Iceland Tax Treaty
Iceland International Tax Compliance Rules
Quick Summary. Iceland is an independent parliamentary republic governed by a president and parliament. Its national parliament, the Althingi, is the oldest national assembly in the world–giving Iceland claim to the world’s oldest assembly democracy.
Resident corporation are taxed on worldwide income. Corporate income tax rates vary depending on whether the entity is a limited liability company, limited partnership company, or other legal entity.
Recent amendments to the Icelandic Income Tax Act no. 90/2003 provide for thin capitalization rules.
Resident individuals are taxed on worldwide income, while non-resident individuals are taxed on certain Icelandic-sourced income.
Income Tax Treaty between the United States and Iceland
Tax Treaty.
- Convention between the Government of the United States of America and the Government of the Republic of Iceland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, signed at Reykjavik on May 7, 1975
- TECHNICAL EXPLANATION OF THE CONVENTION BETWEEN THE UNITED STATES OF AMERICA AND THE REPUBLIC OF ICELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND CAPITAL, SIGNED AT REYKJAVIK ON MAY 7, 1975
- CONVENTION BETWEEN THE GOVERNMENT OF THE UNITED STATES OF AMERICA AND THE GOVERNMENT OF ICELAND FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME
- Technical Explanation of the Convention between the Government of the United States and the Government of Iceland For the Avoidance Of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed on October 23, 2007
Currency. Icelandic Krona (ISK)
Common Legal Entities.
Public and Private Limited Company
Partnership
Limited Partnership
Joint Venture
Foreign Corporation (branch)
Tax Authorities.
Ministry of Finance, Directorate of Internal Revenue
Tax Treaties.
Iceland has concluded over 40 tax treaties. The OECD multilateral instrument (MLI) entered into force for Iceland on 1 January 2020.
Corporate Income Tax Rate. 20%
Individual Tax Rate.
Up to ISK 4,042,996 – 20.6%, plus municipal tax of 12.44%-14.52%
Over ISK 4,042,996 and up to ISK 11,350,472 – 22.75%, plus municipal tax of 12.44%-14.52%
Over ISK 11,350,472 – 31.8%, plus municipal tax of 12.44%-14.52%
Corporate Capital Gains Tax Rate. 0%/20%
Individual Capital Gains Tax Rate. 0%/20%
Residence.
Individual. Individuals are considered resident for tax purposes if they stay in Iceland, in the aggregate, for 183 days or more in a 12-month period.
Corporate. A company is resident in Iceland if it is registered at the company registry in Iceland, if its legal seat is in Iceland, or if its place of effective management is in Iceland.
Withholding Tax.
Dividends.
Residents: Company – 20%; Individual – 22%
Nonresidents: Company – 0%/22%; Individual – 22%
Interest.
Residents: Company – 20%; Individual – 22%
Nonresidents: Company and Individual – 12%
Royalties.
Residents: Company – 20%; Individual – 22%
Nonresidents: Company and Individual – 22%
Commissions. (Fees for technical services)
Residents and Nonresidents: Company and Individuals: 0%
Transactions between related companies (whether resident or nonresident) must be on arm’s length terms; otherwise, the tax authorities can adjust income according to the OECD guidelines. Documentation requirements apply to transactions with cross-border related legal entities with annual income or total assets exceeding ISK 1 billion.
Iceland has implemented a country-by-country reporting requirement, in line with the OECD BEPS initiative.
Advance pricing agreements are not available.
CFC Rules.
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 treatment applies if a resident of Iceland controls a foreign company registered in a low-tax jurisdiction and the Icelandic national benefits directly or indirectly from the company. The Department of Finance has issued a list of low-tax jurisdictions for this purpose. Certain exceptions to the CFC rules apply. m
Hybrid Treatment.
There are no rules specifically addressing hybrid mismatch arrangements.
Inheritance/estate tax.
Inheritance tax is imposed at a rate of 10% on an individual who inherits from an Iceland tax resident, regardless of whether the recipient is a resident of Iceland.
National Income Taxes
Iceland imposes income tax on income at the national level. Taxable income is computed on an annual basis and is taxed either by assessment or by a final withholding tax. For individuals, the rates of tax and deductions allowed depend on the type of income earned. Iceland has had a classical corporate taxation system, and companies generally may deduct dividends received from resident and nonresident companies. Individual shareholders receive a reduced tax rate on dividends. If certain requirements are satisfied, no tax is imposed on capital gain from an individual’s or a corporation’s sale of stock in a company.
Individuals
Individuals resident in Iceland are taxed on their worldwide income. Sources of taxable income include income from three categories: (1) wages, salaries, benefits, pensions, social security payments, grants, royalties, and payments to copyright holders, (2) business and independent economic activity income, and (3) investment income (e.g., dividends, interest, and capital gains).
Operating losses may be deducted only from income in the second category. For individuals engaged in a business, the three categories of income are aggregated and taxed at normal rates. Tax on employment income, including pensions and benefits-in-kind, is withheld by the employer on a monthly basis.
In general, taxes withheld on investment income are creditable. Royalty payments are not considered investment income, and related expenses are deductible. The taxation of capital gains depends on the type of property sold; gains from the sale of privately owned moveable property are not taxed, unlike gains from the sale of privately owned shares, gains from the sale of certain private residences, gains from the sale of nonbusiness immoveable property, and gains from the sale of property derived in the course of a business.
Corporations
Corporations resident in Iceland are subject to a corporate tax on their worldwide income. A legal entity is a resident of Iceland if it is registered in Iceland, if its articles of incorporation provide that its home is in Iceland, or if its effective place of management is Iceland. Resident entities subject to the corporate tax include registered corporate entities where participators are not personally liable for the entities’ debts; commercial banks and lending institutions; mutual insurance associations and cooperative societies; general, limited, and limited liability partnerships registered as taxable entities; registered public and private companies; marketing and production organizations; and other entities that carry on a business.
International Aspects of Taxation in Iceland
Individuals
Individuals resident in Iceland are taxed on their worldwide income. An individual is considered a resident of Iceland if he stays in Iceland for six months or longer. Nonresident individuals are taxed only on their Icelandic-source income and capital gains. Iceland requires a withholding tax on dividends paid by resident companies to nonresident individuals. Icelandic-source interest derived by nonresidents is tax exempt. Royalty income arising from Icelandic sources is subject to a final withholding tax. Icelandic-source business income derived by nonresidents is taxed the same as if derived by a resident. A tax is assessed on nonresident individuals on gains from the sale or lease of property located in Iceland.
Corporations
Companies resident in Iceland are generally taxed on their worldwide income. A foreign company is subject to the Icelandic corporate tax on income derived through the carrying on of, participation in, or entitlement to a share of profits of a business through a permanent establishment in Iceland.
Nonresidents are taxed on capital gains realized on property located Iceland and intangibles pertaining to an Icelandic permanent establishment. Nonresident companies are exempt from taxes on capital gains from the sale of Icelandic company shares. Icelandic-source interest paid to nonresidents is not subject to withholding tax. Royalty payments made to nonresident companies are subject to tax on their net amount. Because the royalties are subject to withholding tax at the general corporate rate, any tax withheld is credited against the final tax liability.
Other Taxes
Inheritance, gift, and wealth taxes
Iceland imposes an inheritance tax where the decedent was an Icelandic resident at the time of death. Each beneficiary is permitted an exemption. Inheritances received by spouses and cohabitants are fully exempt. Iceland has no gift tax; however, gifts are included in taxable income. Certain gifts may be exempt from tax if they are of value considered normal under the circumstances. Iceland does not impose a wealth tax.
Social security
Social security contributions are paid by employers and self-employed individuals in Iceland. In addition, all employees must pay a deductible pension insurance premium into a public pension fund.
Other indirect taxes
Iceland imposes a value-added tax (VAT) on the consumption of goods and services. The rate is reduced for certain products and services, and some products and services are exempt from VAT. Stamp duties are levied on a number of documents.
Tax Treaty Network – International Tax Attorneys
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