The Icelandic Ministry of Finance and Economic Affairs has launched a public consultation, open until August 5, 2025, on the draft bill that would establish in its domestic legislation the core provisions of the Pillar Two of the OECD/G20 Inclusive Framework, which aims to implement an effective global minimum tax rate of 15% on the profits of multinational groups.
Although Iceland is not currently a member of the European Union, the draft legislation follows the structure and terminology set out in Directive (EU) 2022/2523, promoting technical alignment with the current international standard.
Key elements of the Icelandic draft
- Application of the Income Inclusion Rule (IIR) and the Qualified Domestic Minimum Top-up Tax (QDMTT)
- The proposed regime provides for the entry into force of both rules on January 1, 2026, applicable to tax periods beginning after December 31, 2025.
- The IIR requires the parent company to pay tax on the difference between the minimum rate and the effective rate generated in the jurisdictions of its subsidiaries.
- The QDMTT ensures that Iceland collects the additional tax internally before another jurisdiction claims it via the IIR.
- Exclusions and simplification measures
- Certain taxes are excluded from the calculation, such as those applied to controlled foreign companies and withholding taxes on intra-group dividends.
- Safe harbor mechanisms are incorporated, which simplify compliance for groups that exceed certain effective tax rate or revenue thresholds.
- The Undertaxed Profits Rule (UTPR) is not yet included
- Although recognized within the OECD framework, the UTPR has not been included in this first legislative phase, suggesting a gradual implementation.
- Reporting and transparency obligations
- It is anticipated that entities will be required to report the calculation of the top-up tax in accordance with the reporting standard established by the OECD, which will require accounting and tax consistency at the group level.
Relevance of Pillar Two for transfer pricing
Although Pillar Two does not directly modify transfer pricing principles, its implementation will have significant tax and operational effects on intra-group pricing policies, particularly in:
- Interaction between the effective tax rate and profit allocation: Transfer pricing methods determine the distribution of income and margins within the multinational group. Since the calculation of the effective tax rate (ETR) under Pillar Two is based on accounting profits adjusted by jurisdiction, any transfer pricing adjustment that alters the tax base may affect the obligation to pay additional tax (top-up tax).
- Consistency between tax reports: The figures used in local transfer pricing documentation (Local File), the Master File, and tax returns must be reconciled with GloBE (Global Anti-Base Erosion Rules) reports.
Inconsistencies between them may trigger reviews or audits, both in the source and destination jurisdictions.
- Risk assessment for aggressive tax planning: Pillar Two seeks to discourage the use of artificial structures with a presence in low-tax jurisdictions. Transfer pricing policies should more accurately reflect the economic substance of transactions, especially in intermediate financial centers.
- Review of intra-group financial structures: Intra-group payments (interest, royalties, service charges) will be subject to scrutiny if their effect is to reduce the ETR below the 15% threshold. Companies will need to reassess their structures if these payments generate adverse effects under the new rules.
Strategic recommendations
In light of this new regulatory scenario, multinational groups with a presence or subsidiaries in Iceland are advised to:
- Analyze the preliminary impact of Pillar Two on their consolidated effective tax rate, by jurisdiction, and identify potential exposures to top-up tax.
- Review existing transfer pricing policies, ensuring that the margins assigned are supported by actual functions, risks assumed, and assets used.
- Ensure the traceability and consistency of the information reported in transfer pricing documentation, GloBE reports, tax returns, and financial statements.
- Actively participate in the public consultation, especially if existing structures need to be adapted or if regulatory risks are detected arising from the current design of the operation.
Conclusion
The progressive adoption of Pillar Two in jurisdictions such as Iceland demonstrates the global move towards a more harmonized tax system that is less susceptible to base erosion. For multinational firms, the correct interaction between transfer pricing and global minimum tax regulations will be decisive not only in mitigating tax contingencies but also in ensuring a solid position vis-à-vis tax authorities.
Technical coordination between transfer pricing, accounting, and tax planning teams will be essential to successfully navigate this new regulatory environment. Anticipation and strategic preparation are now the cornerstones of compliance.
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