Iceland focuses on favorable environment for businesses in general, including low corporate tax, availability of land and efficient business environment in an European legislative framework. An Act on incentives for initial investment in Iceland has recently been adopted. Apart from certain derogations from taxes and charges, incentives can also come in the form of direct cash grants, training aid and lease of land.
The criteria for incentives has been simplified, and application processes streamlined. The new legislation has been approved by the EFTA Surveillance Authority as a legitimate state aid scheme.
Industrial sites are available around Iceland at competitive cost and local communities may offer certain incentives. However, as a member of the EEA, Iceland has access to EU research funds for R&D programs and joint ventures undertaken with companies from at least one other EEA country. Grants are issued for specific projects on a case-by-case basis by bodies including the New Business Venture Fund and Science Fund.
Film and TV Production rebate
Starting in 1999, special incentives are granted for film and TV production in Iceland. The production must be incorporated in Iceland. An Icelandic branch or a representative office of a corporation registered in one of the EEA countries is considered as incorporated for this purposes. There are no requirements as to the production budget, but the films must promote Icelandic culture and introduce the history of Iceland and its nature. The film and TV production cost rebate rate is currently 20%.
Tax credit for Research and Development
The EFTA Surveillance Authority has approved an Icelandic scheme for innovation companies. The objective of the scheme is to improve and foster research and development. Under the scheme companies that carry out research and development projects can apply for a tax credit to the Icelandic Centre for Research (Rannís). The aid is limited to 20% of ISK 100 or 150 million of the project costs, irrespectively of whether the total project cost may be higher. The aid is granted as a reimbursement of the companies´ paid income tax.
The purpose of a new Act on incentives for initial investment in Iceland is to promote initial investment in commercial operations, the competitiveness of Iceland and regional development. However, the Act does not apply to investments in companies which provide services on the basis of legislation on financial undertakings, insurance operation or securities.
The government authorities are permitted to grant both general and regional incentives for new investments in Iceland up to a defined ceiling, in line with EU legislation. The regional incentives apply to areas outside the capital area.
Regional incentives may include:
- Certain derogations from certain taxes and charges
- Fixed ceiling on the rate of income tax for 10 years
- Security clauses in terms of new taxation
- Favourable depreciation rules
- Direct cash grant
- Authorisation to lease sites from the state or municipalities below market price
General incentives may include:
- Training aid
- Aid to SMEs,
- Aid to R&D investment
- Aid to environmental investment projects
Incentives are subject to a defined ceiling. Incentives do not apply to the financial sector.
Criterias for granting incentives to initial investment projects
- a specific company shall be established in Iceland for the investment project,
- detailed information shall be available on the investment project,
- the envisaged investment project shall not have been initiated and the granting of the incentive shall produce a real incentive effect to undertake an investment which would not otherwise be made in the area,
- a minimum 20% of the investment cost of the project shall be financed by the own equity of the party seeking incentive and at least 65% of the investment cost shall be financed free of any public support,
- the annual turnover of the investment project shall be at least 300 million ISK / or the investment shall create 20 permanent jobs during the first two years,
- cost benefit analysis shall be established which shows that, taking all things into account, the investment project is beneficial for the Icelandic economy and society, i.a. in terms of job creation, rural development, export and tax revenues and knowledge,
- the investment shall be initial investment and equipment in connection with the investment shall be new or almost new and in compliance with legislation on health and pollution,
- the investment shall be in operation in Iceland for at least 10 years,
- the operation of the applicant shall comply with Icelandic law,
- the applicant, or its owners, shall not have unpaid due claims from the state or municipalities on taxes or charges and shall have an unblemished reputation.
Derogations from taxes and charges:
- Authorization to fix the rate of income tax, in line with the current rate of income tax, for 10 years,
- In the year when new assets are taken into operation, the company can elect to depreciate those assets with a proportional factor of the annual depreciation instead of full years depreciation,
- Authorization to depreciate the company‘s assets down to no residual value,
- Exemption from Industrial charge and Market charge,
- Lowering of stamp duties to 0,15% of all stamp duty incurring documents issued,
- Exemption from charges referred to in Article 14(1)(1,4 and 5) of Act No 146/1996, on the safety of electrical installations, consumer utilities and electrical equipment,
- Authorization to reduce the rate of property tax by 30% for 10 years,
- Authorization to reduce the rate of social security charge by 20% for 10 years,
- 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
Direct cash grants:
- Authorization for the state or the municipalities to sell or lease a site for the investment project, at a price which is regarded as below normal market price
Reference to Commission Regulation (EC) No 800/2008 declaring certain categories of aid compatible with the common market:
Incentive as Training aid
- Maximum 2 million Euros
Incentive as aid to SMEs investments
- 10% or 20% of investment cost, max 7,5 million Euros
Incentive as aid to environmental investment projects
- Maximum 7,5 million Euros
Ceilings and limitations
The Act on incentives for initial investment in Iceland does not apply to investments in companies which provide services on the basis of legislation on financial undertakings, insurance operation or securities.
Regional aid ceiling
- The general aid ceiling is 15% of initial investment cost. The ceiling can be lifted further 10% for medium sized enterprises and 20% for small enterprises (total ceiling 35%). For large investments (exceeding 50 million Euros) the aid ceiling decreases in line with the investment cost, in accordance with EU legislation on regional investment aid.
General incentives ceiling
- Training aid can be maximum 2 million Euros. Incentive as aid to SMEs investments can be 10 or 20% of investment cost, max 7.5 million Euros. Incentive as aid to R&D investment or to environmental investment projects can be max 7.5 million Euros
Areas eligible for regional incentives
- Regional incentives can be granted for projects everywhere in Iceland except the Capital Area, Reykjavik and the surrounding municipalities, forming three of Iceland’s six electoral constituancies. The authorisation to grant state aid (incentives) is limited by the obligation of Iceland under the Agreement on the European Economic Area (EEA). The limitations are laid down in a Regional Aid Map for Iceland 2007-2013, approved and issued by the EFTA Surveillance Authority.
Application and granting process
Application for incentives is to be submitted to the Ministry of Industry where a committee reviews applications for incentives.
Invest in Iceland performs cost benefit analysis and establishes the social- and economical benefit.
The incentives committee makes proposal to the Minister of Industry.
The Minister of Industry makes an offer for incentives package to the applicant on the basis of the Act, based on a proposal from the committee.
There can be different combination of incentives depending on different types of investment projects.
An investment agreement stipulates the rights and obligations.
Granted incentives do only apply to the investment project in question and the usage of incentives is monitored.
The Act is valid until 31 December 2013 but an assessment of the implementation and prolongation will be made before end of 2013. Investment agreements made before that time stay in force until they have expired.