Corporate tax in Iceland

Summary

Corporate Income Tax Rate (%) 20 (a)
Capital Gains Tax Rate (%) 20 (b)
Branch Tax Rate (%) 20 (a)
Withholding Tax (%)
Dividends
Residents 20 (c)
Nonresidents 18 (d)
Interest
Residents 20
Nonresidents 10 (e)
Royalties from Patents, Know-how, etc. 20 (f)
Payments under Leases and Rent 20 (f)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 10

a) A 36% rate applies to partnerships.

b) Capital gains are taxed as ordinary income. Capital gains may be offset by extraordinary depreciation (for details, see Section B).

c) Dividends received by domestic companies are considered ordinary income. However, dividends received from domestic companies and from foreign companies that are taxed in a similar manner to Icelandic companies are fully deductible.

d) An 18% withholding tax is imposed on dividends paid to nonresident entities. A 20% withholding tax is imposed on dividends paid to nonresident individu­als. Nonresidents can obtain a refund of the withholding tax or apply for an exemption from the withholding tax based on an applicable double tax treaty. If no double tax treaty applies, nonresidents must suffer the withholding. How­ever, residents of European Union (EU), European Economic Area (EEA) or European Free Trade Association (EFTA) states or the Faroe Islands are eli­gible for a full deduction for dividends received from domestic companies in the same manner as domestic entities. Companies may claim this deduction by filing a tax return. They are accordingly reimbursed for withheld taxes in the general assessment in the following year.

e) A 10% withholding tax is imposed on interest paid to nonresident entities and nonresident individuals unless, on application, the Director of Internal Revenue grants an exemption from withholding tax based on an applicable double tax treaty. Alternatively, the withholding tax may either be refunded or not with­held. Interest on bonds issued in the name of financial undertakings or energy companies is not subject to withholding tax. The bonds must be registered at a central securities depository established in an Organisation for Economic Co-operation and Development (OECD), EEA or EFTA state or the Faroe Islands. Interest paid by Seðlabanki Íslands (the Icelandic central bank) in its own name or on behalf of the Icelandic treasury is also not subject to with­holding tax.

f) Royalties, payments under leases and rent payments that are paid to nonresi­dent companies, partnerships and individuals are subject to withholding tax at a rate of 20%. A 20% rate applies to resident companies. A 36% rate applies to resident partnerships. These payments are not subject to withholding when paid to residents.

Taxes on corporate income and gains

Corporate income tax. Resident companies are taxed on their worldwide income. Resident corporations are those incorporated, registered, domiciled or effectively managed in Iceland. Non­resident companies are taxed only on their income earned in Iceland.

Rate of corporate tax. The rate of corporate income tax is 20%. The rate for taxable partnerships is 36%.

Capital gains. Capital gains result from profits derived from sales of assets. These gains are included in ordinary income and taxed at the normal income tax rates.

Capital gains may be offset by extraordinary depreciation on other fixed assets or on fixed assets acquired within two years of the sale. If the fixed assets are not acquired within two years of the sale, the gain is included in income, and a 10% penalty is imposed.

Profits from stock sales. Profits derived by domestic companies from stock sales are considered ordinary income. However, prof­its derived from stock sales in domestic companies and in foreign companies that are taxed in a similar manner to Icelandic compa­nies are fully deductible.

Administration. The tax year is generally the calendar year.

Due dates for filing income tax returns vary, depending on the type of entity. The filing date for limited companies and partnerships, which is 31 May, is usually extended. Monthly advance tax pay­ments are due on the first day of each month except for January and October. Each advance payment equals 8.5% of the previous year’s tax. The tax due is determined when the annual assessment is issued. Companies generally must pay the unpaid balance in two equal monthly payments in November and December.

Advance rulings. Both resident and nonresident companies may request advance rulings on most corporate income tax conse­quences of future transactions. Rulings are issued only on matters of substantial importance.

Dividends. Dividends earned by domestic companies are consider­ed ordinary income. Dividends are subject to withholding tax ex­cept for dividends paid to companies of the same tax-consolidated group. However, dividends received from domestic companies and from foreign companies that are taxed in a similar manner to Icelandic companies are fully deductible.

Withholding tax is imposed on dividends paid to nonresidents. The rate is 18% for companies and 20% for individuals. Tax trea­ties may reduce or eliminate the dividend withholding tax. Non­residents from EU, EEA or EFTA states or the Faroe Islands are eligible for a full deduction from dividends received from domes­tic companies in the same manner as domestic entities. Com­panies may claim this deduction by filing a tax return. They are accordingly reimbursed for withheld taxes in the general assess­ment in the following year.

No withholding tax is imposed on distributions by taxable part­nerships.

Foreign tax relief. Relief for double taxation may be obtained uni­laterally under Icelandic domestic law or under a tax treaty. Uni­lateral relief may be granted through a tax credit against Ice landic income tax at the discretion of the Director of Internal Revenue.

Determination of trading income

General. The computation of taxable income is based on net in­come in the financial statements prepared according to generally accepted accounting principles. For tax purposes, several adjust­ments are made, primarily concerning depreciation and write-offs of inventory.

In general, expenses incurred to generate and maintain business income are deductible.

Inventories. Inventories are valued at the lower of cost or market value. Cost must be determined using the first-in, first-out (FIFO) method. Five percent of the value of inventory at the end of the year is deductible.

Tax depreciation. Depreciation must be calculated using either the declining-balance method or the straight-line method. The straight-line method applies to buildings, expendable natural resources and the right of ownership of valuable intellectual properties, in cluding copyright, publishing rights, patent rights and brand rights. The declining-balance method applies to ships, aircraft, vehicles and machinery. Fixed assets cannot be depreciated below 10% of cost. The following are some of the applicable deprecia­tion rates.

Assets Rate (%)
Buildings
Office and retail 1 to 3
Industrial plants 3 to 6
Drilling holes and transmission lines 7.5 to 10
Ships, aircraft, cars carrying fewer than nine persons (except taxis) 10 to 20
Automobiles and other transport vehicles 20 to 35
Industrial machinery and equipment 10 to 30
Office equipment 20 to 35
Machinery and equipment for building and construction 20 to 35
Other movable property 20 to 35

The amortization period for goodwill ranges from 5 to 10 years. The amortization period for copyrights, patents, trademarks, de­signs, models, know-how or similar rights ranges from five to seven years.

Relief for losses. Losses may be carried forward for 10 years. Losses may not be carried back.

Groups of companies. Resident companies may use group consoli­dation if one company owns at least 90% of the shares in another company or if at least 90% of the shares in a company are owned by companies that are members of the same tax-consolidated group.

Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)
Value-added tax, on most goods sold in Iceland and most services rendered in Iceland
Higher rate 24
Lower rate for hotels, books and
publications, food products, heating
of houses and road tolls
11
Social security contributions, paid by
the employer on gross payroll
7.49
Commodity tax; on certain goods,
including vehicles and fuel
Various

Foreign-exchange controls

Comprehensive temporary capital controls were introduced in November 2008. The ability to shift between the Icelandic krona and foreign currency is restricted. Bonds and similar instruments denominated in Icelandic krona may not be converted to foreign currency on maturity. The restrictions apply both to residents and nonresidents. Transactions that facilitate imports and exports of goods and services and payments of dividends and interest are allowed.

Nonresidents may directly invest in most industries in Iceland, but they must notify Seðlabanki Íslands (the central bank) of such investments. The fishing industry is the principal industry in which investments by nonresidents are limited. Nonresidents may not own a majority in such companies.

Treaty withholding tax rates

Dividends

  A (a)

%

B

%

Interest

%

Royalties

%

Barbados 5 15 10 5
Belgium 5 15 10 0
Canada 5 15 0/10 0/10 (b)
China 5 (c) 10 10 10
Croatia 5 (c) 10 10 10
Czech Republic 5 (c) 15 0 10
Denmark (d) 0 15 0 0
Estonia 5 (c) 15 10 5/10 (e)
Faroe Islands (d) 0 15 0 0
Finland (d) 0 15 0 0
France 5 15 0 0
Germany 5 (c) 15 0 0
Greece 5 (c) 15 8 10

 

       
       
Greenland 5 (c) 15 0 15
Hungary 5 (c) 10 0 10
India 10 10 10 10
Ireland 5 (c) 15 0 0/10 (h)
Italy 5 15 0 10
Korea (South) 5 15 10 0/10
Latvia 5 (c) 15 10 5/10 (e)
Lithuania 5 (c) 15 10 5/10 (e)
Luxembourg 5 (c) 15 0 0
Malta 5 15 0 5
Mexico 5 15 10 10
Netherlands 0 15 0 0
Norway (d) 0 15 0 0
Poland 5 (c) 15 10 10
Portugal 10 (c) 15 10 10
Romania 5 (c) 10 3 5
Russian Federation 5 (c) 15 0 0
Slovak Republic 5 (c) 10 0 10
Slovenia 5 15 5 5
Spain 5 (c) 15 5 5
Sweden (d) 0 15 0 0
Switzerland 5 (c) 15 0 0
Ukraine 5 (c) 15 10 10
United Kingdom 5 15 0 0
United States 5 15 0 0/5 (b)
Vietnam 10 (c) 15 10 10
Non-treaty countries 18 20 10 (f) 20 (g)

A    Qualifying companies.

B    Individuals and other companies.

a) Unless indicated otherwise, the rate applies to corporate shareholders with ownership of at least 10%.

b) The lower rate applies to copyrights (except for films and similar items), computer software, patents and know-how. The higher rate applies to other royalties.

c) The rate applies to corporate shareholders with ownership of at least 25%.

d) These are the rates under the Nordic Convention.

e) The lower rate applies to equipment leasing.

f) A 10% withholding tax is imposed on interest paid to nonresident entities unless, on application, the Director of Internal Revenue grants an exemption from withholding tax. A 10% withholding tax is imposed on interest paid to nonresident individuals. Alternatively, the withholding tax may be refunded.

g) Royalties paid to nonresidents are subject to withholding tax at a rate of 20%. The net royalties (gross royalties less expenses) are normally included in ordinary income and taxed at the general corporate income tax rate unless a tax treaty provides a reduced rate.

h) The lower rate applies to royalties paid for the use of, or the right to use, com­puter software or patents or for information concerning industrial, commercial or scientific experiences if they are paid to a resident of the other contracting state that is the beneficial owner of the royalties.

Tax information and exchange agreements are in force with Andorra, Aruba, Bermuda, the British Virgin Islands, the Cayman Islands, Guernsey, the Isle of Man, Jersey, Monaco and the Netherlands Antilles (applicable to the successor jurisdictions of the Netherlands Antilles).