Iceland Issues a Draft Bill for IIR and Domestic Top-Up Tax From January 1, 2026

Legislation

On June 5, 2025, the Icelandic Ministry of Finance and Economic Affairs opened a consultation on a Draft Bill to implement the Pillar Two GloBE Rules.

The Draft Bill includes an Income Inclusion Rule (IIR) and a domestic minimum tax (intended to be a Qualified Domestic Minimum Top-Up Tax) for fiscal years beginning after December 31, 2025.

The Under-Taxed Profits Rule (UTPR) is not yet being implemented in Iceland yet.

General

The Draft Bill is based on the EU Minimum Tax Directive and the Explanatory Notes to the Bill states that the translation of the EU directive from English into Icelandic was prepared by the Translation Centre of the Ministry of Foreign Affairs and reviewed by the Ministry  of  Finance and Economic Affairs, without any changes to the content in order to avoid the risk  of misinterpretation from the original text.

As such, whilst the Draft Bill implements the IIR and QDMTT aspects of the OECD Model Rules, it does not currently include aspects of the OECD Administrative Guidance (aside from currency conversion, and some elements of the QDMTT and Safe Harbours).

As Iceland is a member of the EEA and not the EU it is not bound by the EU Directive, however, it intends to take a similar approach and also apply the global minimum tax to wholly domestic groups.

Safe Harbours

Section 28 of the Draft Bill provides for a Safe Harbour if one of the following conditions is  met for the relevant jurisdiction on the basis of simple calculations in accordance with rules to be issued:

 -The MNE Group’s Profit or Loss before Income Tax in a jurisdiction is equal to or less than the Substance-based Income Exclusion amount as calculated under the GloBE Rules, for constituent entities resident in that jurisdiction;

-The MNE Group reports Total Revenue of less than EUR 10 million and a Profit (Loss) before Income Tax of less than EUR 1 million in a jurisdiction

-The effective tax rate in the jurisdiction, is equal to or higher than the minimum tax rate.

No further detail is provided on the nature of the simplified calculations, including on the use of CbCR data and the Transitional CbCR Safe Harbour.

However, as noted above rules are to be issued for further detail on this and the Explanatory Notes to the Draft Bill does refer to the Transitional CbCR Safe Harbour and notes that the simplification rules will be discussed in more detail in the discussion of Article 28 of the bill  as part of the consultation process.

Section 28 of the Draft Bill applies the QDMTT Safe Harbour, and includes some of the Switch-Off rules contained in the OECD Guidance, including where:

-A QDMTT jurisdiction decides not to impose a QDMTT on Flow-through Entities created in its jurisdiction;

 – A QDMTT jurisdiction decides not to impose a QDMTT on Investment Entities

– A QDMTT jurisdiction includes members of a JV Group (which includes Joint Ventures) within the scope of the QDMTT but imposes the liability on Constituent Entities of the main group instead of directly on the members of the JV Group.

Domestic Minimum Tax  – General

Section 10 of the Draft Bill includes a domestic minimum tax intended to be a Qualified Domestic Minimum Top-Up Tax (QDMTT). The intention is for the design of the domestic minimum tax to meet the requirements of a QDMTT so that the top-up tax paid is creditable against the top-up tax imposed under the GloBE rules.

QDMTT Design Features

Section 10 of the Draft Bill provides that the method of calculation is to take the general top-up tax calculation (or additional top-up tax from a prior year). However, this is then effectively recalculated taking account of some adjustments that are provided in the OECD Administrative Guidance

Push-Down Taxes

Tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules must be excluded, as provided in the OECD Administrative Guidance. This is included in Section 10 of the Draft Bill.

This preserves Iceland’s primary right to tax income accruing to an Icelandic member entity which is also a CFC. If there were no statutory derogation from the general GloBE rules for the calculation of the domestic minimum tax, and the CFC tax paid by the controlling company abroad were included in the included taxes of the Icelandic CFC, the effective tax rate would be increased. Therefore, excluding the CFC tax from the Icelandic CFCs covered taxes allows Iceland to tax low-taxed income at a higher rate than would be the case under an IIR.

Section 10 also prevents the pushdown of tax to hybrids, PEs and for taxes on distributions (except for Icelandic withholding tax on dividends).

Accounting Standard

The QDMTT applies the general GloBE rules to determine the accounting standard used. As such, the domestic minimum tax is calculated using the financial accounting standard of the UPE, and, if that is not practicable, on the basis of an accepted accounting standard or an approved accounting standard, if:

                -the constituent entity’s financial statements are prepared in accordance with that standard,

                 -the information contained in the financial statements is reliable; and

                 -permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.

Initial Phase of International Activity Exemption

The UTPR exclusion for MNEs in their initial phase of international activity does not need to be included in a QDMTT, however, it can be included. The Second Set of OECD Administrative Guidance provides jurisdictions with three options regarding the temporary UTPR exclusion in their QDMTT legislation.

Option one allows the jurisdiction not to adopt it.

Option two allows the jurisdiction to adopt it but limits it to cases where no Parent Entity is required to apply a Qualified Income Inclusion Rule with respect to Constituent Entities of an MNE Group located in the QDMTT jurisdiction.

Option three allows the jurisdiction to adopt it without any limitations.

The Draft Bill suggests Iceland will apply option one.

Elections

As required in the OECD Administrative Guidance, Section 10 of the Draft Bill also requires that any GloBE election made (or revoked) is taken into account for QDMTT purposes.