beyond being a ‘recommendation or opinion’ and, thus, could be considered the act to appeal. The action regarding invalidity of the notice on the Side-by-Side approach, under article 263 TFEU, should then be initiated within two months starting on 12 January 2026. In that action against the European Commission’s notice, article 277 TFEU would then allow to also start discussions on the validity of article 32 of the Global Minimum Tax Directive, or the directive as a whole, especially on grounds of lack of competence, infringement of the Treaties or of any rule of law relating to their application, or misuse of powers. In that way and following the Meroni-doctrine, the legal basis for the Side-by-Side approach could be tested as well.

4. Some final remarks

The correctness of the implementation of the Side-by-Side solution raised concerns among the EU Member States as well, and it reopened discussions on exceptions for – especially smaller – EU Member States from the Pillar Two rules.18

Because, until the European Commission’s note in the Official Journal, it lacked a legal entry for initiating a validity procedure, now that door might have been opened for more in-depth discussions on the Global Minimum Tax Directive. As the recent CJEU judgment in the Fugro-case learns that it would be hard for individual taxpayers to successfully start this procedure,19as they probably would fail to demonstrate that they are individually concerned by the European Commission’s acting, the ball is primarily in the court of the EU Member States or the European Parliament to start this litigation. Whether one of them will is to be awaited.

• 1Council Directive (EU) 2022/2523 of 14 Dec. 2022 on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union, OJ 2022 L 328/1.
• 2https://home.treasury.gov/news/press-releases/sb0181.
• 3OECD (2026), Tax Challenges Arising from the Digitalisation of the Economy – Global Anti-Base Erosion Model Rules (Pillar Two), Side-by-Side Package: Inclusive Framework on BEPS, OECD, https://www.oecd.org/content/dam/oecd/en/topics/policysub-issues/global-minimum-tax/side-by-side-package.pdf.
• 4Commission Notice on The OECD Inclusive Framework Agreement on Safe Harbors and the Pillar Two Directive, OJ C/2026/253 o 12 January 2026.
• 5WK 2798/2022 INIT.
• 6When it was proposed, this was article 30a of the proposed directive.
• 7https://taxation-customs.ec.europa.eu/document/download/ca7bf5d9-19d6-47f2-b4f5-4aab9b0912c1_en?filename=20231222%20Pillar%202%20technical%20FAQ.pdf.
• 8Cyprus needs to explicitly consent to the Administrative Guidance in order for it to apply.
• 9D. Weber, A full carve-out for U.S. groups for Pillar 2: an EU Constitutional Trojan Horse?, https://legalblogs.wolterskluwer.com/international-tax-law-blog/a-full-carve-out-for-us-groups-for-pillar-2-an-eu-constitutional-trojan-horse/.
• 10D. Weber, The Pillar 2 Side-by-Side Package: A Structural Breach of EU Tax Law, https://www.linkedin.com/pulse/pillar-2-side-by-side-package-structural-breach-eu-tax-dennis-weber-ebdfe/?trackingId=Ocj1niJWQ3SpFEcEWNRH%2BA%3D%3D.
• 11Global Minimum Tax Directive, preamble point 2.
• 12Also see comments of several academics towards the approach to implement the Side-by-Side approach via article 32 of the directive: E. Lamer, EU Walks Fine Line Between Legal and Political Issues on Pillar 2, 120 Tax Notes Int'l 798 (Nov. 3, 2025).
• 13France, Germany and Italy.
• 14Article 263, sixth paragraph TFEU.
• 15CJEU 2 March 1994, C-316/91 (European Parliament v Council of the European Union), ECLI:EU:C:1994:76, point 9.
• 16CJEU 13 July 2004, C-27/04 (European Commission v Council of the European Union), ECLI:EU:C:2004:436.
• 17This also follows the remark made by the authoritive Gerassimos Thomas, the EC’s Director-General for Taxation, where he announced the publication in the EU’s Official Journal “by which officially [italics, JK] we will announce, with the acceptance of all member states, that this [Side-by-Side] agreement will be part of European law after the mechanism that we have established under article 32.” See S. Soong, Cyprus Accepts Side-by-Side Deal; EU Pillar 2 Notice Imminent, 2026 TNTI 6-4.
• 18See, for instance, S. Soong and E. Lamer, Estonia Wants Same Global Minimum Tax Flexibility as U.S., 120 Tax Notes Int'l 1145 (Nov. 17, 2025); and, Spain Publishes Statement on U.S. Pillar 2 Exemption, 2025 TNTI 230-24. In relation to the latter, the concerns were especially raised by ICC Spain and not by the Member State itself.
• 19CJEU 30 October 2025, C-146/24P (Fugro NV), ECLI:EU:C:2025:841.