The Memo: The Innovation Bill

I didn’t send out a Memo last Monday. I attended Startup Iceland and didn’t have time to write one. Sorry about that. Also, I’ll be doing two this week, so expect another one on Wednesday or Thursday. On to the Memo.

Althingi passed the Innovation Bill last week. Bjarni’s bill, that he introduced earlier this year after some good ol’ lobbying by SI and others, eases tax burden on startups. It also tries to incentivize startup investment by individuals (angels) with tax deduction. Let’s look at it step by step.

Employee Stock options are now taxed at sale. This is a huge change that results in a more favorable taxation of stock options in Iceland than in Silicon Valley. TechCrunch did an article about these issues titled Handcuffed to Uber in April. I’m happy about these changes.

Convertible bonds got a similar treatment as ESO’s. No longer do investors need to pay taxes on “gains” when they convert their bond into equity. These changes make convertible notes a real option in financing.

Foreign specialists get a special tax discount. In general, I don’t like this, but I can understand the companies that benefit from this option. I hope that in the long term, our schools produce enough talent to employ at startups. And I hope that in the long term, expats coming to Iceland come here for the country, culture and great companies that we’ve built.

Sign up for the Memo – delivered sheeply🐑 to your inbox.

A rise in the R&D tax return ceiling is a part of the new law. Companies can now get up to a 300m ISK refund for R&D, up from 100m ISK before. It’s a similar tax break as in Canada, France, England and elsewhere. Except it’s way lower. The economic affairs and trade committee covered this in their changes. They decided not to raise the refund even more (they got a suggestion to remove the ceiling completely), with the following rationale:

By removing the ceiling of R&D tax refunds, the refund would rather benefit companies that have left seed and growth stages and are listed on exchanges. That’s not the purpose of the bill, but to support R&D at smaller companies in Iceland. (full text here)

It’s fair. The bill’s purpose is to support and help startups. But that’s missing the big picture. The companies that look to refunds like these to make investment decisions are the big ones. Companies like Tempo, that is most likely investing in Canada instead of Iceland. Or CCP, that can invest their fresh $30m in any of their studios where R&D refunds are more generous.

The Icelandic startup community needs these companies to invest in Iceland. And we need the government to incentivize that. We need a healthy community of older tech companies that can hire and train our local talent. Those create spin-out effects, like Oz in the day, and CCP has on game development and VR. If the Icelandic government can do things to ensure these companies invest in Iceland, it should.

Sign up for the Memo – all the cool kids have. 🦀

Last but not least, the bill introduces a tax deduction for angel investors. The bill gives a tax deduction for up to 50% of investments that are at least 300k (~$2,300). The maximum refund per year is for a 10m ISK investment (~$77,000), so a total deduction of 5m ISK. This means, if you invest for 10m ISK, you can deduct 5m ISK from your tax base (income and financial gains combined). Companies need to fulfil a long list of stuff to be eligible. I hope that fulfilling those things will be electronic and easy, otherwise this might get stuck in bureaucracy hell. One thing caught my interest. The economic affairs and trade committee didn’t receive commentary on this from known angel investors. Neither oral nor verbal – at least not according to official records. Which I find strange. Are you an angel investor? What do you think about these changes? Let me – thanks.

That’s it for now. Until next time.