The Pillar 2 - Side-by-Side Package: A Structural Breach of EU Tax Law

Introduction

The publication of the OECD Pillar 2 Side-by-Side (SbS) Package1marks a decisive moment in the evolution of the Global Minimum Tax (Pillar 2 or GloBE2)3 and its interaction with EU implementation.

The SbS Package includes:

(i) a set of measures presented as “simplifications”, aimed at reducing compliance burdens for multinational enterprises (MNEs) and tax authorities in the calculation and reporting of the global minimum tax,

but also introduces new substantive rules, such as:

(ii) the introduction of a targeted substance-based tax incentive safe harbour, which protects U.S. research and development credits and other U.S. tax incentives for investment and job creation from the operation of the Global Minimum Tax4; and

(iii) new safe harbours for MNE Groups whose ultimate parent entity is located in an “eligible jurisdiction” meeting minimum taxation requirements (the Side-by-Side Safe Harbour and the UPE Safe Harbour). At present, only the United States tax system qualifies as a “Qualified SbS” regime. As a result, U.S.-parented MNE Groups are effectively excluded from additional top-up taxation under the Income Inclusion Rule (IIR) and the Undertaxed Profits Rule (UTPR).

At the time of writing of this post, neither the European Commission nor the European Council has issued an official proposal or press release on how, or to what extent, the EU Pillar 2 Directive would be amended to accommodate the SbS Package.

The European Commission had previously indicated that the EU Pillar 2 Directive would not require amendment to accommodate subsequent OECD guidance5. It appears that the EU may adopt the changes contained in the OECD Side-by-Side (SbS) Package on the basis of Article 32 of the EU Pillar 2 Directive, which allows the European Union to take into account a ‘qualifying international agreement on safe harbours’6.

This would mean that the European Union would align itself with substantive new tax law, going well beyond mere simplification, particularly through the substance-based tax incentive safe harbour and the Side-by-Side Safe Harbour/UPE Safe Harbour, that was negotiated multilaterally outside its own constitutional framework and will be incorporated into OECD soft law, namely the Commentary to the GloBE Model Rules7. The question is not whether such alignment is politically convenient, it undoubtedly is, but whether it is legally permissible under EU law.

This post, which builds on my earlier Trojan Horse post8 (see here), argues that using Article 32 of the EU Pillar 2 Directive as the legal basis for implementing the SbS Package constitutes a breach of the Meroni doctrine of the Court of Justice of the European Union (CJEU)9. More broadly, it risks transforming the EU into an implementing agent of the OECD Inclusive Framework rather than a constitutional legislator in its own right10. In this post, I also argue that the SbS Package would reduce legal certainty, undermine equal treatment, offer no effective judicial protection, and potentially give rise to prohibited selective State aid.

1. Article 32 as an Automatic Alignment Clause

Article 32 of the EU Pillar 2 Directive was drafted to allow the Union to take into account a ‘qualifying international agreement on safe harbours’. Article 32 was designed as a tool for administrative simplification. Safe harbours are temporary or simplified methods intended to avoid disproportionate compliance costs and burdens for taxpayers and tax administrations11.

In practice, however, the SbS Package, which represent, in the words of the OECD, ‘a significant political and technical agreement’12; turns Article 32 into something it was never meant to be:

• A dynamic incorporation mechanism,
• which may make it possible the execution of actual economic policy negotiated outside EU institutions,
• With binding legal effects for taxpayers within the Union.

This is precisely the type of delegation prohibited by Meroni: the transfer of discretionary norm-setting to an external body without safeguards, democratic accountability, or judicial oversight.

2. The Meroni Threshold: Discretion of a technical nature versus political nature

In Meroni, and reaffirmed in 2024 by the Grand Chamber of the CJEU in C-551/22 P, Single Resolution Board case13, and in 2025 in ABLV Bank14, the CJEU drew a bright constitutional line:

- The EU may delegate executive, clearly defined circumscribed powers15 (discretion of a ‘technical’ nature). This discretion is justified by the ‘complexity of the technical, economic and legal situations they have to examine and of the assessments which they have to make’16.

- It may not delegate discretionary economic policy-making, especially where rights and obligations are affected (discretion of a ‘political’ nature), because it entails the exercise of political responsibilities17.

The SbS Package is not based on ‘clearly defined executive powers’ the exercise of which can, therefore, be subject to strict review in the light of objective criteria determined by the delegating authority (EU)18. The outcome of the SbS Package is ‘actual economic policy’, since it replaces the choices of the delegator (EU) with the choices of the delegate (OECD Inclusive Framework), and brings about an ‘actual transfer of responsibility’19. The SbS Package changes the scope of the IIR and the UTPR, and the competitive position of U.S.-headed groups relative to EU-headed groups. It also adds new rules framed as supporting substantial investment and economic development, in particular the targeted substance-based tax incentive safe harbour, which in effect protects U.S. research and development credits and other U.S. tax incentives for investment and job creation from the operation of the Global Minimum Tax20.

By applying the SbS Package through Article 32, the EU allows an external forum, the OECD Inclusive Framework, increasingly shaped by G20/OECD dynamics and by actors with divergent values, to influence the content of binding EU law without a constitutional filter. Delegation of broad discretionary power to non-EU bodies, particular with regard to fundamental issues of a certain policy area (in this case: taxation), disturb the balance of power which is one of the characteristics of the institutional structure of the European Union21.

According to the OECD Inclusive Framework, the SbS Package was agreed in order to preserve the benefits of the Global Minimum Tax while enhancing stability, simplicity, and certainty22. Contrary to this stated objective, however, the SbS Package undermines Pillar Two’s central rationale. The Global Minimum Tax is premised on neutrality. The SbS Safe Harbour/UPE Safe Harbour is not a mere simplification measure, but a structural exemption that reintroduces residence based primacy through the back door by allowing certain UPE jurisdictions to shield their groups from the application of the IIR and/or the UTPR. This risks recreating the very competitive distortions and BEPS dynamics that Pillar Two was designed to neutralise, now effectively legitimised under the label of a ‘safe harbour’. Moreover, the SbS Safe Harbour reintroduces asymmetry by selectively accommodating U.S. blending mechanics.

With the introduction of the SbS Safe Harbour/UPE Safe Harbour, the objective of the Global Minimum Tax, namely the creation of a level playing field, has instead resulted in an uneven staircase.

3. Less legal certainty, No equal treatment, No effective judicial protection and selective state aid

Under the Side-by-Side system, the application of IIR/UTPR may depend on whether a non-EU body (the Inclusive Framework) designates a third-country tax regime as “Qualified SbS Regime”. That designation is based on open-textured and evaluative criteria, such as the absence of a “material risk” of effective taxation below 15%, the existence of “substantial mechanisms” to address BEPS, and a  ‘pragmatic’, ‘holistic’ assessment of the tax system as a whole, ‘over time’ and ‘at an aggregate level (and not considering each MNE Group separately)’23 which confer wide discretion and render differential outcomes difficult to justify on an objective and verifiable basis.

The Court of Justice has accepted that the EU legislature may have recourse, in the norms it adopts, to ‘abstract legal notions’ (see the Belgian Association of Tax Lawyers-case24), and has held that the mere fact that such notions “often leave grey areas at the fringes of a definition” does not, in itself, render a measure unlawful25. However, the eligibility criteria used for the Side-by-Side Safe Harbour go significantly further. Concepts such as the existence of a “material risk” of effective taxation below 15%, combined with the instruction that this criterion is to be assessed “pragmatic’, “holistically, over time, and at an aggregate level”26, are formulated at such a high level of abstraction that it becomes questionable whether any ambiguity or vagueness can in fact be dispelled by applying the ordinary methods of legal interpretation27. In that respect, the SbS eligibility criteria may be regarded as approaching, if not crossing, the boundary between permissible legislative abstraction and a lack of clarity or precision and insufficient foreseeability, such that their scope may no longer be capable of being determined by the ordinary methods of interpretation required under EU law, thereby breaching the principle of legal certainty.

As a result, economically comparable multinational groups may be treated differently solely by reference to the location of their UPE. These concerns are compounded by the fact that the determination of whether a given tax system qualifies as a “Qualified SbS Regime” is made by the OECD Inclusive Framework, that is, outside the EU legal order and without effective judicial review, neither for the taxpayer nor for the relevant jurisdiction, while directly determining the applicability of core EU tax enforcement mechanisms. This raises serious issues of legal certainty, equal treatment, and access to a court and effective judicial protection under Article 47 of the EU Charter of Fundamental Rights.

From a State aid perspective, the SbS Safe Harbour/UPE Safe Harbour raises additional concerns of selectivity, insofar as access to the regime depends on the exercise of a broad discretionary power, which the Inclusive Framework itself characterises as a “pragmatic assessment of the overall operation of the tax system”28, based on open-textured criteria. Where the legal framework confers a margin of discretion allowing eligibility to be assessed on the basis of open-ended or evaluative conditions, it is liable to favour certain undertakings over others in comparable factual and legal situations. In such circumstances, where the granting of an advantage is conditional on pragmatic, subjective judgments rather than on objective, verifiable, and uniformly applicable conditions, the resulting differentiation between undertakings may be attributable to discretion rather than to the intrinsic logic of the tax system29. Such discretion is capable of conferring a selective advantage within the meaning of Article 107(1) TFEU, particularly where comparable undertakings may be treated differently without a clear and objective justification. if the SbS Safe Harbour/UPE Safe Harbour were found to constitute prohibited State aid, Member States could be required to recover the tax advantage from benefiting US MNEs, resulting in retroactive tax liabilities and significant legal uncertainty for those groups.

4. A System Without a Constitutional Filter

The deeper institutional problem lies not in SbS Package itself and the eligibility criteria for the SbS Safe Harbour/UPE Safe Harbour, but in what Article 32 becomes once stretched to cover it. If Article 32 is interpreted as a standing invitation for the Commission and the EU Council to incorporate any OECD Inclusive Framework output, the Union risks forfeiting its constitutional autonomy in the field of direct taxation.

Three structural dangers stand out:

(1) The Inclusive Framework lacks EU-style democratic legitimacy
It includes non-democracies and low-tax jurisdictions whose values diverge sharply from the EU constitutional order.

(2) The Inclusive Framework is not accountable to the CJEU
EU taxpayers cannot challenge IF-driven outcomes before EU courts.

(3) EU institutions have no control over the Inclusive Framework’s agenda or tempo
But Inclusive Framework decisions could directly alter obligations within the Union if Article 32 is read expansively.

This is the Meroni scenario: the transfer of genuine policy discretion beyond the institutional balance established by the Treaties.

5. The Side-by-Side Package as the Moment of Revelation

The SbS Package removes any remaining ambiguity.
Article 32 is no longer functioning as a technical provision. It has become a constitutional hinge through which external actors shape internal EU tax law.

The EU is not aligning with OECD technical guidance.
It is aligning with a multilateral geopolitical compromise struck between the U.S. Treasury and the OECD Secretariat30, and presented to the EU as a fait accompli.

If the Union accepts that such compromises can automatically override its own Directive (hard law), it effectively assumes the role of executor of international political soft law, de facto what the CJEU warned against in Meroni and reiterated in the Single Resolution Board case and in the ABLV Bank case.

Conclusion: A Call for Legislative Re-Anchoring

The SbS Package exposes the structural fragility of Article 32. It was drafted too broadly, with insufficient safeguards, no clear constitutional boundaries and no judicial review. Used as a vehicle for the SbS Package, Article 32 risks triggering a Meroni breach by permitting the importation of external discretion into binding EU law.

But a remedy exists:

• Amend Article 32;
• Re-anchor alignment in formal EU legislative processes, not administrative drift;
• Ensure democratic control;
• Explicitly define the objectives, content, scope and duration of the delegation of executive power;
• Use objective, verifiable, and uniformly applicable conditions and
• Introduce judicial review over any future incorporation of Inclusive Framework executive outputs.

Without this recalibration, the implementation of the SbS Package may become the first chapter in which the Union abandons constitutional autonomy in direct taxation.

• 1OECD (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, published 5 January 2026; https://www.oecd.org/content/dam/oecd/en/topics/policysub-issues/global-minimum-tax/side-by-side-package.pdf.
• 2Global anti-Base Erosion rules (GloBE).
• 3For more about the Global Minimum Tax, see Grilli/Weber (editors), Annotations on the OECD Global Anti-Base Erosion Model Rules, (Pillar 2), Kluwer Law International, 2024, 567 pp.
• 4See: Treasury Secures Agreement to Exempt U.S.-Headquartered companies form Biden Tax Plan, Press Release, U.S. Department of the Treasury, 5 January 2026; Treasury Secures Agreement to Exempt U.S.-Headquartered Companies from Biden Global Tax Plan | U.S. Department of the Treasury
• 5See: EU Commission Doesn’t Foresee Need to Change Pillar 2 Directive, Tax notes, 1 July 2025.
• 6The Netherlands announced that it will come forward with a proposal to amend its legislation on the basis of the SbS Package. See: S. Soong, Netherlands to Start Side-by-Side Package Adoption Before Summer; Tax Notes, 7 January 2026.
• 7See: OECD (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, published 5 January 2026; p. 5, point 5.
• 8See: CJEU 13 June 1958. Case 9/56, Meroni.
• 9See for a different opinion: Pramod Kumar Siva and Willam Byrnes, Pillar Two Side-by-Side Challenges of EU Law, Global Tax Governance, Sovereignty. Comments for a Rational Win-Win Path Forward, Kluwer International tax blog, 5 December 2025.
• 10See: OECD, Safe Harbours and Penalty Relief: Global Anti-Base Erosion Rules (Pillar Two) (Dec. 2022). See in General: J. Monsenego, Réflexions sur la prise en compte des travaux du cadre inclusif pour la détermination des régimes de protection couverts par l’article 32 de la directive GloBE, N° 2024/4, Revue européenne et internationale de droit fiscal, p. 483.
• 11OECD press release. International community agrees way forward on global minimum tax package, 5 January 2026; Italics added by the author of this blogpost.
• 12CJEU 18 June 2024, case C-551/22 P, SRB.
• 13CJEU 11 December 2025, C-602/22 P, ABLV Bank.
• 14See also, by analogy, art. 290(1) TFEU. In CJEU 20 November 2025, C-617/24, Siegfried PharmaChemikalien Minden GmbH, the Court ruled (para 25): ‘In accordance with the first sentence of the second subparagraph of Article 290(1) TFEU, the objectives, content, scope and duration of the delegation of power must be explicitly defined in the legislative act granting such a delegation’ (Italics added).
• 15See AG Leger in his opinion in case 40/03 P, Rica Foods, point 46.
• 16See AG Leger in his opinion in case 40/03 P, Rica Foods, point 45. See also, by analogy, art. 290(1) TFEU. In CJEU 20 November 2025, C-617/24, Siegfried PharmaChemikalien Minden GmbH, the Court ruled (para 25): ‘Furthermore, it follows from the second sentence of that subparagraph [second subparagraph of Article 290(1) TFEU] that the essential elements of the matter in question must be laid down in the basic legislation and cannot be delegated. It follows from the case-law that those essential elements are those which, in order to be adopted, require political choices falling within the responsibilities of the EU legislature’ (Italics added).
• 17CJEU 18 June 2024, case C-551/22 P, SRB, para. 70.
• 18CJEU 11 December 2025, C-602/22 P, ABLV Bank, para. 88.
• 19The United States has been remarkably explicit that both the Side-by-Side Safe Harbour/UPE Safe Harbour and the targeted substance-based tax incentive safe harbour were designed to protect U.S. tax interests. See:Treasury Secures Agreement to Exempt U.S.-Headquartered companies form Biden Tax Plan, Press Release, U.S. Department of the Treasury, 5 January 2026; Treasury Secures Agreement to Exempt U.S.-Headquartered Companies from Biden Global Tax Plan | U.S. Department of the Treasury
• 20CJEU 18 June 2024, case C-551/22 P, SRB, para. 72.
• 21See: OECD (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, p. 6, point 6.
• 22See: OECD (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, p. 83, point 17.
• 23See: CJEU 29 July 2024, case C-623/22, Belgian Association of Tax Lawyers, para. 37.
• 24See: CJEU 29 July 2024, case C-623/22, Belgian Association of Tax Lawyers, para. 42.
• 25See: OECD (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, p. 83, point 18.
• 26See: CJEU 29 July 2024, case C-623/22, Belgian Association of Tax Lawyers, para. 44.
• 27See: OECD (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, p. 83, point 17.
• 28See, by analogy: CJEU 18 July 2013, case C-6/12, P OY, para. 26-27.
• 29See: Treasury Secures Agreement to Exempt U.S.-Headquartered companies form Biden Tax Plan, Press Release, U.S. Department of the Treasury, 5 January 2026; Treasury Secures Agreement to Exempt U.S.-Headquartered Companies from Biden Global Tax Plan | U.S. Department of the Treasury
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  See: Treasury Secures Agreement to Exempt U.S.-Headquartered companies form Biden Tax Plan, Press Release, U.S. Department of the Treasury, 5 January 2026; Treasury Secures Agreement to Exempt U.S.-Headquartered Companies from Biden Global Tax Plan | U.S. Department of the Treasury