Iceland

Basic taxes (briefly)

Personal tax 33-46%
Corporate tax (in detail) The corporate income tax rate is a flat rate of 20%.
Capital gains tax. Details Capital gains are subject to income tax.
VAT. Details The standard VAT rate is 24%. A preferential VAT rate of 11% applies to certain goods and services.
Other taxes Real property tax; Inheritance tax; Social security contribution; Financial activities tax
Government fee No
Stamp duty 0,8-1,6%

International tax agreement

   


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TAXATION

Overview

Some characteristics of Icelandic tax law:
  • Corporate income tax of 20% on net income levied by the state only
  • Dividends received by corporations are not taxable
  • Participation exemption available to domestic legal entities
  • No branch profits tax levied on repatriated profits from branches
  • Double taxation treaties available
  • Foreign tax credit available to avoid double taxation in the absence of tax treaties
  • No legislation on “thin capitalization”
  • Incentives available to initial investment projects
  • Tax incentives available for research and development projects

Personal Income Tax

Personal income tax is levied on worldwide income of residents and Iceland-source income of non-residents in Iceland.
Taxable income includes wages and salaries, benefits and self-employment income; income from the carrying on of a business; and investment income.
Capital gains derived by an individual from nonbusiness property and gains from the disposition of shares are taxed as investment income. Gains from the sale of a private residence generally are exempt if the property has been owned for more than 2 years.
Iceland imposes three levels of taxation on individual income, other than investment income:
Income, ISK Rate
Up to 3,480,000 22.86%
3,480,001 – 9,415,428 25.3%
Over 9,415,429 31.76%

The municipal tax on individual income ranges between 12.44% and 14.52%, the average being 14.44%.
Tax year for individual is the calendar year. Employment income of individuals is taxed by way of withholding. The individual tax return must be filed by a specific date, generally between two and three months after the end of the tax year. Tax is collected by an assessment that is raised by 31 July following the tax year. Penalties and interest are imposed for late filing, failure to file and/or tax avoidance/evasion.

Corporate Income Tax

Corporate income tax is levied on worldwide income of resident companies and Irish-source income of nonresident companies.
Taxable income includes all business income, as well as capital gains and interest; deductions are allowable if certain conditions are satisfied.
The corporate income tax rate is a flat rate of 20%. Branches of foreign corporations are taxed at the regular corporate rate of 20% on Icelandic-source income.

Capital Gains Tax

There is no separate capital gains tax in Iceland. Capital gains of Icelandic companies are taxed as income, although a deduction is possible in certain cases. No tax is levied on gains from the corporate sale of shares in companies. Gains on business property are included in business income, with a provision for rollover relief where applicable.

Dividends

Dividends received are deductible from business income. A company must withhold a 20% tax on dividends paid to a resident company, although the tax may be reimbursed at the time of assessment if certain requirements are met. The effective tax is therefore 0% if a tax return is submitted.

Losses

Net operating losses may be carried forward for 10 years. The carryback of losses is not permitted.

Tax Year

The calendar year is used, unless the taxpayer is authorized to use a different period.

VAT

VAT is imposed on most sales of goods and the provision of services.
The standard rate is 25.5%. A lower rate of 7% applies to most foodstuffs, hotel accommodations, books and newspapers (both in hard copy and electronic form) and hot water, electricity and fuel oil used for domestic heating. Exemptions include medical services, vehicles using environmentally friendly power, insurance and a number of financial services. Exports are zero-rated.

VAT Registration

Registration for VAT is compulsory for businesses, including representatives of foreign enterprises and foreign entities that sell electronic services to nonregistered parties in Iceland. Nonresident without a permanent establishment in Iceland must appoint a local VAT representative.
The threshold for compulsory VAT registration is a turnover of ISK 1,000,000 ex-VAT (USD 7,786) per year.

VAT Tax Period and Returns

Parties that are taxable under VAT Act must arrange their accounts and settle liabilities so that the tax authorities can always verify the VAT returns. All books, settlements and data related to VAT returns must be maintained for 7 years from the close of the relevant year.
Each VAT settlement period is 2 months, January/February, March/April, May/June, July/August, September/October and November/December.
The VAT return and payment must be submitted no later than the 5th day of the second month following a settlement period for transactions during that period.

Withholding Tax

Dividends paid to a resident company are subject to a 20% withholding tax. Dividends paid to a nonresident company are subject to an 18% withholding tax, which may be reduced under a tax treaty, provide an application is submitted to the tax authorities. The final taxation of dividends paid to a company within the EEA is nil, as withholding tax will be reimbursed in the year following payment, provided a tax return is submitted.
Interest paid to a resident company is subject to a 20% withholding tax, and interest paid to a nonresident company is subject to a 10% withholding tax.
Gross Royalties paid to a nonresident are taxable at the standard 20% corporate income tax rate.
Technical service fees paid to a nonresident company are taxable at the standard 20% corporate income tax rate.

Double Tax Agreements

Iceland has exchange of information relationships with 103 jurisdictions through:
  • 42 DTCs: Albania, Austria, Barbados, Belgium, Canada, China, Croatia, Czech Republic, Estonia, France, Germany, Greece, Hungary, India, Ireland, Italy, Korea, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Mexico, Netherlands, Norway, Poland, Portugal, Romania, Russia, Slovakia, Slovenia, Spain, Switzerland, Ukraine, United Kingdom, USA, Vietnam.
  • 50 TIEAs: Andorra, Anguilla, Antigua and Barbuda, Aruba, Bahamas, Bahrain, Belize, Bermuda, Botswana, Brunei Darussalam, British Virgin Islands, Cayman Islands, Cook Islands, Costa Rica, Curacao, Denmark, Dominica, Faroe Islands, Finland, Gibraltar, Greenland, Grenada, Guatemala, Guernsey, Hong Kong, Isle of Man, Jamaica, Jersey, Liberia, Liechtenstein, Macau, Marshall Islands, Mauritius, Monaco, Montserrat, Niue, Panama, Qatar, Saint Kitts and Nevis, Saint-Lucia, Saint Vincent and Grenadines, Samoa, San Marino, Seychelles, Sint Maarten, Sweden, Turks and Caicos Islands, United Arab Emirates, Uruguay, Vanuatu. Convention on Mutual Administrative Assistance in Tax Matters.

Stamp Duty

Stamp duties in Iceland are levied on the following documents:
Document Rate
Deeds for real estates, vessels etc. 0.4%
Loan documents, bonds etc. 1.5%
Issued shares for public limited companies 0.5%
Bills of exchange 0.25%
Formation fund of a limited partnership 0.5%
Formation fund of a partnership 2.0%

Stamp duties are generally not levied on loans from non-residents.

Government Fee

There is no annual government fee for Icelandic companies.

Other Taxes and Duties

Real property tax levied by the municipal authorities on the assessed value of real estate at various rates.
Inheritance tax imposed at a rate of 10% on a recipient who inherits from an Iceland tax resident, regardless of whether the recipient is a resident of Iceland.
Social security contribution imposed on all remuneration paid to an employee, at a rate of 7.59%.
Financial activities tax collected from financial institutions (other than pension funds) and insurance companies; the tax is imposed on all remuneration paid to employees at a rate of 5.45%.
Contribution to the state radio and television a levy in the amount of ISK 18,800 is collected in the assessment of all businesses and individuals with income exceeding the tax-free limit and contributed to the state radio and television in Iceland.

Anti-Avoidance Rules

Transfer pricing: According to a general provision of Icelandic tax law, if financial transactions take place between taxpayers under terms that differ substantially from those generally applicable to such transactions, any financial benefit or advantage which would, in the absence of such terms, have accrued to one of the parties, but did not accrue to that party by reason of such terms, may be added to that party’s taxable income. Tax authorities may also determine a reasonable purchase or sales price if property is bought at an abnormally high price or sold at an abnormally low price. This also applies to possible adjustments of taxable profits where an Icelandic business entity controlled by a foreign enterprise is subject to trade terms different from those which would apply between independent business entities. The tax authorities may reassess such transactions at fair market value.
Thin capitalization: Icelandic tax law does not include specific rules concerning thin capitalization of corporations.
Controlled foreign companies: A resident of Iceland that is a shareholder of a nonresident company (of any kind) is taxed on the income of the foreign subsidiary, regardless of whether the nonresident’s income is distributed to the Iceland resident, if the Icelandic shareholder owns at least 50% of the capital or voting rights of the nonresident entity and the entity is resident in a low-tax jurisdiction. The same applies if a resident of Iceland controls a foreign company registered in a low-tax jurisdiction, if the Icelandic national benefits directly or indirectly from the company. The Department of Finance has issued a list of low-tax countries for this purpose.
Disclosure requirements: No

Foreign exchange control

Foreign exchange controls in Iceland were introduced again in 2008, after being previously fully abolished in 1995. According to rules No. 370/2010 on foreign exchange (the “Rules”), investing in securities denominated in foreign currency is prohibited. However, parties that have invested in securities prior to 28 November 2008 are permitted to reinvest. Sales proceeds from transactions with ISK-denominated financial instruments (e.g. securities) that take place between domestic and foreign parties and are settled in Iceland must be deposited to the seller ́s account with a financial undertaking in Iceland. Transactions with ISK-denominated securities may not be settled in foreign currency.
However, interest, indexation, dividends, equity income and contractual instalment payments are not considered movement of capital in the sense of the Rules, and such proceeds are therefore allowed to flow freely between currencies. Cross-border prepayment of securities or other financial instruments is however prohibited.
Capital proceeds from ISK-denominated investments made after 31 October 2009 may be converted back to foreign currency, if certain conditions of the Rules are fulfilled.
It should be noted here that there are no restrictions on foreign entities buying ISK, but after buying the ISK it would be difficult getting the capital out in another currency if the transaction took place before 1 November 2009.

ACCOUNTS

Accounting Records

Under general Icelandic legislation on business and commerce, an enterprise must keep books of accounts and records that reflect its rights and obligations in Icelandic currency. The text of the books must be in Icelandic, Danish or English.
However, business enterprises registered in Iceland, with the main part of their income from foreign sources, can apply to keep their books of accounts and records in a foreign currency by meeting one or more of the following requirements:
  • Enterprises whose main activities are abroad or which form part of a foreign corporate group
  • Enterprises, which own foreign subsidiaries or stock or a part in foreign enterprises and whose main business is with these subsidiaries and foreign enterprises
  • Enterprises whose main activities are in Iceland but conduct a considerable part of their business in another currency than the Icelandic currency
  • Enterprises, which have the majority of their investments and related debts in foreign currencies.

The books of accounts and records, including source documents and incoming and outgoing correspondence should be retained in Iceland for at least seven years and annual accounts for twenty-five years. However, the documents may be retained at a foreign permanent establishment for up to six months and must be available to Icelandic authorities upon request.
The books may be kept in any form, including mechanized and electronic systems, and all methods of tracing transactions between accounts and documentation should be retained.

Financial Statements

Every company which resides and operates in Iceland must submit annual accounts that comply with statutory accounting rules and disclosures, and reflect a true and fair view of the company’s assets, liabilities, results and financial position. Presentation is modelled upon standard EU requirements.
Annual accounts should be filed within eight months from the end of the year accounted for. Annual financial reports must include a report by the board of directors, the auditor’s report, an income statement, a balance sheet, a cash flow statement or a statement showing application of funds, and explanatory notes.
The formal statement of annual accounts must be expressed in Icelandic krónur. However, corporations can apply to keep their books of accounts and records and express their statement of annual accounts in a foreign currency. The text of the statement of annual accounts must be in Icelandic, Danish or English.
In general, the same requirements apply to the information to be included in the annual accounts of all entities obliged to follow the instructions laid down under Act No. 3/2006. However, an entity, which is not registered on the Nasdaq OMX and is under certain size limits, may file abbreviated statements at the Register of Annual Accounts, consisting of an abridged income statement, a balance sheet and abridged explanatory notes. To qualify for this, the company must fulfil at least two of the three conditions listed below:
  • Total assets amount to ISK 300 million or less.
  • Operating income amounts to ISK 600 million or less.
  • Total man-years within each fiscal year are 50 or less.

Audit

The audit requirements are set out in the Annual Accounts Act. Entities subject to the Annual Accounts Act must appoint at least one state authorized public accountant, an audit firm or two accountants.
Entities, which meet all the following conditions, do not have to meet the audit requirements:
  • Staff members are less than 50.
  • Annual turnover is less than 400 million ISK.
  • Equity capital is less than 200 million ISK.

Banks, securities companies, insurance companies, pension funds, travel agencies and entities listed on the Nasdaq OMX have mandatory audit requirements.

Annual Return

Generally speaking, Annual Return is a short review on the current state of the company, which is prepared by the company secretary annually. As a rule it includes the following information:
  • Incorporation information (registration date, registered address);
  • Information about directors and their resignation;
  • Information about secretaries and their resignation;
  • Information about registered capital, nominal value of shares and amount of issued shares;
  • Information about shareholders and share transfer.

Icelandic companies are required to prepare Annual Return. Annual return is publicy accessible.

Tax Returns

Companies must make monthly (except January and October) advance tax payments, calculated on the basis of the previous year’s assessment. The tax return is due by 31 May following the end of the tax year, irrespective of whether or not the entity has any taxable income. An assessment is raised by 31 October and final tax due may be paid by further monthly installments.
If tax due is not paid on time, penalty interest is levied on the outstanding amount. Failure to file a tax return on time results in an estimated assessment made by the tax authorities. When the tax return is filed it is considered to be an appeal to the tax authorities. If the taxpayer has a substantiated reason to have filed after the deadline and has a track record of having returned his previous tax returns on time, the tax authorities levy tax according to it without any consequences to the taxpayer. If not, the tax authorities levy the tax according to the tax return with a penalty.

    Taxes of Iceland

    Min. rate for corporate tax 20%
    Capital gains tax Regular rate
    VAT 24%
    Withholding tax 20%/12%/20%
    Exchange control Yes
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