International Tax Agreement US Exemption: What the 2026 OECD Deal Means

The agreement allows qualifying US-parented multinational groups to use a “side-by-side” system that recognises eligible US minimum tax rules alongside the OECD’s global minimum tax framework. It can prevent additional tax being imposed through the Pillar Two Income Inclusion Rule and Undertaxed Profits Rule, but it does not eliminate ordinary corporate taxes or every form of minimum tax.

On 5 January 2026, the 147 countries and jurisdictions participating in the OECD/G20 Inclusive Framework agreed a new side-by-side global minimum tax package.

The US Treasury’s announcement described the outcome as an agreement under which US-headquartered companies would remain subject to US global minimum taxes while being exempted from Pillar Two. The OECD uses more technical language, describing safe harbours for groups whose ultimate parent entity is located in an eligible jurisdiction with qualifying domestic or worldwide minimum tax systems.

Key facts at a glance

Question	Current position
What agreement is involved?	The OECD/G20 Pillar Two Side-by-Side Package
When was it agreed?	5 January 2026
What is the global minimum rate?	15%
Which businesses are normally in scope?	Large multinational groups with annual consolidated revenue generally of at least €750 million
Who may receive the US-related relief?	Qualifying multinational groups with a US ultimate parent entity
When does the new safe harbour apply?	Fiscal years beginning on or after 1 January 2026
Are all taxes removed?	No
Do domestic top-up taxes remain relevant?	Yes
Estimated UK revenue effect	HMRC forecasts £600 million less revenue annually than previously expected

The UK’s Pillar Two rules generally concern multinational groups with consolidated annual revenue above €750 million. They are therefore aimed at very large corporate groups rather than ordinary small businesses, sole traders or individual taxpayers. The GOV.UK explanation of Multinational Top-up Tax provides the relevant UK scope and registration information.

How Did the Original Global Minimum Tax Work?

How Did the Original Global Minimum Tax Work

The OECD’s Pillar Two framework was designed to ensure that large multinational enterprises pay an effective tax rate of at least 15% in each jurisdiction where they generate profits.

The system uses three main mechanisms:

Pillar Two mechanism	What it does
Qualified Domestic Minimum Top-up Tax, or QDMTT	Allows the country where low-taxed profits arise to collect the top-up tax first
Income Inclusion Rule, or IIR	Allows a parent company’s jurisdiction to collect top-up tax relating to low-taxed subsidiaries
Undertaxed Profits Rule, or UTPR	Acts as a backstop where an IIR has not collected the required top-up tax

For example, if an in-scope multinational earned profits in a jurisdiction where its effective tax rate was 10%, the system could potentially impose an additional tax to bring that rate towards 15%.

The OECD explains that the local jurisdiction’s QDMTT normally has the first opportunity to collect the tax. The IIR and UTPR then operate according to an agreed rule order. (OECD)

What Changed for US-Headquartered Companies?

Under the new side-by-side arrangement, an eligible multinational group with its ultimate parent entity in a qualifying jurisdiction can receive safe-harbour treatment.

Where the safe harbour applies, top-up tax that would otherwise arise under the IIR or UTPR may be treated as zero. The US system can therefore operate alongside the OECD system rather than having foreign jurisdictions apply those particular Pillar Two mechanisms to the same US-parented group.

The arrangement reflects the existence of US minimum tax measures covering domestic and overseas corporate income. Eligibility is not based solely on a company having an American office or subsidiary. The location of the ultimate parent entity, the group’s tax system and the OECD’s qualification criteria all matter.

The OECD package applies to fiscal years beginning on or after 1 January 2026. Further administrative guidance issued in May 2026 clarified the transition from the earlier UTPR safe harbour into the side-by-side or ultimate-parent-entity safe harbours.

What the exemption does not mean?

The agreement does not mean that:

every US company is exempt from foreign corporation tax;
American companies can automatically move profits offshore tax-free;
US subsidiaries operating in the UK stop paying UK Corporation Tax;
domestic minimum top-up taxes are abolished;
all reporting and information-return obligations disappear;
individuals can claim a personal US tax exemption under this corporate agreement.

The OECD has expressly stated that qualified domestic minimum top-up taxes remain a primary part of the global framework. Countries can therefore continue protecting their domestic tax bases by taxing low-taxed profits generated within their jurisdictions.

Which Companies Are Affected?

Which Companies Are Affected

The agreement mainly affects very large multinational groups rather than independent companies and local employers.

US-parented multinational groups

A qualifying group with a US ultimate parent entity may obtain relief from IIR and UTPR top-up taxation under the side-by-side safe harbour.

Its overseas subsidiaries may still have local corporate tax, withholding tax, transfer-pricing, reporting and domestic minimum tax obligations.

UK subsidiaries of US companies

A UK subsidiary does not stop paying UK tax merely because its parent company is American. Normal UK Corporation Tax rules continue to apply, together with transfer-pricing rules and any applicable UK Domestic Top-up Tax.

What may change is whether an additional Pillar Two charge can be imposed elsewhere in the ownership chain under the IIR or UTPR.

UK-parented multinational groups

A UK-headquartered group does not receive the US exemption simply because it has operations or customers in America. It must assess its position under the UK’s Multinational Top-up Tax, Domestic Top-up Tax and the wider Pillar Two framework.

Small and medium-sized businesses

Most UK SMEs are below the €750 million group-revenue threshold and are not directly within Pillar Two.

A growing owner-managed company still needs to consider ordinary Corporation Tax, VAT, payroll and overseas permanent-establishment risks. Businesses moving from supplementary income into a larger commercial operation can review the practical distinctions covered in our article about scaling a side business into full-time income.

What Does the US Exemption Mean for the UK?

The UK has already introduced Pillar Two through Multinational Top-up Tax and Domestic Top-up Tax.

A July 2026 Public Accounts Committee report said HMRC had originally expected Pillar Two to produce approximately £2.2 billion annually for the UK. HMRC now forecasts that the US side-by-side agreement will reduce that expected benefit by £600 million a year, leaving an estimated annual yield of £1.6 billion. These are forecasts rather than final revenue figures from completed tax returns. (UK Parliament Committees)

The same parliamentary report said approximately £21 billion of the tax under consideration in HMRC investigations into large businesses related to international tax risks, including profit shifting. This figure represents tax being examined, not necessarily tax proven to be unpaid or ultimately recoverable.

HMRC also estimated that Pillar Two compliance would create collective one-off costs of £13.7 million and recurring annual costs of £8.2 million across affected businesses. The figures describe estimated system-wide compliance costs, not a fee charged to each company.

How Could the Agreement Work in Practice?

Example 1: A US-parented multinational with a UK subsidiary

A US technology group has annual revenue well above €750 million and owns companies in the UK and several other jurisdictions.

The UK subsidiary continues paying UK Corporation Tax. If its UK effective tax rate falls below the Pillar Two minimum, the UK Domestic Top-up Tax may still apply.

However, qualifying low-taxed profits elsewhere in the group may receive side-by-side safe-harbour treatment from the IIR and UTPR because the ultimate parent company is located in the United States.

Example 2: A UK-parented multinational operating in America

A UK-headquartered group owns a profitable US subsidiary.

The group is not treated as US-parented merely because it trades in America. Its ultimate parent remains in the UK, so it must assess the UK IIR and other Pillar Two obligations without assuming that the US exemption applies.

Example 3: A small UK company selling to US customers

A UK limited company earns £400,000 annually by providing online services to American customers.

The company is far below the Pillar Two revenue threshold and is not directly affected by the international minimum tax exemption. It may still need advice about UK Corporation Tax, US permanent-establishment exposure, sales taxes, withholding and tax-treaty treatment.

Individual founders working internationally should also distinguish corporate Pillar Two rules from personal UK tax residency considerations.

Is This the Same as a US Tax Treaty Exemption?

Is This the Same as a US Tax Treaty Exemption

No. The 2026 side-by-side agreement concerns the corporate global minimum tax system. A US income tax treaty exemption is a different form of relief.

The United States has bilateral tax treaties with various countries. Depending on the treaty and type of income, a foreign resident may qualify for reduced US withholding or an exemption covering income such as interest, royalties, pensions, employment income or certain student and research payments.

The IRS tax treaty overview makes clear that treaty benefits vary according to the country, taxpayer, income type and detailed eligibility conditions. A treaty does not create one universal exemption for everyone receiving income from the United States.

US citizens and resident aliens are also generally required to report worldwide income, even when living abroad, although foreign tax credits, exclusions or treaty provisions may reduce double taxation in qualifying cases. (IRS)

What Should Affected Businesses Do Now?

An in-scope multinational should not treat the word “exemption” as sufficient evidence that no action is required.

Finance and tax teams should:

Confirm whether consolidated group revenue brings the organisation within Pillar Two.
Identify the ultimate parent entity and every constituent entity in the group.
Check whether the parent jurisdiction and tax regime qualify for the relevant safe harbour.
Model local QDMTT liabilities separately from IIR and UTPR exposure.
Review tax incentives, research and development credits and deferred-tax treatment.
Prepare the accounting data needed for the GloBE Information Return.
Check domestic implementation in every country where the group operates.
Record the legal and factual basis for any safe-harbour election.
Obtain specialist international tax advice before changing group structures or filing positions.

The OECD reported in May 2026 that dozens of jurisdictions had already completed qualification processes for an IIR, domestic minimum tax or QDMTT safe harbour. That means compliance must be assessed country by country rather than through one global assumption.

Confirmed Facts, Estimates and Misleading Claims

Status	Statement
Confirmed	The OECD/G20 Inclusive Framework approved the side-by-side package on 5 January 2026.
Confirmed	It provides safe-harbour treatment connected to qualifying parent-jurisdiction minimum tax systems.
Confirmed	Relevant safe-harbour rules apply for fiscal years beginning on or after 1 January 2026.
Confirmed	Qualified domestic minimum top-up taxes remain part of the system.
HMRC forecast	The UK’s expected annual Pillar Two yield may fall by £600 million to approximately £1.6 billion.
Misleading	Every American business is now exempt from overseas tax.
Misleading	UK subsidiaries of US groups no longer pay UK Corporation Tax.
False	The agreement provides a personal tax exemption to US citizens or foreign workers.
Not yet known	The final long-term revenue effect after complete filings, audits and behavioural changes.

Final Takeaway

The international tax agreement US exemption is a targeted Pillar Two safe-harbour arrangement for qualifying US-parented multinational groups. It recognises eligible US minimum tax rules and may prevent further top-up tax through the OECD’s IIR and UTPR mechanisms.

It does not make US companies tax-free, remove local Corporation Tax or abolish domestic minimum top-up taxes. For the UK, the principal concern is that the agreement is forecast to reduce expected Pillar Two revenue by £600 million annually.

Editorial basis: This article has been prepared using official information from the OECD, the US Treasury, HMRC, GOV.UK and the UK Parliament. Tax rules can depend on a company’s ownership, revenue, operating countries and accounting arrangements.

The international tax agreement US exemption refers to a January 2026 arrangement under which qualifying US-headquartered multinational groups can remain subject to US minimum tax rules instead of certain parts of the OECD’s Pillar Two global minimum tax system.

It is not a general exemption from corporation tax. US companies must still pay applicable federal, state and overseas taxes, while foreign subsidiaries may remain exposed to domestic minimum top-up taxes in the countries where they operate.

Frequently Asked Questions

Is the United States completely exempt from the global minimum tax?

No. Qualifying US-parented groups may receive safe-harbour treatment from certain Pillar Two IIR and UTPR charges, but they remain subject to US taxes, foreign corporate taxes and potentially domestic minimum top-up taxes.

Does the exemption apply to all US companies?

No. Pillar Two is aimed at multinational groups with consolidated revenue generally of at least €750 million. Small US companies and ordinary domestic businesses are not receiving a new universal exemption.

Are foreign subsidiaries of American companies covered?

They may be included within a qualifying US-parented group, but local tax obligations remain. A subsidiary can still owe corporation tax and domestic top-up tax in the country where it operates.

Does the agreement affect individuals?

Not directly. Personal tax-treaty exemptions, foreign tax credits and expatriate tax rules are separate from the OECD corporate minimum tax agreement.

Will US companies still pay UK Corporation Tax?

Yes. A US-owned company earning taxable profits through a UK subsidiary or UK permanent establishment remains subject to applicable UK tax rules.

Why did the OECD accept the US side-by-side system?

The arrangement was designed to recognise eligible US minimum tax systems, reduce overlapping taxation and preserve international cooperation. Supporters describe it as improving certainty, while critics argue that it weakens uniform application of the original 15% framework. The confirmed legal effect should be distinguished from political opinions about whether the compromise is fair or effective.

How much could the agreement cost the UK?

HMRC currently forecasts that it will reduce the expected UK benefit from Pillar Two by about £600 million annually, from approximately £2.2 billion to £1.6 billion. This remains an estimate and may change after tax returns and compliance data become available.

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