When Equivalence Stops Short: The Side-by-Side Safe Harbour and Its Uneasy Fit with Revised ATAD CFC Rules

This piece examines the CFC carve-out in the reportedly leaked EU Tax Omnibus proposal and argues that, rather than simply reducing overlap with Pillar Two, it introduces a layered exemption that reveals a deeper tension. While the Side-by-Side safe harbour recognises third-country minimum tax systems, such as the US regime, as Pillar Two equivalent at system level, the ATAD CFC framework does not extend that recognition to individual entities or jurisdictions. This divergence reflects the implicit use of two standards of comparability: a global, system-level test under Pillar Two and a more granular, jurisdiction-level test under ATAD CFC rules. At the same time, reliance on Inclusive Framework-based classifications raises constitutional questions under the Meroni doctrine in the ATAD context and illustrates how Pillar Two increasingly channels international soft-law tax norms into the application of existing hard-law EU directives, creating legal uncertainty and strategic tensions for taxpayers.

1. Introduction: the CFC carve-out in the Omnibus

Recent developments surrounding the leaked EU Tax Omnibus proposal from the European Commission, as reported, inter alia, by Elodie Lamer in Tax Notes International of 2 June 2026,1 point to significant adjustments to the Anti Tax Avoidance Directive (ATAD) framework aimed at simplification and improved EU competitiveness.

One of the reportedly proposed amendments concerns the introduction of a carve-out from the Controlled Foreign Company (CFC) rules in ATAD (Articles 7-8 ATAD) for multinational groups subject to Pillar Two. The Omnibus forms part of a broader reform package introducing coordinated amendments across several directives, including ATAD. This contribution focuses on the redesign of the ATAD CFC rules, as it exposes broader systemic questions concerning equivalence, comparability and the interaction between Pillar Two and existing EU anti-tax avoidance legislation.

The draft proposal introduces a general exemption from the CFC rules for entities belonging to groups that fall within the scope of Pillar Two. This aims to reduce overlap between the traditional ATAD CFC regime and the global minimum tax, thereby avoiding double taxation and reducing complexity. More broadly, it reflects a recalibration of the EU anti-tax avoidance framework in light of global minimum taxation.

However, the exemption is not unconditional. Where the ultimate parent entity is located in a jurisdiction operating an equivalent minimum tax system covered by the Inclusive Framework’s Side-by-Side Safe Harbour (e.g. US-headquartered multinationals), the general CFC exemption is effectively set aside. In those cases, it re-applies only if the low-taxed entity is subject to a Qualified Domestic Minimum Top-Up Tax (QDMTT) without corresponding refunds or indirect benefits.

The structure operates as a layered mechanism. A general carve-out from the CFC rules, followed by a carve-out from that carve-out and a conditional re-entry. This construction raises a question. Why should a foreign minimum tax regime be regarded as sufficiently equivalent for Pillar Two purposes while that same equivalence remains insufficient under the ATAD CFC rules?

2. CFC carve-out, Side-by-Side Regime, and the Position of US MNEs under the EU Omnibus Framework

2.1 The asymmetry: SbS sufficient for Pillar Two, but not for ATAD’s CFC

This layered design leads to a striking asymmetry, particularly for US-headquartered multinational enterprises benefiting from the Side-by-Side safe harbour. On the one hand, under the Side-by-Side regime the US minimum tax system (GILTI/NCTI, BEAT, CAMT) is treated as sufficiently comparable to justify the non-application of the Pillar Two Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR). At that level, the EU appears to accept that the US system achieves the objectives of the global minimum tax.

On the other hand, US minimum taxation is not regarded as sufficient to displace the application of the ATAD CFC rules. Instead, the continued availability of the CFC exemption depends on the existence of a jurisdiction-specific minimum tax through a Qualified Domestic Minimum Top-Up Tax for EU Pillar Two purposes. The result is that the same foreign minimum tax regime is treated as both comparable and insufficient, depending on whether it is assessed under EU’s Pillar Two framework or the EU’s ATAD CFC framework.

2.2. Two implicit standards of comparability

The asymmetry appears to stem from the implicit use of two distinct standards of comparability. Under Pillar Two, a foreign minimum tax regime is assessed for Side-by-Side eligibility at system level. Under the ATAD CFC rules, the assessment shifts to individual entities or jurisdictions. The same regime is thus examined at two different analytical levels.

This duality is not explicit, yet decisive for the legal outcome. The same minimum tax system may be treated as functionally equivalent in one context and insufficient in another. Comparability therefore becomes dependent on the level at which equivalence is assessed, rather than constituting a single coherent legal standard of equal treatment before the law. Much of the asymmetry in the proposed CFC exemption stems from this distinction.

2.3. Internal inconsistency or justified differentiation

Two readings are possible. On one view, the newly devised ATAD CFC-framework appears internally inconsistent. If the US system is considered sufficiently robust to justify refraining from the application of extraterritorial minimum top-up tax mechanisms under the EU’s Pillar Two framework, it is unclear why that same system should not equally justify the exclusion of the EU CFC tax. In this reading, the layered carve-out reflects a shifting application of equivalence rather than a stable normative criterion.

On another view, the distinction reflects a deliberate policy choice. Pillar Two is based on jurisdictional blending, whereas the US minimum tax system is based on global blending. The Side-by-Side safe harbour bridges this divergence for political reasons by treating these approaches as equivalent at system level. By contrast, the ATAD CFC rules continue to operate at the level of individual entities or jurisdictions, focusing on the effective taxation of specific streams of low-taxed income.

The Side-by-Side safe harbour deems globally blended systems equivalent to jurisdictionally blended ones for Pillar Two purposes, while the ATAD CFC framework does not extend that equivalence to individual corporate taxpayers to which the CFC rules apply. The additional requirement for CFC exemption eligibility imposed in Side-by-Side scenarios may therefore be understood as preserving this disaggregated logic despite system-level equivalence under Pillar Two.

The difficulty lies in the absence of an explicit articulation of this distinction. Primary EU law does not define when a system-level equivalence assessment suffices and when a jurisdiction-specific comparability test must prevail, leaving the framework normatively ambiguous – and its application subject to legal risks.

2.4 The role of soft law, the Meroni question, and spill-over from Pillar Two

A further layer of complexity arises from reliance on soft law in defining Side-by-Side safe harbour eligibility, now also becoming relevant for ATAD CFC purposes. The classification of a jurisdiction as operating a minimum tax regime eligible for such treatment is derived from OECD-hosted political processes within the Inclusive Framework. Although this classification originates outside the EU legal order, it becomes decisive for the application of EU law, including the scope of the ATAD CFC exemption.

This raises constitutional concerns in light of the Meroni doctrine – on which Weber has also written on this blog, amongst others – which limits the delegation of discretionary powers to external bodies. By incorporating externally developed classifications into binding EU legislation, the draft Omnibus proposal attributes normative significance to standards that do not originate within the EU legislative process. The issue is compounded by the contested and evolving legal status of the Side-by-Side package within the Pillar Two framework, including under Article 32 of the Pillar Two Directive.

This mirrors a broader dynamic within Pillar Two. The regime relies extensively on soft-law standards developed within the OECD’s Inclusive Framework, creating a tension between pragmatic functional coordination and constitutional constraints. While effectiveness depends on alignment with internationally agreed rules, such alignment risks shifting elements of normative determination beyond EU institutional safeguards.

Notably, this dynamic is no longer confined to the Pillar Two Directive. Through its interaction with ATAD, such externally defined classifications spill over into pre-existing hard-law EU instruments. The ATAD CFC regime, too, becomes partly dependent on rulemaking originating in international soft law, notably within the Inclusive Framework.

Pillar Two thus functions not merely as an international minimum tax framework, but also as a conduit through which soft-law mechanisms are used to reshape the application of existing EU tax legislation.

2.5. The position of US MNEs: a strategic paradox

The resulting position is paradoxical. A classification that supports equivalence in the Pillar Two context simultaneously demonstrates its limits within the ATAD CFC framework. The same concept thus produces different legal consequences depending on the context within which it is applied.

For US multinational enterprises, this creates a particular set of incentives. In the Pillar Two context, reliance on the Side-by-Side classification of the US minimum tax rules may lead to the disapplication of the Income Inclusion Rule and Undertaxed Profits Rule within the EU, reducing overall tax exposure. In the ATAD CFC context, however, the same classification does not secure relief from CFC-related top-up exposure – thereby potentially increasing overall tax exposure. From an economic perspective, this may also shift taxing rights towards the EU, as taxation that would otherwise arise under globally blended regimes such as GILTI is partially pre-empted by the reactivation of EU CFC rules.

Taxpayers may argue that the US system is functionally equivalent pursuant to the Side-by-Side arrangement and should justify a broader exemption from CFC taxation under primary EU law. Such arguments, however, entail legal risk, as they would invite judicial scrutiny of the Side-by-Side arrangement itself, including issues of comparability, equal treatment and institutional balance under that same primary EU law.

This results in a paradox in which reliance on Side-by-Side is advantageous in one corporate tax domain while potentially destabilising in another.

2.6. ATAD in transformation: a broader perspective

The issues surrounding the CFC exemption and Side-by-Side eligibility fit within the broader transformation of ATAD under the Omnibus proposal. While the reform package covers multiple measures, the redesign of the CFC rules illustrates how existing anti-tax avoidance instruments are being reconfigured in response to the global minimum tax framework.

Rather than being replaced, the CFC rules are conditionally subordinated to Pillar Two, creating a layered system in which different tax policy logics coexist. The introduction of exceptions, counter-exceptions and conditional re-entry mechanisms marks a shift from a relatively uniform anti-tax avoidance framework to a fragmented architecture in which traditional anti-tax avoidance rules and Pillar Two operate as interconnected systems, while that interconnectedness does not extend to minimum tax systems treated as Pillar Two equivalent under the Side-by-Side safe harbour.

3. Final remarks

Although the introduction of a CFC exemption for Pillar Two groups is presented as a simplification measure, it adds new complexity. The conditional treatment of minimum tax systems covered by the Side-by-Side safe harbour shows that the EU relies on different, partly implicit standards of comparability across corporate tax contexts.

The interaction between the CFC carve-out structure and externally defined classifications produces a more complex framework. The issue is not merely technical but conceptual. Under what conditions can minimum tax regimes be regarded as equivalent under EU law, and at what analytical level should that assessment be made?

The Side-by-Side system reflects a broader transformation of EU tax law in the post-Pillar Two era, in which global and regional frameworks are increasingly interdependent. What begins as a coordination mechanism within Pillar Two becomes a channel through which international tax concepts reshape existing EU directives, extending constitutional and conceptual tensions into the wider EU tax framework.

The significance of the Side-by-Side problem therefore goes beyond the interaction between ATAD CFC rules and Pillar Two. It reflects how existing anti-avoidance instruments increasingly operate through concepts and classifications developed within international tax governance.

The central question is no longer only whether different minimum tax regimes can be treated as equivalent, but also who determines that equivalence and at what level. The Omnibus proposal suggests that Pillar Two is evolving into a broader normative framework shaping the application of EU tax legislation.

• 1Elodie Lamer, ‘EU Draft Suggests ATAD Will Evolve Beyond Antiavoidance Focus’, Tax Notes International, Jun. 2, 2026: “Also expected is the exemption for groups subject to pillar 2 from the controlled foreign company rule. (...) The carveout would apply to all EU-based companies with low-taxed subsidiaries, unless their group is headquartered in a jurisdiction with a qualified side-by-side regime and the subsidiary is either not subject to a qualified domestic minimum top-up tax or receives refunds or other benefits related to that tax. That was a key request by stakeholders, although in October, instead of an exemption for pillar 2 companies, the commission suggested crediting qualified domestic minimum top-up taxes against the CFC tax liability. Small and medium-size enterprises would also be exempted from the CFC rules, and the draft would require member states to apply the ATAD's passive-income-based CFC regime, known as option A.”