Key tax factors for efficient cross-border business and investment involving Iceland.
No, however, Iceland is a Member State of the European Economic Area (EEA)
With the following countries, territories and jurisdictions:
||Isle of Man||Russia|
|Estonia||Rep. of Korea||Sweden|
Public Limited Liability Company and Private Limited Liability Company
The minimum initial capital of a public limited liability company is ISK 4,000,000, whereas the minimum initial capital of a private limited liability company is ISK 500,000.
A company is resident if registered in Iceland, its legal seat is in Iceland according to its Articles of Association or its place of effective management is located in Iceland. Resident companies are taxed on their worldwide income. Non-resident companies are taxed only on their Icelandic source income.
The fiscal year is the calendar year. In general, companies must file their tax returns by the end of May of the following year. Companies are required to make advance tax payments each month, except January and October, until the assessment has been completed.
The corporate income tax rate for limited liability companies is 20 percent. The rate is 36.7 percent for other legal partnerships registered as taxable entities.
On dividends paid to non-resident companies
20 percent. Tax withheld on dividends paid to companies resident in the EEA, EFTA or the Faroe Islands may be refunded following the final tax assessment in November of the year following that in which the distribution took place, assuming the foreign company files an annual tax return.
On interest paid to non-resident companies
12 percent. Any premium or discount arising from transactions in Icelandic debt securities between two non-residents is not subject to WHT in Iceland. There is, however, no WHT on interest 1) paid by the Central Bank of Iceland on bonds or securities it has issued or that it issued on behalf of the Icelandic Treasury, 2) paid to foreign states, international organizations or other public entities exempt from tax in their resident states, 3) paid on bonds issued by financial institutions or energy companies if the bonds are registered on a bond market in one of the OECD countries within the EEA, EFTA or the Faroe Islands, 4) paid on bonds issued by entities that previously operated as commercial banks or savings and loans institutions and are now being wound up.
On patent royalties and certain copyright royalties paid to non-resident companies
On fees for technical services
Remuneration for technical and management services is treated as business profits subject to the general corporate income tax rate (20 percent) provided that the services are rendered in Iceland or through a PE in Iceland.
On other payments
Gains from the disposal of shares in Icelandic companies are subject to WHT at: 22 percent in the case of individuals and 20 percent in all other cases. These rates also apply to transactions between two non-residents.
Branch withholding taxes
No WHT on branch profits.
Dividend received from resident/non-resident subsidiaries
Dividends received by Icelandic companies are generally treated as taxable income. The same amount can, however, be deducted if the taxpayer can demonstrate that the underlying profits were:
The same rules as above apply to capital gains except that losses exceeding gains from the disposal of shares are non-deductible and can not be carried forward.
Losses, except from the disposal of shares, may be carried forward and offset against taxable income in the following 10 years. No carry-back is allowed.
Two resident companies may opt for consolidated taxation if one company owns at least 90 percent of the shares in the other company. Under consolidated taxation, losses incurred by one of the companies may be offset against the other company's profits. With effect from January 1, 2019, consolidated taxation extends to permanent establishments in Iceland belonging to companies that are resident in an EEA or EFTA country or in the Faroe Islands, i.e. those PEs can be consolidated with other group companies resident in Iceland, but subject to certain restrictions on loss utilization.
Consolidated taxation does not however extend to non-resident companies.
Registration duties amount to approximately EUR 1,000 for a private liability company and approximately EUR 2,000 for a public liability company. A minimum fee is charged for any changes reported to the Registry of Companies.
On the transfer of shares
On the transfer of land and buildings
Yes, on deeds of immovable property and vessels. The stamp duty does not apply where a transfer is linked to a merger carried out under Company Law, a conversion of a private limited company to a public limited company or a division of a company.
0.8 percent stamp duty if the owner is an individual and 1.6 percent stamp duty if the owner is a legal entity.
Real estate taxes
CFC rules apply when an Icelandic individual or company owns or controls, directly or indirectly, more than 50 percent of an entity situated in a low tax country. A “low tax country” is a jurisdiction that charges a corporate income tax rate that is less than two-thirds of the Icelandic corporate income tax rate.
The CFC legislation does not apply, if the controlled company, fund, institution or other type of entity:
(1) is resident in a treaty country, that has a sufficient exchange of information article in the treaty and its income is not mainly financial income, or,
(2) is resident in a country within the European Economic Area and is engaged in business activities there and the Icelandic tax authorities are able to request all necessary information according to an international treaty.
General transfer pricing rules
If prices are not set in accordance with the arm’s length principle they must be adjusted according to the transfer pricing guidelines issued by the OECD.
Companies that have total revenue or assets at year-end in excess of ISK1,000 million are required to document the nature and extent of transactions with related parties, the nature of the relationship, the transfer pricing method used and why it was chosen. Transfer pricing documentation should follow the relevant OECD guidelines.
With effect from January 1, 2017, a limitation on the deduction of net interest expense applies if the lender is a related party. Under the new rules, a taxpayer can only deduct net interest expense (and economically equivalent payments) amounting to a maximum of 30 percent of the company's EBITDA on a stand-alone basis. There are, however, four exceptions to this rule:
1. if the net interest expense amounts to less than ISK 100 million;
2. if the related lender is resident for tax purposes in Iceland;
3. if the taxpayer demonstrates that its equity ratio is not more than 2 percentage points below the consolidated equity ratio of the group it belongs to; and
4. if the taxpayer is a financial institution, an insurance company or a company owned by such companies and that carries on a similar business.
With effect from January 1, 2019, the abovementioned exception (2) has been amended, insofar as it only applies to interest paid on loans within a group of companies, either subject to consolidated taxation, or which fulfils the statutory conditions for consolidated taxation, if all companies within the group are resident in Iceland.
Transactions structured in a manner that differs significantly from common practice may be disregarded for tax purposes. According to established case law, tax authorities are required to demonstrate that the transaction was carried out between related parties and with little or no commercial purpose other than the avoidance of tax. Parties have extensive reporting obligations to the tax authorities, including regarding foreign subsidiaries or affiliates. Non-compliance with these obligations can be used against a party when assessing the facts.
Yes, PPT-rule included in Iceland-Switzerland DTT with respect to dividends, interest, royalties and other income. The Iceland-UK DTT also contains a similar PPT-rule. In general, no relief is available under the relevant DTT articles if the main purpose or one of the main purposes of any party involved was to take advantage of the relevant DTT articles.
Yes, a binding ruling may be requested by resident or by non-resident companies on most aspects of corporate income taxation.
A ruling can normally be obtained only on the tax consequences of a future transaction and is only issued if it is of substantial importance.
In respect of filmmaking in Iceland: 25 percent of the value of eligible production costs is refunded.
In respect of music- and book production in Iceland: 25 percent of the value of eligible production costs is refunded.
An innovative company that owns research or development projects is entitled to a special income tax deduction amounting to 20 percent of expenses incurred on qualifying projects. The amount on which the R&D deduction is calculated within each company shall not exceed ISK 600 million for each operating year. This limit is increased to ISK 900 million, if an innovative company purchases R&D services from an unrelated party for its own benefit and use in an already approved R&D project.
A special incentive for foreign experts recruited to work in Iceland was introduced as of January 1, 2017. Under the incentive, foreign experts who work in Iceland and who are fully liable to tax may deduct 25 percent of their income for the first 3 years after commencing their employment (i.e. only 75 percent of their income is subject to tax), provided that certain requirements are met.
The standard rate is 24 percent. A reduced rate of 11 percent, or a zero VAT rate applies in some instances.
Ágúst Karl Guðmundsson
KPMG in Iceland
T: +354 545 6152