A. At a Glance

Corporate Income Tax Rate (%) 18 (a)
Capital Gains Tax Rate (%) 18 (b)
Branch Tax Rate (%) 18
Withholding Tax (%)
Dividends (c)
Companies 15
Individuals 10
Interest 0 (d)
Royalties from Patents, Know-how, etc. 0 (e)
Payments Under Leases and Rent 0 (e)
Branch Remittance Tax 0
Net Operating Losses (Years)
Carryback 0
Carryforward 10

(a) A 5% rate applies to International Trading Companies (see Section B), and a 26% 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) These are final withholding taxes imposed on nonresidents, which may be reduced by tax treaties.
(d) A 10% withholding tax is imposed on interest paid to nonresidents unless, on application, the local tax director grants an exemption from withholding tax. Alternatively, the withholding tax may be refunded.
(e) Royalties, payments under leases and payments of rent are not subject to withholding tax. The net payments (gross payments 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.

B. 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 18%. The rate for taxable partnerships is 26%. International Trading Companies (see International Trading Companies below) are subject to tax at a reduced rate of 5%.

International Trading Companies. Effective from 1 January 1999, resident public and private companies that meet certain requirements may qualify as International Trading Companies (ITCs) in Iceland. ITCs are subject to corporate income tax at a reduced rate of 5%. From March 1, 2004 no new ITCs can be established and on January 1, 2008 the laws and regulations regarding ITCs will expire.

Dividends received from ITCs are fully taxable. This is contrary to the general regime under which dividends received by resident companies from other resident companies are fully deductible for the recipient. ITCs are exempt from the net worth taxes and from stamp duties. They can register for value-added tax (see Section D).

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.

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 10.5% 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. 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 rates are 15% for companies and 10% for individuals. Tax treaties may reduce or eliminate the dividend withholding tax. However, 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 though a tax credit against Icelandic income tax at the discretion of the local tax director. Foreign income and capital taxes may be deducted as expenses from income.

C. 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.

In general, expenses incurred to generate and maintain business income are deductible. Companies may deduct dividends received during the year (see Section B).

Inventories. Inventories are valued at the lower of cost or market value. Cost must be determined using the first-in, first-out (FIFO) method. 5% of the inventory value at year-end is deductible.

Tax Depreciation. Depreciation must be calculated using the straight-line method. 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 elect 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.

D. Other Significant Taxes

The table below summarizes other significant taxes.

Nature of Tax Rate (%)
Value-added tax, on most goods sold
in Iceland and most services rendered
in Iceland
Standard rate 24.5
Lower rate for hotels, books and pub-
lications, food products, heating of
houses and road tolls 14
Tax on industrial activities; levied on
operating revenue 0.08
Net worth tax, on net assets 0.6
Social security contributions, paid by

the employer on gross payroll 5.73

E. Foreign-Exchange Controls

Nonresidents may directly invest in most industries in Iceland, but they must notify the central bank of such investments. The fishing industry is the principal industry in which investments by non-residents are limited. Nonresidents may not own a majority in such companies. Proceeds from sales of investments and profits may be remitted freely.

F. Treaty Withholding Tax Rates

Dividends
A (a) B Interest Royalties
% % % %
Belgium 5 15 10 0
Canada 5 15 10 0/10 (b)
China 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
Greenland 5 (c) 15 0 0
Latvia 5 (c) 15 10 5/10 (e)
Lithuania 5 (c) 15 10 5/10 (e)
Luxembourg 5 (c) 15 0 0
Netherlands 0 15 0 0
Norway (d) 0 15 0 0
Poland 5 (c) 15 0 10
Portugal 10 (c) 15 10 10
Russian Federation 5 (c) 15 0 0
Slovak Republic 5 (c) 10 0 10
Spain 5 (c) 15 5 5
Sweden (d) 0 15 0 0
Switzerland 5 (c) 15 0 0
United Kingdom 5 15 0 0
United States 5 15 0 0
Vietnam 10 (c) 15 0 0
Nontreaty countries 15 10/15 (f) 0 (g) 0 (h)

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 0% rate applies to copyrights (except for films and similar items), computer software, patents and know-how. The 10% 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) The 10% rate applies to individuals.
(g) A 10% withholding tax is imposed on interest paid to nonresidents unless, on application, the local tax director grants an exemption from withholding tax. Alternatively, the withholding tax may be refunded.
(h) Royalties paid to nonresidents are not subject to a withholding tax. 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.

Iceland has signed a tax treaty with Italy, but the treaty is not yet effective.