Iceland – the Base for your Business

Tax Benefits and other Advantages of the Icelandic Fiscal System


 ICELAND DENMARK INDIA JAPAN LUXEMBOURG NETHERLANDS UK USA
Corporate Taxes
National 18% 28% 33.66% 22%-30% 22.88% 27%/31.5% 19%/30% 15%-35%
Local None None None* Y 6.75%* None None 0-12%
AMT None None Y* None None None None Y
Capital Gains
Taxable Y Y Y Y Y* Y* Y* Y
Treated as Ordinary Income Y Y* N* Y Y Y Y Y*
Tax on Dividends Received
Domestic N Y/N* N* Y* Y Y N N*
Foreign N Y/N* N Y Y Y Y Y
Participation Exemption N* Y N N Y Y Y N
Deductions
Royalties Y Y Y* Y Y Y Y Y
Dividends N N N N N N N N
Interest Payable:
Debt/Equity Ratios N Y N* Y Y* 3:1* Y N
Bad Debt Provisions
General Y N N Y* Y Y N Y
Specific N Y N Y Y Y Y N
Losses
Carry Forward Y Y Y Y Y Y Y Y
Time Limit 10 yrs Indefinite 8 yrs 7 yrs Indefinite Indefinite Indefinite 20 yrs
Restricted Offset N Y* Y N N N Y N
Carry Back N N N N N 3 yrs 1 yr 2 yrs
Consolidated Tax Returns
Available Y Y N Y Y Y* N Y
Requirement of Common Control 90% 100% N/A 100% 95% 95% N/A 80%
Foreign Currency Fluctuations
Full/Partial Recognition Full Full Full Partial Full Full Full Full
Capital Investment Tax N N N N 1%* 0.55%* N N
Net Wealth Tax N N Y* N 0.5%* N N Y
Tax on Repatriaton of Branch Profits N N N N N N N Y
CFC Legislation N Y Y Y N N Y Y
Thin Capitalisation Rules N Y N Y Y Y Y Y*
Tax Treaties Available 27 73 80 56 46 86 108 60
Tax Credit Available in the Absence Y Y Y Y Y Y Y Y
of Tax Treaties
* Subject to further information.
Please contact a tax adviser.

Iceland
Instead of participation exemption, a com-
pany may defer taxation of the realised
capital gain by reinvesting in shares within
two years from the date of sale.
Denmark
Received dividends in Denmark are not
taxed if the recipient owns more than
20% of the corporate payer for more
than 12 months. Capital gains or losses
on disposal of shares are only included
in taxable income if the disposal takes
place within the first 3 years of owner-
ship. Gross proceeds from the sale of
shares to the issuing company and liqui-
dation proceeds are in some cases taxed
as dividends.
Netherlands
Proposed abolition of the capital invest-
ment tax in January 2006. Group treat-
ment companies may, upon joint request,
apply to be treated as fiscal unity.
LuxemboUrg
7.5% local tax for Luxembourg, 0.5% net
worth tax. Resident companies are sub-
ject to net worth tax on their worldwide
net worth. The tax rate is 0.5%. The tax-
able base is determined as assets less
liabilities. However, the value of a quali-
fying participation is exempt from net
worth tax under the same conditions that
apply to the participation exemption for
dividends, except that there is no holding
period condition.
A reduction of net worth tax is given un- 2. There is no tax on the dividends dis- Japan
der certain conditions. tributed by companies provided the com- Dividend payment among consolidated
panies have paid a Dividend Distribution companies is tax-exempt. Dividend is
United States Tax (DDT) of 14.025 percent on dividend also tax-exempt when 25% or more of
A thin capitalisation statute provides for distributed. the corporate payer is owned for more
a facts and circumstance test. than 6 months. In all other cases, 50% of
3. Where the royalty is payable outside In- received dividend is tax-exempt.
India dia or to a non-resident in India, then the
Depending on the nature of activities royalty shall be allowed as deduction only Bad debt reserve calculation depends on
and income derived from it, local taxes the size of the company.
may be applicable. when the tax has been deducted at source
and paid to the Central Government.
Special bad debt reserve is allowed for
1. Domestic companies are taxable at a
rate of 30% plus a surcharge of 10% on 4. Wealth tax is levied at the rate of receivables unlikely to be collected.
the tax plus an education cess of 2% on 1% when net taxable wealth exceeds
the tax and surcharge, and foreign compa- R 1,500,000.
nies at the rate of 40% plus a surcharge
of 2.5% on the tax plus an education cess
of 2% on the tax and surcharge.
 Iceland – the Base for your Business

Why choose Iceland?

The Icelandic business environment is fast moving, focused and company-friendly. Iceland presents international
businesses with a wide range of opportunities for different activities and operations in a highly developed economy.
It also offers an attractive fiscal and tax environment for locating holding companies and multinational headquarters
with world-wide activities. For efficient infrastructure, expert services and smooth administration, Iceland meets the
highest international standards.

Tax Benefits and other Advantages of the Icelandic Fiscal System

Corporate income tax only 18% on net income

No taxes levied by municipalities on corporate profits

No alternative minimum tax

No net wealth taxes levied on net capital

Tax incentives available for film production in Iceland

Dividends received by corporations are deductible. No requirements are made for percentage of stock
ownership in the corporate payer.

Consolidated returns available for corporations subject to 90% common control

Accounting in foreign currencies allowed

Publicly traded companies are allowed to issue their share capital in a foreign currency

Non-publicly traded companies are allowed to issue their share capital in a foreign currency
if certain requirements are met

No branch profits tax levied on repatriated branch profits

Double taxation treaties available

Tax credit available to avoid double taxation in the absence of tax treaties

No specific legislative restraints on controlled foreign corporations

No legislation on thin capitalisation

No “basket system” (the US system)

Easy and inexpensive establishment of companies

Developed financial and service sector

Iceland is part of the European Single Market as a member of the 28-nation European Economic Area

International exhibitions and conferences

Broad range of office and residential accomodation

Advanced infrastructure for telecommunications networks and services

Reliable power and utilities at affordable prices

International standard hotels, restaurants, shops, schools and hospitals

Sophisticated lifestyle


 Establishing a Business in Iceland

a   Types of Business Forms

Foreign companies interested in setting up a business in Iceland have a wide choice for finding the most
suitable way to structure their business arrangements. Options include starting up a new subsidiary,
forming a joint venture with an existing foreign or Icelandic company, setting up a branch or acquiring an
existing Icelandic company. Sole proprietorships are sometimes used for small businesses run by a single
entrepreneur, as there are no capital requirements. Such a personal business entity can be incorporated
tax-free if certain requirements are met. Icelandic company law conforms with the principles and provi-
sions in effect in the European Union.
Among business forms in Iceland available for international entities are:

Public or private limited company

Partnership
Branch
Joint venture
European company (SE)

The most common business forms chosen by foreign entities are the partnership and private limited
company. It takes only 1-2 days to form a company in Iceland.

The table on page 7 compares the public and private limited company, partnerships and branch in terms
of requirements for registration, registration fees, liability, capital, management, taxes and accounting.

b   Permanent Establishment
A non-resident interested in operating in Iceland without establishing a business should consider
whether or not its activities could constitute a permanent establishment. Definitions in double taxation
conventions are taken into consideration in determining whether or not a permanent establishment has
been established. Permanent establishment primarily includes a place of management, branch, office,
factory, workshop, installation or structure used for the exploration of natural resources, a mine, oil or
gas well, quarry or any other place of extraction or exploitation of natural resources. Temporary projects
do not constitute a permanent establishment. A building site or construction or installation project
constitutes a permanent establishment only if its duration exceeds 12 months.

Even if its activities do not constitute a permanent establishment, a foreign business may need an
Icelandic ID number and value-added tax registration number. However, it may also use the ID number
of an Icelandic agent registered for the VAT number on its behalf.

Representative offices can also be set up, which is sometimes done in the initial stages of establishing a
more permanent business in Iceland.

c   The Public Limited Liability Company

Stricter requirements apply for public limited liability companies than for private ones. Generally, public
limited liability companies are a suitable form for business operations which have a wide shareholder
base and intend eventually to go public. The minimum capital requirement is ISK 4 million, and
share certificates must be issued. It must be established by at least two persons. A minimum of two


 shareholders, one Manager and three persons on the Board of Directors are required. Total registration
cost for a public limited company is ISK 171,000. Profit is subject to the 18% corporate income tax rate.
The liability of individual shareholders is limited to their share capital.

d   Private Limited Liability Companies

Private limited liability companies are the most popular business form in Iceland. Liability is limited to the
share capital and the income tax rate is 18%. Dividend payments to individual shareholders are subject
to 10% final capital tax. Total cost of registration amounts to ISK 88,500. A single person may establish
a private limited company and be the sole shareholder; if they are more, board and shareholder meetings
are required. It is not obligatory to appoint a manager in private limited companies. The minimum
capital requirement is ISK 500,000, which must be paid into the company prior to its registration at the
Enterprise Register. Transfer of funds from both public and private limited companies is limited and has
to be in accordance with rules on payments of dividends. Company loans and guarantees to owners of
private limited liability companies are also broadly prohibited.

e   Partnerships
Partnerships (sameignarfélög) of two or more persons may also be established in Iceland. They are
registered at the Register of Firms of the relevant local District Commissioner for a fee of ISK 56,000
plus ISK 5,000 for an ID number issued by the Enterprise Register. Liability of members of partnerships is
unlimited, i.e. they guarantee the company’s liabilities with their entire assets, which may be an important
disadvantage in the event of setbacks in operations. The income tax rate for a partnership is 26% if it has
been registered as a taxable entity on foundation. Alternatively, individual members are taxed according
to their ownership interest in the partnership at the 36.72% personal income tax rate, limited companies
at 18% and other partnerships at 26% (figures valid in 2006). Distributed profits from partnerships are
not subject to withholding tax when income has been taxed at company level. No capital requirements
are made for partnerships.

f   Limited Partnerships
Limited partnerships (samlagsfélög) are another business form. These must have a minimum of two
members, and at least one member must bear unlimited liability for the partnership. Other members may
limit their liability to the equivalent of their share contribution. A limited partnership may be registered as
a taxable entity subject to an income tax rate of 26%. Its flexibility makes this company format desirable
in many cases. The same registration process and fees apply to limited partnerships as to partnerships.

g   B ranch
Branches of foreign incorporated businesses with limited liability are registered with the Enterprise
Register. When registering the branch, the head office must file the following documents:

A copy of the articles of association of the head office.

The incorporation certificate of the head office.
A letter of representation for the branch manager together with documentation that the branch
manager meets the requirements as to residency, citizenship and solvency.
The financial statements of the head office for the preceding year.


 The name of the registered branch must include the name of the foreign company. Note that
documentation filed with the Icelandic authorities must be submitted in certified Icelandic translation.
The total cost of registering a branch is ISK 171,000.

h   Joint Venture
A joint venture generally denotes any kind of international business undertaking that involves participa-
tion by two or more parties of different nationality. No requirements apply in Iceland to local equity
participation in the joint venture. There is no need to license the joint venture or publish the agreement
establishing it. However, the participation of the foreign party may constitute a permanent establishment
in Iceland. Most joint venture parties establish a company for the project. All available business forms in
Iceland may be used for the joint venture and no separate legislation covers its operation.

i   Societas Europaea / European Companies (SE)

Since 2004, it has been possible to establish a European public limited company in Iceland. The legal
framework of the SE company is based on EU Directive No. 2157-2001 on Societas Europaea, but is to a
large degree subject to national company law. The nationality of an SE company can be changed without
liquidation and re-founding. If the official address of the SE company is in Iceland, it must be registered
with the Enterprise Register. Minimum capital requirement is EUR 120,000. The same requirements
apply to financial statements and auditing as for other local public limited companies. An SE company
registered in Iceland is subject to corporate income tax of 18%.


 Corporate Forms

Public limited liability Private limited Limited

Partnership partnership Branch
company liability company

Larger companies. Only a public

Smaller and medium-sized Smaller companies and Fixed place of business where the business
Application limited liability company may be
companies joint venture projects
Smaller companies
of a company is wholly or partly carried on
listed on Iceland Stock Exchange

Must be registered at the Enterprise Must be registered at the

Registration Register Enterprise Register
The local Register of Firms The local Register of Firms Must be registered at the Enterprise Register

ISK 61,000 (56,000 for reg- ISK 61,000 (56,000 for

Registration fees ISK 171,000 ISK 88,500 istration and 5,000 for an ID registration and 5,000 for an ISK 171,000
number) ID number)

No minimum capital No minimum capital

CapITal requirement Minimum ISK 4,000,000 Minimum ISK 500,000
requirements requirements
No minimum capital requirements

Liability Limited Limited Unlimited Unlimited/limited Unlimited liability of the foreign corporation

Mandatory two-tier system. A Board
Management of Directors of minimum 3 persons,
and at least one Managing Director.
Minimum of 3 Directors
unless shareholders
are 4 or less, then 1-2. No requirements No requirements One Branch Manager must be registered.
A Managing Director is
optional.

The Managing Director(s)

The Managing Director(s) and at
Residence least half of the directors must
requirements reside in Iceland. Does not apply to
citizens of an EEA or OECD country
of directors residing there. An exemption may
and managers be granted from the Minister of
Commerce.
and at least half of the
directors must reside in Residence requirements, unless the Branch
Iceland. Does not apply to Manager is a citizen of an EEA or OECD
citizens of an EEA or OECD No residence requirements No residence requirements country and residing there. An exemption
country residing there. An may be granted from the Minister
exemption may be granted of Commerce.
from the Minister of
Commerce.

26%, if registered as 26%, if registered as

taxable entity. If not, taxed taxable entity. If not, taxed
Tax 18% 18%
on the same basis as the on the same basis as the
18%
partners. partners.

Annual financial Annual financial statements,

Annual financial statements.
Audit requirements apply to publicly
traded companies and companies
Accounting which meet two of three conditions:
Staff members >50, annual turnover
>ISK 240 million, total assets > ISK
120 million
statements, if a taxable
entity. If not, included in the
Annual financial annual financial statements
statements. Audit of the partners (legal
requirements apply to entities) or in the tax return
companies which meet two of an individual partner.
of three conditions: Staff Audit requirements apply to
members >50, annual partnerships registered as
turnover >ISK 240 million, taxable entities and meet
total assets >ISK 120 two of three conditions:
million Staff members >50, annual
turnover >ISK 240 million,
total assets >ISK 120
million
if a taxable entity. If not,
included in the annual
financial statements of the
partners (legal entities)
or in the tax return of an
Balance sheet and income statement
individual partner.
of the branch together with the annual
Audit requirements apply to
financial statement or consolidated financial
partnerships registered as
statement of the foreign corporation.
taxable entities and meet
two of three conditions:
Staff members >50, annual
turnover >ISK 240 million,
total assets >ISK 120
million

Act on Private Limited

Legislation Act on Public Limited Companies
Companies
No corporate law applies No corporate law applies Act on Public and Private Limited Companies

a   Corporate Taxes
b   O ther Levies on Business Entities
Our clients have chosen
Iceland as a location
mainly because of the
low corporate tax rate in
addition to a simple and c   Deductible Expenses
transparent tax system.
Birkir Leósson,
Tax Partner
Páll Jóhannesson,
Senior Manager
d   Depreciation

Taxation
The corporate income tax rate is a flat rate of 18% on profits. The income tax rate for partnerships is
26% if registered as taxable entities. No surcharges or municipal taxes are levied on business profits of
companies or branches, nor any alternative minimum tax. Capital taxes are not levied on net capital in
Iceland.
An industrial charge, equivalent to 0.08% of annual turnover, is levied on businesses engaged in
industrial activities.
Property taxes are levied on the nominal value of real estate. Rates differ among municipalities and also
depending upon the use to which buildings are put.
Operating expenses are fully deductible in the year in which they are incurred. In general, allowable
expenses are those incurred for the purpose of earning income, including salaries and all other staff
expenses, rent, interest, depreciation, advertising expenses and maintenance.
Research and development costs, including market research costs, may be deducted in full in the year
they are incurred, or depreciated over a five-year period. The same applies to lawyers’ and accountants’
fees incurred in establishing or expanding an enterprise.
Tangible assets such as equipment, machinery, ships and aircraft are depreciated by the declining
balance method, but buildings, plants, other premises and intangible assets such as copyrights and
trademarks are depreciated by the straight-line method. A residual value of 10% of the original value of
a tangible asset is retained in the accounts until it is scrapped or sold. Accelerated and/or extraordinary
depreciation or write-offs are deductible from income in certain limited and specific cases. The base
value for depreciation of buildings, plants and intangible assets such as copyrights and trademarks is
their purchase value. The account value provides the base value for depreciation of other tangible assets
such as ships, aircraft, automobiles, office equipment and other movable property.
Assets subject to ordinary depreciation are classified in categories with different annual depreciation
rates. The rates within the limits in each category are optional. The main categories are:
CATEGORY RATE (%)
Rights to mines, quarries and Ships, aircraft, cars carrying less than 9 persons (except taxis) 10-20
Automobiles and other transport vehicles 20-35
other natural resources may be
industrial machinery and equipment 10-30
depreciated and deducted from office equipment 20-35
income using the unit-of-production machinery and equipment for building and construction 20-35
other movable property 20-35
method. Purchased goodwill is buildings and other structures, e.g. office buildings 1-3
considered a depreciable asset for industrial plants and storage tanks 3-6
Quays 6-8
tax purposes at a rate of 10-20%,
drilling holes and electric transmission lines 7.5-10
and patents, copyrights and other Purchased Intangibles 15-20
Purchased goodwill 10-20
similar rights at a rate of 15-20%.
Purchased property rights such as
patents, copyrights and the like may be depreciated at their determinable useful life if it is shorter than
the nominal recovery period of 5 years. Likewise, various start-up costs may be deducted in the year in
which they accrue.
e   Bad Debts
Bad debts are deductible, in full or in part. Companies may deduct annually up to 5% of their
receivable accounts.

f   Treatment of Losses
The net operating loss of a company may be carried forward for 10 years. Carry-back is not allowed. From our work with UK and

Icelandic clients in the last

g   C apital Gains and Losses years, we have seen that
Capital gains are added to other taxable income and taxed as ordinary income at the regular corporate the Icelandic environment

rate for each business form. If the capital gains derive from sales of assets, they may be offset by is feasible and worth

extraordinary depreciation on other fixed assets or on fixed assets acquired within two years of the looking at as a platform

for investment projects or

sale. If the fixed assets are not acquired within two years of the sale, the gain is included in the income
other operations, especially
and a 10% surcharge imposed.
with its favourable

treatment of both
Capital losses on the sale of shares can only be deducted from realised gains on other shares in the
dividends and capital gains
same tax year. for corporate investors.

h  Consolidated Tax Returns Brendan O’Grady

Resident companies can apply for joint taxation if one company owns at least 90% in another. One KPMG LONDON

implication of joint taxation is that losses of one company can be set off against profits of the other Partner-M&A tax

companies. Joint taxation must last for a term of at least five years. If joint taxation is waived, at
least five years must elapse until it can be granted again. Joint taxation may not be extended to non-
resident companies.

i  Royalties
Royalties are treated as deductible business expenses in Iceland. Royalties paid from Iceland are
subject to withholding tax. Rates depend on the classification of recipient. The same procedure as for
dividends applies to exemption from withholding tax and reduced tax rates.

j  Transfer Pricing
Transactions, both domestic and cross-border between associated companies, are treated according
to the arm’s length principle, which applies to entities controlled by another entity, group-related
companies and the relation between a head office and a permanent establishment.
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, may be added to that party’s taxable
income. Tax authorities may also determine a reasonable purchase or sales price if property is bought
or sold at an unusually high or low price.

k   Controlled Foreign Corporations

There is no legislation in Iceland on Controlled Foreign Corporations. Therefore, a domestic company
in Iceland controlling another company in an overseas jurisdiction with an effective tax rate essentially
lower than the Icelandic tax rate does not have to pay Icelandic taxes on the retained earnings of the
controlled foreign company.

l   Thin Capitalisation Rules

Thin capitalisation rules are not applicable to resident companies which have a debt to a non-resident
company. All interest expenses and capital losses related to debts for a legitimate business purpose
are deductible in Iceland.


m Place of Residence
Corporate tax is levied upon both resident and non-resident companies. Companies are considered
Icelandic residents if they can demonstrate that they are effectively managed in Iceland. In addition,
companies are deemed to be Icelandic tax residents when incorporated under Icelandic law, even if the
actual management is abroad. Such dual residency is usually avoided by tax treaty provisions in favour of
the country where the company is effectively managed.

n   Value-Added Tax
The general rule is that a 24.5% value-added tax is levied on any sale of goods and services. A rate of 14%
is levied on food, hotels and other accommodation, licences for television and radio stations, books, hot
water and other utilities, and road tolls. Social services, such as schools, health care, transportation, and
rental, postal, banking and insurance services are exempt from value-added tax, and so are export sales.

o   Import Duties
Customs duty and excise duty are levied on a variety of goods. However, Iceland is a contracting party to
many international agreements, including the EEA Agreement, which provide for tariff-free movement
of goods.

p   Advance Ruling
Taxation is a significant factor for international groups in their choice of business location. The Icelandic
tax authorities are aware of this fact and seek to be as accessible as possible. Advance rulings by the
Internal Revenue Service enable decisions to be made with certainty and both resident and non-resident
companies may request an assessment of most aspects of corporate income tax and the consequences
that future transactions will have for it. Advance rulings are normally given within four weeks, but
in more complicated cases the tax authorities may extend this deadline to 3 months. The Ministry of
Finance issues advance rulings on international transactions and double taxation treaties.

q   Tax Authorities
The Icelandic tax authorities consist of the Ministry of Finance, the Internal Revenue Service and nine
local tax offices. Furthermore, there is a Directorate of Tax Investigations and a State Internal Revenue
Board in case of disagreements between taxpayers and the tax authorities.

Iceland’s tax authorities are efficient and ready to provide consultancy on tax matters.
4 International Transactions

a   Double Taxation and Tax Treaties

If the taxpayer is subject to tax on the same income in Iceland and in a foreign jurisdiction, relief from
double taxation may be allowed under one of the conventions that Iceland has concluded. If double
taxation occurs with a non-tax treaty country, a tax credit may be applied for under the provisions of the
Icelandic Income Tax Code.

b   Double Taxation Conventions

The rates of withholding tax in the chart below apply to dividends, royalties and interest paid to a
recipient resident in a country with which Iceland has a tax treaty in force. Non-residents may apply to
have no withholding tax on interest paid to them.

Country Dividends % Royalties % Interest %

Individuals, COMPANIES Qualifying compANIES
Belgium 158 51 0 06
6
Canada 158 51 02/10 0
6
China 158 5 3 10 0
Czech Republic 158 5 3 10 0 Iceland has a well-educated
Denmark4 158 01 0 0 population, most of
6
Estonia 158 5 3 55/10 0 which speaks English. The
Faroe Islands 4 158 01 0 0
infrastructure is advanced and
Finland4 158 01 0 0
communication systems are
France 158 51 0 0
Gemany 158 5 3 0 0 very modern. The banks are

Greenland 158 5 3 15 0 progressive and international.

6
Ireland 158 5 3 02/10 0 Icelandic government agencies
6
Latvia 158 5 3 55/10 0 are accessable and reliable.
6
Lithuania 158 5 3 55/10 0 Several tax treaties are to be
Luxembourg 158 5 3 0 0 recommended and it is possible
Netherlands 158 01 0 0 to get advance rulings, both
Norway4 158 01 0 0
6 on issues concerning the
Poland 158 5 3 10 0
6 treaties and local tax. Last, but
Portugal 158 103 10 0
Russia 158 5 3 0 0 not least, professionals such

Slovakia 10 8 5 3 10 0 as lawyers and accountants

6
Spain 158 5 3 5 0 are becoming international,
Sweden4 158 01 0 0 combining good education and
Switzerland 158 5 3 0 0 knowledge of English.
United Kingdom 158 51 0 0
8
United States 15 51 0 0 Edmund Bendelow
15 10
8 3 6
Vietnam 10 0 TEP Group Chief Executive
10/15
8 7
Non-treaty countries 15 18/26/36.72 0 & Chairman

Notes:
1. This rate applies to corporate shareholders with a minimum ownership of 10%.
2. The zero rate applies to copyright royalties (except films, etc.), and to royalties for computer software or patents,
or for information concerning industrial, commercial or scientific experience (except information provided in connection
with a rental or franchise agreement).
3. This rate applies to corporate shareholders with a minimum ownership of 25%.
4. The Nordic Convention.
5. The 5% rate applies to royalties paid for the use of industrial, commercial or scientific equipment.
6. The source state has the right to levy a withholding tax on interest. However, according to Icelandic tax
legislation, interest paid to non-residents is not taxed provided that an application is filed for this exemption.
7. The 18% rate applies to corporations, the 26% rate applies to partnerships registered as taxable entities
and the 36.72% rate applies to individuals.
8. According to Icelandic tax legislation, dividends paid by resident companies to resident and non-resident
individual shareholders are subject to a final 10% withholding tax.

Iceland has initialised tax treaties with Italy, Malta and Hungary, which are pending ratification. In addition,
Iceland has signed draft treaties with Austria, Greece, Croatia, Mexico, South Korea and the Ukraine which are
expected to be initialised and ratified in the immediate future. Negotiations on tax treaties with Slovenia, India
and Romania have started, and the tax treaty with Romania is expected to be signed in 2006.

c   Double Tax Relief

To take advantage of the benefits of a tax treaty, the relevant party has to file the document RSK 14.03
(Claim under a Double Taxation Convention) with the Internal Revenue Service.

11
 Holding Companies in Iceland

a   Benefits of a Holding Company in Iceland

There is no special legislation on holding companies in Iceland. All business forms may therefore be used to
establish a holding company, such as a limited liability company (both private and public), partnership, limited
partnership and branch. If the holding company is used solely for holding shares, its profits may never be
taxed as long as it is a going concern. Received domestic dividends may be deducted from the profits, thus
resulting in a zero tax. The same applies to received dividends from abroad if certain requirements are met.
Furthermore, net wealth taxes have been abolished in Iceland, and Icelandic holding companies enjoy treaty
benefits under double taxation conventions.

OVERVIEW OF Advantages and tax benefits of locating

a holding company in Iceland

The absence of CFC or
thin capitalisation rules
in Iceland has influenced
the decisions of many
clients to set up holding
companies in Iceland.
Elín Árnadóttir,
Attorney at Law.
Icelandic companies can be used for both active business and holding simultaneously
No specific corporate form is required
No net wealth taxes
Dividends received by corporations are deductible. No requirements apply to the percentage
of stock ownership in the corporate payer
Taxation of realised capital gains may be deferred
No foreign-exchange controls
Consolidated returns available for corporations subject to at least 90% common control
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 general anti-avoidance rule for direct corporation taxation
No legislation on controlled foreign corporations
No basket system regarding foreign tax credit

The majority of current holding companies in Iceland have chosen the partnership form for their domestic
financial transactions. The reasons for their choice of location are the attractive tax environment and smooth
administration.

b   Participation exemption
Icelandic tax law does not exempt sales profits on shares. However, business entities are authorised to defer
taxation on realised capital gains on sales of shares, including other changes of ownership, for two years. If
the company reinvests the capital gain in shares within the two-year time limit, taxation of capital gains will be
deferred further. If the purchase price of the new shares is lower than the capital gain, the difference will be
subject to 18% corporate tax for a corporate shareholder and 10% for a partnership shareholder registered as
a taxable entity. If the capital gain is not used to reinvest in other shares within two years and the capital gain
is deferred, it will be taxed in the second year from the time it was realised with a 10% surcharge.

c   Taxation of Received Dividends

Dividends received by resident corporate shareholders are exempt from tax since they are deductible.
Partnerships, limited or unlimited, pay 10% income tax on received dividends.
This level of taxation also applies to foreign dividends received by corporations incorporated abroad, if the
recipient business entity can demonstrate that the they are received from a corporation whose profits have
been taxed under provisions which do not substantially deviate from those in Iceland. Profits of the corporate
payer must also have been subject to an income tax rate which is not lower than the general income tax rate
in some of the OECD countries.

d   Withholding Taxes on Distributed Dividends

Dividends paid from an Icelandic company to a domestic company are subject to 10% withholding tax. Taxes
withheld from source are credited against assessed income tax.
Dividends paid to a company in a non-treaty country are subject to 15% withholding tax at source.
Dividends paid to a company in a treaty country are subject to withholding taxes described in the relevant tax
treaty. In that case, the foreign company has to prove its residence and tax liability in the treaty country with
certification from the relevant tax authorities.

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6
Equity Funds
The private and public equity and venture capital industry is important for any country’s economy.
It offers a way of strengthening the economic and social base by providing new opportunities for professional job
creation, innovation and sustainable growth. A favourable business environment for equity funds will also attract
international investors and venture capitalists to share in the risks and rewards in the economy.
Like any other industry, private equity and venture capital depends on the macro and micro economic environment.
A country’s entrepreneurial culture, availability of long-term sources of finance, the quality of its educational system,
its policies and its tax and legal environment all influence equity funds and venture capitalists in their choice of location.

JUST SOME OF THE ADVANTAGES OF LOCATING IN ICELAND:

Simple and efficient tax system with low tax rates
Low income taxes for private individuals in high-income brackets
Low capital gains taxes for private individuals
No separate merger authority
No undue restrictions on investments
Flexible rules on the taxation of stock options
Excellent entrepreneurial environment

 Location for Equity Funds

CRUCIAL CRITERIA FOR EVALUATING THE MOST FAVOURABLE ENVIRONMENT
TO DEVELOP A PRIVATE EQUITY AND VENTURE CAPITAL INDUSTRY
1. Tax factors
The Icelandic tax system is transparent for domestic investors’ income tax purposes
Investments by international investors in equity fund structures do not create a permanent establishment in Iceland
Tax-efficient capital investments or incentives can be structured for fund managers
Management charges are not liable to value-added tax unless structured that way
No undue restrictions on the type of investments undertaken

2. Merger regulation
The Icelandic Competition Authority may suspend a merger if it entails a dominant market position.
International competition has to be taken into account as well. However, this only applies to companies with
combined annual turnover of at least € 11,111,111.

3. Regulation on pension funds Country Corporate income tax on profits

Pension funds in Iceland can invest in private equity Iceland 18%
with quantitative restrictions. Austria 25%
Belgium 33.99%
4. Regulation on insurance companies
Czech Republic 24%
Insurance companies in Iceland can invest in private
Denmark 28%
equity with restrictions.
Finland 26%
France 34.43%
5. Corporate tax rate on profits
Germany 25% plus 5.5% surcharge
Hungary 16%

6. Company tax rate for small Ireland 12.5% on trading income

and medium-sized enterprises Italy 33% plus local tax of 4.25%
Iceland has no special tax rate for small and medium-sized companies. Luxembourg 30.38%
The 18% corporate income tax rate applies to all limited liability Netherlands 27/30.5%
companies. The 26% income tax rate applies to partnerships and Poland 19%
limited partnerships registered as taxable entities. Portugal 25% plus 0-10% local surcharge
Slovakia 19%
7. Income tax rate for private individuals Spain 30/35%
Resident individuals in Iceland are subject to 23.75% national Sweden 28%
income tax plus municipal income tax, which may vary from Switzerland 32.5%
11.24% to 13.03% between municipalities; the average rate in United Kingdom 19%/30%
2006 is 12.97%. The monthly personal allowance is ISK 29,029,
which means that income up to ISK 79,055 per month is tax-free.

Social security contributions are payable only by employers and self-employed individuals. The rate is 5.79% in 2006. In addition,
contribution must be made into a pension fund which is usually divided between employee (4%) and employer (6%-7%,
depending on wage agreements). Most pay agreements on the labour market require employers to pay an extra 2% to a pension
fund, if the employee chooses to pay an additional 2-4% contribution. Employees can deduct their contributions to a pension
fund from tax. Salaries and salary-related expenses are deductible from tax for companies.

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 8. Capital gains tax rate for individuals

Country Capital gains tax rate for individuals

Iceland 10%
Austria 0-50%
Belgium 33% plus surcharges
Czech Republic 15%-32% (the common tax rate applies)
Denmark 23%-59%
Finland 28%
France 27%
Germany 15%-42% plus 5.5% surcharge on 50% of the capital gains
Hungary 25%
Ireland 20%
Italy 12.5% for capital gains related to non-qualified participation
Luxembourg Taxable at normal rates up to 40%
Netherlands 25%, if holding over 5%
Poland 19%
Portugal Exempt if participations are held for more than 12 months
Slovakia 19%
Spain 15% for capital gains generated over a period of more than 1 year
Sweden 30%
Switzerland Exempt if belongs to private wealth
United Kingdom 20% or 40% depending on tax band tapering

9. Taxation on stock options

The general rule is that stock options are taxed when the option is exercised.
Iceland provides taxation schemes where the option can be taxed when the underlying stocks are sold.

10. Entrepreneurial environment

Iceland offers a very favourable environment for establishing private and public limited companies.
In a comparison of establishment costs in 21 European countries, Iceland ranks well below the average.

Based on an exchange rate of €1 = ISK 90.

Iceland Average
Company tax rate 18% 28.8%

Maximum income tax rate for private individuals 36.72% 45.3%

Private limited company:

Business days for set-up 1-2 23.5

Administrative costs involved € 983 € 1,638

Minimum issued capital required € 5,556 € 13,946

Public limited company

Business days for set-up 1-2 25.7
Administrative costs involved € 1,900 € 2,301

Minimum issued capital required € 44,444 € 64,484

11. Fiscal R&D incentives

Research and development costs, including market research costs, trademarks and patent applications
may be deducted in full in the year they are incurred, or depreciated over a five-year period.
The same applies to lawyers’ and accountants’ fees incurred in establishing or expanding an enterprise.
Contributions by domestic companies to research institutes or universities are deductible up to 0.5%
of annual turnover.

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12. Bankruptcy and insolvency
Iceland offers companies anticipating financial difficulties early protection and possible restructuring
mechanisms. The process is through the relevant district court. Normally, a declaration of bankruptcy
does not have any consequences for bona fide managers and directors with respect to new responsibilities
in that capacity.

13. The Competitiveness of Iceland as a Location for Equity Funds

The European Private Equity & Venture Capital Association (EVCA) undertook a comparison between 21
countries on the tax and legal environments they offer for the private equity and venture capital industry.
EVCA collected information on 13 criteria for each member state, valid as of February 1, 2004 or later. Equal
weight is accorded to all of the 13 criteria when calculating the composite score. Some criteria are based
on more than one factor, in which case the average is used for the score. The total score of each of the 21
countries is shown in the table below. Iceland’s score is added to the table, strictly calculated according to
EVCA’s methodology. The lower the score, the more favourable the environment.

Average of scores:
Total score

United Kingdom 1.26

Iceland 1.38

Luxembourg 1.49

Ireland 1.53

Greece 1.75

Netherlands 1.76

Portugal 1.81

Belgium 1.82

Hungary 1.86

Italy 1.86

France 1.89

Switzerland 1.95

Spain 1.96

Norway 2.04

Sweden 2.05

Czech Republic 2.12

Poland 2.13

Finland 2.30

Germany 2.37

Austria 2.42

Denmark 2.46

Slovakia 2.49

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 Invest in Iceland Agency is run by the Trade Council of Iceland and the Ministry of Industry and Commerce.
The Agency’s advisors provide free of charge information and expert confidential service on all aspects
of investments in Iceland.

This report was compiled by the Invest in Iceland Agency.

The author of this report is Anna Linda Bjarnadóttir, Attorney at Law, LL.M
with contribution from the international audit firm KPMG in Iceland.

While every effort has been made to ensure that the information in this publication
is correct, the publishers cannot accept liability for any errors or omissions.

Please contact the Invest in Iceland Agency for further information on investments in Iceland.
The entire text of this publication can be found on the Invest in Iceland Agency website: www.invest.is
Reproduction for non-commercial distribution is allowed provided that the source is acknowledged.

June 2006
ISBN 9979-9544-4-2

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