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)
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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 percent for other legal partnerships registered as taxable entities.
On dividends paid to non-resident companies
18 percent. Tax withheld on dividends paid to companies resident in EEA, EFTA or the Faroe Islands may be refunded in connection with the tax assessment in November of the following year after the distribution has taken place, assuming the foreign company files the annual tax return.
On interest paid to non-resident companies
10 percent. Possible reductions applicable. Any premium or discount arising in transactions between two non-residents with debt of an Icelandic company is not subject to WHT in Iceland.
On patent royalties and certain copyright royalties paid to non-resident companies
On fees for technical services
Technical services are not specifically identified in the law, hence they should be treated the same as any other services.
On other payments
Gains from the disposal of shares in Icelandic companies are subject to a WHT: 20 percent in the case of individuals and 18 percent in all other cases. This also applies to transactions between two non-residents.
Branch withholding taxes
Branches fall under the same rules as LLC.
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:
- taxed under tax rules that do not deviate substantially from those applicable in Iceland, and
- subject to a tax rate that is not lower than the general corporate income tax rate in any other OECD, EEA, EFTA country or of the Faroe Islands.
Capital gains obtained from resident/non-resident subsidiaries
The same rules as in I.a. above apply to capital gains except that losses exceeding gains from the disposal of shares are non-deductible and can not be carried forward.
Tax withheld on capital gains realized by companies resident in an EEA / EFTA Member State or in the Faroe Islands may be refunded following the final tax assessment in November of the year following the year in which the distribution took place, assuming the foreign company files an annual tax return.
Losses may be carried forward and offset against taxable income in the following 10 years. No carry-back is allowed.
Two 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. Consolidated taxation does not extend to non-resident companies.
Registration duties amount to approximately EUR 1.100 (ISK 130.800) for a private liability company and approximately EUR 2.100 (ISK 256.300) 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.
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, 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 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.
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.
Ágúst Karl Guðmundsson
KPMG in Iceland
T: +354 545 6152