Support of funding and operation of new business ventures and small growth companies
On 2 June 2016, Parliament passed amendments to legislation on the support of funding and operation of new business ventures and small growth companies. The main changes centre on taxation of stock purchase options, tax concessions for foreign experts, and deductions for new business ventures' R&D expense, as well as a tax deduction for equity securities purchases, where individuals who invest in public or private limited-liability growth companies have the option of applying a deduction to their income tax base plus investment income. The objectives of the amendments include improving the competitive position of Icelandic companies and supporting innovation and the development of such companies insofar as is possible; for instance, with the involvement and participation of individuals.
Main substance of the legislation.
Taxation of stock purchase options. According to the Income Tax Act, no. 90/2003, the general rule is to view the difference between the purchase price according to a stock option agreement and the fair value of the securities at the time the purchase option is exercised as a work-related wage payment, which is taxed as regular income. As of the date the Act entered into force, the payment will not be taxed at the time the purchase option is exercised but will be deferred until the securities are sold. The redemption price at the time the option is exercised is then considered, as before, as the base price for subsequent sale, and the gain on the sale thus calculated will be considered investment income accruing to the seller. The change entails a tax concession in that the holder of the purchase option is not required to pay income tax upon redemption but upon the sale of the securities.
Taxation of convertible bonds. Until now, profits accruing to owners of convertible bonds that are converted to share capital at a price below the general market price have been taxed at the time the conversion rights are exercised. An owner who is an individual must pay investment tax even if he or she has not sold any shares at a profit. Share capital is by its very nature risk capital; the possibility always exists that it will be lost in full, and the owner has then paid tax on the loss. As of the date the Act entered into force, taxation is deferred until the sale of the shares in the case of individuals, which makes this financing option much more appealing for investors and makes the tax structure fairer.
Taxation of foreign experts. The Act incorporates provides a tax deduction for foreign experts hired to work in Iceland, in that only 75% of their income will be considered taxable. 25% of their income will therefore be tax-free and exempt from withholding for the first three years of employment, upon fulfilment of specified conditions. As before, payroll tax and pension fund premiums are levied on total wages, irrespective of the 25% deduction. The same applies to payments of child benefits and mortgage interest allowances. The deduction provision entails a change that is necessary in order to attract foreign experts to work in Iceland, particularly for research and technology companies and in the university community.
Tax deduction for equity securities purchases. Also contained in the Act is an amendment affecting the imposition of public levies in 2017, 2018, and 2019, for investments undertaken in 2016, 2017, and 2018, and establishing a new tax deduction system for individuals who purchase equity securities. Individuals who bear limited and unlimited tax liability in Iceland and who invest in companies that satisfy the conditions of the provision will be eligible to deduct 50% of the investment from their income tax base plus investment income each year. It is assumed that the Act will affect investments undertaken in 2016, upon satisfaction of the conditions laid down in the provision in other respects. The objective of the Act is to promote innovation and job creation by encouraging investors who invest sizeable amounts in order to contribute new share capital to growth companies.
Increased deduction thresholds for new business ventures' R&D expense. The Act provides for substantially increased tax concessions for new business ventures. There are two amendments: on the one hand, the maximum amount of deductible R&D expense is increased from ISK 100 million to ISK 300 million, and on the other, the maximum R&D expense threshold for the deduction increases from ISK 150 million to ISK 450 million in instances involving outsourced R&D services purchased from unrelated firms, universities, or research institutions.