Tax Treaties: United States And Iceland

Tax Treaties: United States And Iceland

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.

Treaty.

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%

Transfer Pricing. 

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.

Have a question? Contact Jason Freeman, Freeman Law.

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 ta

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.

Mr. Freeman is the founding and managing member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney. Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service.
He was honored by the American Bar Association, receiving its “On the Rise – Top 40 Young Lawyers” in America award, and recognized as a Top 100 Up-And-Coming Attorney in Texas. He was also named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas” by AI.

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