Postponing payment deadlines
- Employers can elect to postpone the payment deadlines of up to three payments of social security tax and withheld public levies at source that fall due between 1 April 2020 and 1 December 2020.
- The payment deadline for all postponed payments will be 15 January 2021. As such, the payment deadline for social security tax and public levies which had already been postponed from 1 March 2020 to 1 April 2020, will be extended further until 15 January 2021.
- There are conditions to be satisfied to invoke the right to the postponement, such as substantial operational difficulties in 2020 due to immediate and unforeseen loss of income, directly or indirectly caused by the COVID-19 outbreak (among other conditions).
- Similarly, and subject to conditions, payers of real estate taxes on business property can postpone up to three tax payments.
- Currently the deadlines for value added tax (VAT) are not being postponed. However, guidelines have been issued indicating that the Icelandic tax authorities will not impose penalties if VAT payments are not made before the deadlines on 7 December 2020 for ordinary bi-monthly VAT reporting period of September and October 2020 as was done with the four previous reporting periods of 2020. Notwithstanding the above, VAT payment must be completed at the latest one month following the reporting periods’ deadline.
VAT –”Everybody to work”
- Persons and entities building, renovating or maintaining residential housing or vacation home can seek reimbursement for 100% of the VAT incurred due to certain craftsman labor. The reimbursement rate has been increased from 60% to a 100% and now includes more types of labor, for example architects.
- The VAT reimbursement also applies to VAT incurred by to non-profit entities, such as charities, sports clubs and rescue units due to certain craftsman labor on construction sites, building, renovating or maintaining structures that are entirely in their possession.
- Reimbursements are also available for 100% of VAT incurred due to the following services: Car repair. Individuals can claim 100% reimbursement of VAT incurred due to car repair or car painting on civilian cars. Home care. Owners and renters of residential housing can claim 100% reimbursement of VAT incurred due to home care.
Netting of business entity tax payment
- According to the Icelandic Income Tax Act, business entities can transfer operating losses to net their tax base for up to 10 years but netting operating losses to their income for the previous year has never been allowed, until now.
- If companies foresee an operating loss for the year 2020, they can apply to further postpone income tax payments for the operating year of 2019. The income tax payment shall then be postponed until the 2021 tax payment deadline. The maximum amount of income tax that can be postponed will be ISK 20,000,000.
- If further conditions are met a company can then deduct 20% of the operating losses for the year 2020 from the postponed income tax base from the year 2019 (a maximum of ISK 20,000,000).
Concession of debt in excess of operating losses and conversion of debt to equity
- Instead of fully including concessions of debt in excess of operating losses as income due to financial distress in the years 2020, 2021 and 2022 business entities and individually run businesses shall be allowed to distribute part of the concessions between the income years 2020 – 2022 if certain conditions are met. I.e. fully utilizing carry forward of losses, maximum depreciation and amortization.
- If, in end of the year 2022, debt concessions of more than ISK 500,000,000 ISK remain, tax entities are permitted to include the excess as income in equal amount over the income years 2023 – 2027.
- If the debt concessions are less than ISK 500,000,000 in the end of the year 2022, they will not be included in the tax entities income.
Conversion right of financial claims to equity
- Should financial claims be converted to shares, the value of the shares on the conversion date shall be appraised.
- The debtor shall include in his income the difference in the lower value of the shares and the higher book value of the claim against him.
- The claimant shall in turn include in his income or expense the difference in the value of the shares and the book value of the claim. That is if the value of the shares is higher than the book value of the claim.
Research and development grants (R&D grants)
- A special tax deduction shall be granted to innovation companies in the years 2021 and 2022. The deduction shall amount to 35% of the expenses incurred to smaller and medium sized companies but 25% of expenses to large companies. The previous rate of this tax deduction was 20%.
- The underlying expenses for the deduction cannot amount to more than ISK 1,100,000,000.
VAT reimbursement to local authorities – expansion of “everybody to work”
Local authorities or institutions and companies solely owned by local authorities will be reimbursed for VAT incurred due to craftsman labor during building, renovating or maintaining other structures than residential housing or vocational property, that are fully owned by them and registered in the Icelandic real estate register, during the time period of March 1 to December 31, 2020.
Tax discounts for individuals investing in innovation companies
The proposal to motivate individual investors to invest in innovation companies was approved.
Other law changes were also made, for instance the Icelandic’s Tax Authorities’ obligation to publish a record of tax imposed in each municipality was abolished, the pension funds were given increased investment authorizations, previous actions regarding payments to individuals in quarantine were prolonged and subsidies to privately run media companies.
Miscellaneous changes to tax legislation
With Act no. 33/2020 a few very positive changes were made to Icelandic tax legislation that do not directly pertain to the response packages.
These changes should nonetheless make foreign investments in Icelandic companies simpler and more feasible. Some of the changes that took effect on May 13, 2020 are as follows:
- Abolishment of withholding tax on capital gains realized by foreign entities/persons from the sale of shares in Icelandic companies.
- Abolishment of withholding tax on interest income realized by foreign entities/persons from bonds registered on certain Stock Exchanges issued by Icelandic companies.
The most noteworthy legislative change is however the abolishment of withholding tax on dividends between domestic limited liability companies.