Iceland has proposed amendments to its R&D tax incentive law to introduce project-based support, flexible application procedures, defined eligible cost categories, and independent review mechanisms, with the new framework scheduled to take effect on 1 January 2027.
Iceland’s Ministry of Finance has launched a public consultation on 7 October 2026 on a draft bill proposing amendments to Law No. 152/2009 on Support for Innovation Companies.
The consultation is scheduled to conclude on 21 October 2026.
Scheduled to take effect on 1 January 2027, the proposed draft bill modernises the statutory framework governing corporate research and development (R&D) tax incentives. The draft legislation aims to enhance legal clarity, streamline administrative oversight, and align national practices with European Economic Area (EEA) state aid rules—specifically the General Block Exemption Regulation (GBER)—and international standards such as the OECD Frascati Manual.
Structural shift to project-based support
The draft bill renames the law the Law on Support for R&D Projects of Companies and replaces “innovation company” with “company” to clarify that tax incentives are project-based and available across economic sectors.
Eligible applicants must be tax-paying corporate entities engaged in commercial activity. Universities and public institutions are excluded from direct support but may provide contracted services. Support is limited to the actual R&D project owner, which must manage the project, bear professional responsibility and financial risk, and retain rights to its results or economic benefits. Intellectual property ownership alone is insufficient.
Companies in financial distress or subject to outstanding illegal state aid recovery orders are also ineligible.
Flexible application processes and multi-year approvals
The bill introduces two annual application deadlines for R&D support: 1 October, allowing approvals for one to four operating years, and 1 April, allowing approval for one operating year. Companies with multi-year approvals must submit annual progress reports by 1 February following each operating year. The bill also authorises Rannís to grant partial approvals for eligible technical project components or specific cost categories rather than approving or rejecting an entire project.
Categorisation of eligible costs and spending constraints
The legislation codifies four explicit categories of eligible R&D costs:
- Direct payroll costs: Wages and employment expenses for researchers and staff working directly on the certified project, supported by verifiable time tracking. General management salaries are excluded unless an executive directly performs documented technical R&D tasks.
- Outsourced R&D and expertise: Eligible costs include outsourced R&D, specialised consulting, knowledge acquisition, and patent or licensing fees paid to independent third parties in the EEA or tax-treaty countries. Outsourced R&D is generally capped at 20% of total eligible project costs per year. However, the Icelandic Centre for Research (Rannís) may grant an exemption raising this cap up to 80% if the applicant demonstrates that required expertise or facilities are unavailable internally and cannot realistically be built in-house. Overall corporate outsourcing is capped annually at 20% of the maximum total cost ceiling of ISK 220 million.
- Other fixed operating costs: Direct project overhead and operational expenses, strictly capped at 20% of eligible direct payroll costs.
- Materials, supplies, and consumables: Direct raw materials and inputs consumed specifically during project execution. This category is independent of the 20% operating overhead cap.
General administrative costs, sales, marketing, and equipment depreciation are excluded from eligible expenses.
Tax deduction rates, independent appeals, and implementation
Tax credit rates remain at 35% for SMEs and 25% for large companies, applying to eligible costs capped at ISK 1.1 billion annually per corporate group. Excess credits above income tax liability are reimbursed in cash.
Icelandic Centre for Research (Rannís) assesses technical eligibility, while Iceland Revenue and Customs (Skatturinn) calculates the final tax deductions using verified financial data. Companies may request an independent review of Rannís’ rejection within three months, requiring written opinions from two external experts before a final decision.
The law is proposed to take effect on 1 January 2027, with the updated cost categories first taking effect for tax assessments in 2028 regarding expenses incurred during tax year 2027.
