Tax incentives for new investments in Iceland

A new Act governing the regulatory regime concerning regional incentives for new investments in Iceland (“the Incentives Act”) has been implemented, which makes Iceland an interesting choice for international investors looking for a competitive edge.  The potential tax incentives are however, not the only thing that should spark an interest with investors.  There are numerous other factors that contribute to Iceland’s competitiveness, such as a stable investment environment, low rate of corporate income tax, abundance of sustainable energy, a European legislative framework and a highly skilled workforce.  Indeed, the Incentives Act contributes even further to an already highly developed investment environment. 
 
The main objectives of the Incentives Act is to boost new investment in the country’s business sector, strengthen the country’s competitiveness and promote regional development, while at the same time complying with Iceland’s commitments under the EEA agreement involving restrictions on state aid.  Furthermore, the Incentives Act is a framework legislation, which is intended to make the procedure in matters regarding investment incentives transparent and efficient.  Accordingly, the available incentives and the conditions upon which they are granted, are clearly stated in the Incentives Act itself.
 
The Incentives Act inter alia provides for various tax reductions for investment projects that meet the conditions laid down in the Act.  These tax reductions include:

 - A lower corporate income tax rate of 15%, as opposed to the current rate of 20%.  Moreover, as precaution the Incentives Act also states should the general corporate income tax rate subsequently be reduced below 15%, the lower percentage will apply.
 - Depreciation incentives, allowing companies, if they choose, to depreciate new assets taken into operation in proportion with the annual wear of the asset, instead of full depreciation, in the year when the assets in question are taken into operation.  Furthermore, full depreciation of assets is allowed, whereas general rules provide that assets cannot be depreciated below 10%.
 - 50% reduction of the applicable real-estate tax rate.
 - 50% reduction of the applicable social security tax rate.
 - Exemption from duties on certain imported goods.  This involves exemption from customs duties and excise duties on importation or domestic purchase of construction materials, machinery and equipment and other capital goods and spare parts for the building of the investment project and the operation thereof.  In addition, a postponement is granted for the payment of VAT in customs on imported goods and equipment that is to be used for the investment project.  Accordingly, the investor does not have to fund payment of VAT, in circumstances where it would later be entitled to have the same VAT refunded. 
 
There are certain conditions laid down in the Incentives Act that must be fulfilled in order for the investment project to qualify for incentives thereunder.  These conditions are inter alia:

 - A separate company shall be established in Iceland for the purpose of overseeing the investment project.  An Icelandic branch or agency of a company established in an EEA member state shall be considered sufficient in this regard. 
 - Detailed information shall be available concerning the investment project.
 - The investment project shall not have commenced before an agreement regarding incentives has been signed.
 - The investor must demonstrate that the granting of the incentive is a prerequisite for the investment project becoming a reality in Iceland. 
 - That at least 75% of the investment cost will be financed without state aid, of which a minimum of 20% shall be financed in the form of equity on the part of the investor that is seeking incentive.
 - That the annual turnover of the investment project shall be at least 300 million ISK / or the investment shall create at least 20 permanent jobs during the first two years of the project.
 - That a yield of the investment project has been calculated.
 - The investor must demonstrate that the investment project complies with the objectives of the Incentives Act, thus taking into account the overall effect the investment project will have on job creation, regional development, export, tax income, innovation and the propagation of new technology and knowledge.
 - The investment must be an initial investment and equipment in connection with the investment shall be new or relatively new and in compliance with legislation on health and pollution.
 - The investment project shall be in operation in the relative region in Iceland for at least 10 years.
 
It should be noted that incentives pursuant to the Incentives Act do not apply to investments in companies which provide services on the basis of legislation on financial undertakings, insurance operation or securities.
 
The Incentives Act also provides for certain ceilings and limitations for incentives granted thereunder.  The general ceiling is 15% of initial investment cost.  The ceiling can be raised to 25% for medium sized enterprises and 35% for small enterprises.  Large companies that do not meet the criteria of being considered small or medium sized enterprises as defined in the EFTA Surveillance Authorities State Aid Guidelines, shall demonstrate that the amount of the incentive granted relates only to the decision about either the investment or the location.  Hence, one of the two following conditions must be fulfilled: (i) the amount of the incentive must not exceed the amount necessary for the investment to be sufficiently lucrative; or (ii) the amount of the incentive must not exceed the excess cost related to the location of the investment, compared to other locations.
 
In the case of large investments, exceeding €50 million, the aid ceiling decreases in direct proportion with the investment cost.
 
Regional incentives can be granted for projects that are located in areas accepted by the EFTA Surveillance Authority, according to Iceland’s Regional Aid Map, which has been approved and issued by the Authority.  The authorisation to grant incentives (state aid) is limited by Iceland’s obligations under the EEA Agreement.  Although the Incentives Act has already entered into force, individual agreements entered into on the basis of the Incentives Act will not become effective until the EFTA Surveillance Authority has approved the state aid system the Incentives Act entails.
 
Tax incentives pursuant to the Act must be applied for at the Ministry of Industry and Innovation.  All agreements that will be entered into on the basis of the Incentives Act will be published on the Ministry’s website and in the legal gazette.
 
It should be noted that besides granting tax incentives, the Act also provides for exemptions inter alia from rules restricting foreign ownership of real-estate and requiring that a majority of board members and directors of private limited companies are domiciled in Iceland. 
 
The Incentives Act will without doubt facilitate foreign investment in Iceland in the future, making Iceland a preferable option for investors worldwide.  The tax incentives provided by the Act, including certain derogations, a reduced rate of corporate income tax, a stability clause in terms of new taxation and favourable depreciation rules are suited to increase the profitability of new investments.  A framework legislation involving distinct incentives ensures equal treatment and transparent procedures, making it a win-win situation for Icelandic economy and international investors.
 
Garðar G. Gíslason is a partner at LEX Law Offices and is among the country’s most experienced attorneys in the field of tax law and corporate law.  He worked for the tax authorities in Iceland from 1989 to 2005, first for the Director of Internal Revenue and later at the Directorate of Tax Investigations as a legal counsel, and also for an eight-year period as a manager and deputy director at the Directorate of Tax Investigations.  He joined LEX in 2005, where his assignments mainly consist in comprehensive consulting and advocacy for domestic and foreign companies and individuals in the fields of tax law and corporate law. 
 
Garðar Víðir Gunnarsson is a partner at LEX Law Offices.  He is one the country’s chief specialists in the field of arbitration law.  In addition to issues concerning this area, he focuses on litigation and consulting services for companies in relation to corporate law and tax law.  He holds an LL.M. degree in International Commercial Arbitration Law from Stockholm University.  He is inter alia a member of the Icelandic Bar Association and a member of the International Council for Commercial Arbitration.  He has authored and co-authored several publications on the subject of international arbitration.  He joined LEX in 2009 and has been a lecturer at Reykjavík University since 2008. 
 
Gunnar Viðar is a partner at LEX Law Offices.  He is one of Iceland’s most experienced lawyers in the field of banking and capital markets legislation.  His assignments at LEX mainly consist in providing legal advice in the field of financial services, contracts and corporate law.  He also handles cases in the field of natural resources and energy, particularly with regard to contracts and project finance.  He holds an LL.M. degree in Law from New York’s Fordham University as well as a law degree from the University of Iceland and a degree in securities transactions.  He has an extensive professional experience of the financial sector.  He has contributed to the preparation of various legislative bills on the financial market and served on the board of numerous companies.  He joined LEX in 2010.
 
LEX is one of Iceland´s leading law firms, providing clients with comprehensive services over a wide range of financial, corporate and commercial issues, as well as most other aspects of Icelandic law.
LEX is one of Iceland’s largest law firms comprised of 45 lawyers.  Over the past decades, LEX has successfully acted on behalf of a large number of internationally respected corporations, organisations and private individuals both in Iceland and abroad.
 
LEX enjoys 1 tier ranking with all major ranking firms such as Chambers & Partners, IFLR 1000 and Legal 500.