Pillar Two and tax incentives

Europe

In response to the global implementation of Pillar Two, some countries introduced new qualified refundable tax credits – QRTCs – (e.g., Hungary, Norway, Switzerland, Romania) or tweaked the refundability conditions of existing credits to align with the Pillar Two rules (e.g., Ireland and Belgium). In addition, a number of countries already had in place tax credits that are aligned with the GloBE Rules before the rules came into effect (e.g., France, Germany, the UK).

However, it appears that a significant number of R&D tax incentives are still provided in the form of non-refundable tax credits, super deductions, exemptions or preferential rates across Europe. Whilst, over the past couple of years, a number of countries have reportedly been exploring options to replace those incentives that result in a significant impact on the GloBE ETR with incentives that are aligned with Pillar Two (e.g., Croatia and Poland), some may have postponed taking action in anticipation of further guidance, which was published as part of the SbS Package.

Following the announcement of the SBTI Safe Harbour (as at April 2026), yet to be implemented by most European countries into the local Pillar Two law), it is conceivable that a number of European countries may find that their existing palette of incentives fares well under the new rules. For example:

• It is expected that many tax credits will qualify as QTIs, including those that currently do not meet the refundability criteria for QRTC treatment (e.g,, the Luxembourg Investment Tax Credit or the Finnish tax credit for large investments supporting climate-neutral economy (as confirmed by local guidance)).
• In addition, many super deductions and enhanced allowances that are currently being offered by European countries are expected to be treated as QTIs (e.g., the Swiss R&D super deduction for eligible payroll costs, the Polish super deduction for R&D-related personnel costs, the Czech R&D allowance or the Finnish enhanced R&D allowance (as confirmed by local guidance)).
• In limited circumstances, local regimes that provide for income exemption or reduced CIT rates may also benefit from QTI treatment where they are considered to be calculated ‘directly’ by reference to expenditure and to be ‘generally available’ to taxpayers (e.g., the Polish Investment Zone Regime or the recently updated Czech Tax Holiday regime).
• It is also conceivable that some of the existing incentives may see an increased use under the new SBTI Safe Harbour, with their benefits no longer being neutralized by Pillar Two.

For an overview of available R&D tax incentives, please refer to the KPMG’s Global R&D Incentives Guide.

Other countries may be prompted to modify their incentive offerings to enhance their investment attractiveness. For example:

1. The Swedish government is considering the introduction of new R&D tax incentives. As at the date of publication of this article, two alternative incentive models are being discussed, both proposed to apply from 2027 and to be claimed through the corporate income tax return. Under the first alternative, companies would be entitled to deduct 300 percent of qualifying R&D salary costs. Under the second alternative, a 20 percent refundable tax credit for qualifying R&D salary costs would be available. According to the Ministry of Finance’s related memorandum, the proposal reflects alignment with the SBTI Safe Harbour conditions.
2. In the Netherlands, a public debate in the beginning of 2026 was focusing on whether to amend the existing innovation box regime by calculating the benefit of the incentive by reference to expenditures incurred. As noted above, it is currently expected that most of the European IP regimes will not qualify as a QTI. As such, this may be a consideration also relevant for other European countries that currently provide for an IP regime (e.g., Ireland, Luxembourg, Poland, Spain, Switzerland).
3. Furthermore, European countries may be considering amending existing incentive offerings to provide a stronger link to expenditure related to personnel and tangible assets (in light of the substance cap).

Asia Pacific (ASPAC)

As in other world regions, Pillar Two has prompted a need to reshape tax incentive policies in ASPAC. Ten jurisdictions in the region have introduced Pillar Two rules, half with effect from 2024 and half from 2025¹⁹. Policymakers in non-adopting countries are also aware that the value of their incentives to investors will be impacted by Pillar Two rules adopted by other jurisdictions. Despite this, moves in the region to update incentives have generally been slow. Several factors are in play in this regard.

Firstly, ASPAC Pillar Two adopters may be divided into high tax jurisdictions, which will only see local ETRs below 15 percent in rare cases (e.g., Australia, Japan), and jurisdictions that either have low general rates or extensive tax incentives / preferential tax regimes, with frequent instances of ETRs below 15 percent (e.g., Hong Kong SAR, Singapore, Vietnam). As it happens, most of the existing (non-refundable) tax credits in the region were, prior to Pillar Two, offered by the higher tax jurisdictions.20 As these credits would be unlikely to lower ETRs below 15 percent (resulting in Pillar Two claw back) these jurisdictions saw little need to convert their existing credits to QRTCs to preserve their value. As such, the trend of existing tax credits being made refundable, noted in Europe, was not in evidence in ASPAC.

For ASPAC jurisdictions in which ETRs below 15 percent frequently arise, there are two main sources of low rates, both of which were problematic under the pre-SBTI Pillar Two framework – namely, income-based tax incentives (tax holidays, preferential rates, exemptions, territorial regimes) and super deductions. Two ASPAC jurisdictions that relied in particular on income-based tax incentives, Singapore and Vietnam, did take significant steps to adapt.

Singapore introduced a QRTC in 2024, the Refundable Investment Credit (RIC), with the benefit calculated at rates up to 50 percent of qualifying expenses in connection with favored activities, e.g., headquarters, innovation, green and digital projects, and advanced manufacturing. In addition, Singapore also introduced a new concessionary tax rate tier of 15% across its various tax incentives (previously 0.5 or 10 percent concessionary tax rate for most income-based tax incentives). Vietnam instead created a new tax‑exempt cash grants scheme, financed from a 2024-established investment support fund, directed at large‑scale investments in designated high-tech sectors, e.g., semiconductors and AI data centers. Other ASPAC jurisdictions in which ETRs below 15 percent frequently arise, including Hong Kong SAR, Indonesia, Malaysia, and Thailand, indicated that they were considering incentive regime changes, possibly including QRTC introduction, but ultimately did not seem to follow through. 

The SBTI Safe Harbour significantly changes the game for ASPAC, in particular with regard to super deductions. For ASPAC jurisdictions in which ETRs below 15 percent frequently arise this is in many cases in consequence of super deductions.²¹ These can be generous, ranging for example up to 400 percent in Singapore for certain categories of expenditure, e.g., R&D, employee training, etc. It is likely that for many of the ASPAC jurisdictions in respect of which Pillar Two top-up tax would have been due (under the pre-SBTI Pillar Two framework) as a result of super deductions, these exposures are significantly mitigated or eliminated under the new framework from 2026 onwards. This may consequently enhance the attractiveness of jurisdictions including China, Hong Kong SAR, Indonesia, Malaysia, Philippines, Singapore and Thailand, relative to their position under the pre-SBTI Pillar Two framework. It remains to be seen if these jurisdictions ‘lean into’ this advantage, e.g., by expanding the range of qualifying projects/expenditures, enhancing the rates, or by permitting businesses to opt for enhanced deduction schemes, in the place of other types of incentives, where they see fit.²²

Open questions remain around next steps with ASPAC income-based tax incentives. Clearly, these are in many cases enjoyed by smaller enterprises outside the scope of Pillar Two and ASPAC jurisdictions offering tax holidays do not appear to be rolling these back. Tax holidays are clearly of diminished attractiveness to Pillar Two in-scope groups – policymakers and businesses in the region are still in the process of evaluating whether, post-SBTI, the existing national (Pillar Two-protected) incentive offerings are adequate to attract investment, or whether existing income-based tax incentives also need to be modified or replaced. 

Regard is being had, in the region, to how some European jurisdictions are looking to adapt income-based incentives so that benefits are calculated ‘directly’ by reference to expenditure, in order to avail of QTI treatment. This may be a bit more challenging in many ASPAC jurisdictions, due to the frequent broad coverage of income-based incentives, e.g., tax holidays for companies operating in certain sectors or locations.²³ Typically, these tax holidays do not calculate any limitation on the relief given with reference to expenditures incurred, which may differ from the approaches taken in some European countries.

• Barbados introduced in 2024 tax credits aimed to align with the requirements of a QRTC under the GloBE rules. These credits are offset against corporation tax (and any other tax liability) and are intended to encourage economic growth, development and employment in strategic sectors. QRTCs will be available to companies taxed at the rate of 9 percent and to companies subject to the QDMTT24 of 15 percent. For example, a refundable payroll tax credit on eligible payroll costs was introduced in respect of full-time employees engaged in designated activities (with a maximum effective payroll credit of 100 percent). In addition, a credit of 50 percent of qualifying expenses incurred for qualifying research and development activities was introduced.
• Following the introduction of a DMTT (applicable from 2024) in The Bahamas, a Business Development Incentives Programme was introduced on July 1, 2025. An eligible licensee may be awarded financial incentives for engaging in qualifying investment activities (e.g., capital expenditure, job creation, employee training, research and innovation, as well as adopting, maintaining or expanding the use of The Bahamas as the situs of senior management functions and decision-making or centres of excellence). A financial incentive may only be based on expenditures incurred or turnover earned by an eligible licensee in 2023 and where the eligible licensee carried on business operations with annual turnover exceeding B$50 million (approximately EUR 43 million). The financial incentive may offset liabilities under the Business Licence Act, 2023 or the Domestic Minimum Top-Up Tax Act, 2024. A financial incentive may be carried forward and used to offset eligible tax liabilities arising within a four‑year period.
• In Bermuda, following the introduction of a 15 percent corporate income tax (applicable from January 1, 2025), a substance-based tax credit was introduced for fiscal years beginning on or after January 1, 2025 for the insurance sector. The amount of the tax credit is calculated with reference to eligible expenses incurred in the jurisdiction (including payroll, premises, tangible assets, training). In addition, a community development tax credit has been introduced and is calculated by reference to donations made to registered Bermuda charities for the fulfilment of charitable purposes in the jurisdiction. Where these tax credits cannot be used to offset tax liabilities within a four-year period, the tax credit benefits may be refunded to the taxpayer, subject to conditions.
• In Brazil, although the Pillar Two legislation expressly provides that some regional tax incentives (i.e., SUDAM / SUDENE) may be converted into QRTCs by the Executive Branch as from 2026, this has not happened yet. Further guidance from the Executive branch and the Brazilian IRS is yet to be issued.
• The United Arab Emirates recently introduced a non-refundable R&D tax credit that is expected to qualify as a QTI. The credit is applied at a rate of 15, 35 or 50 percent depending on the amount of qualifying R&D expenditure and the average number of R&D staff per qualifying entity or tax group in each fiscal year. Qualifying R&D expenditure comprises staff costs, consumables costs, subcontracting fees and arm’s length contributions to cost contribution arrangements, provided that they are attributable to qualifying R&D activity, with a maximum expenditure of AED 5 million (approximately EUR 1.2 million). The credit is non-refundable and may be utilized against UAE corporate income tax and/or Top-up Tax liabilities of the qualifying entity, tax group or domestic group. For more details, please see a report by KPMG in the UAE.