The Icelandic krona
A.1 Incentives and Official Attitude
Iceland has systematically made its business environment increasingly attractive for investment and location. A new Act on incentives for initial investments in Iceland has been adopted and Iceland has one of the lowest levels of corporate income tax in Europe. Apart from certain derogations from taxes and charges, incentives can also come in the form of direct cash grants, training aid and lease of land. The criterias for incentives have been simplified, and application processes streamlined. Advantages offered by Iceland for industrial investors include competitively priced green electricity and industrial steam. Industrial sites with good natural harbors, for small and large ventures, are located in several parts of the country, and many local authorities have designed development strategies and scenarios which provide for new investments. Highly skilled labour is available, including experts in software and a wide range of research fields. Special incentives are granted for film and TV production in Iceland, whereby 20% of total costs are refundable. Production costs incurred in other EEA countries are also refundable within certain limits. Special incentives are also granted to certified innovation companies with their activities engaged in research and development projects.
A.2 Regulatory Constraints and Reliefs
As a member of the 30-nation European Economic Area, Iceland implements the same basic liberal business philosophy as the European Union. Except in a few limited areas, all EU commercial legislation and directives take effect in Iceland. Consequently, Iceland makes an ideal springboard for tariff-free access to the major EU market area, as well as a fully competitive location for EU companies to operate.
Foreign Ownership of Business
In principle, foreign ownership of business is unrestricted. However, some limitations apply to specific sectors, namely fishing, primary fish processing, energy production and aviation. A wide range of portfolio investment options are available through licensed securities trading companies.
A.3 Tax System
The Icelandic tax system is relatively simple and effective. The emphasis has been to simplify it further, reduce tax rates, broaden the tax base and conclude more double taxation conventions, which will increase the competitiveness of Icelandic corporations and attract foreign investors. With corporate income tax of 20% Iceland ranks among the lowest tax rates within the OECD member countries.
After the financial crisis hit Iceland in October 2008, the Central Bank of Iceland is authorized upon approval from the Minister of Economic Affairs to issue rules that limit or stop certain types of cross border capital movements or foreign exchange transactions related thereto, that in the Central Bank’s estimation cause serious and substantial monetary and exchange rate instability. The Central Bank’s legal authority to limit or stop these certain types of cross border capital movements and foreign exchange transactions is based on Paragraph 1 of Temporary Provision I of the Foreign Exchange Act No 87/1992. The Provision further authorises the Central Bank to impose repatriation obligation on resident parties. According to the provision the authorization is currently valid until August 31 st , 2011. For further information, please visit the website of the Central Bank of Iceland: http://www.cb.is.
Some characteristics of Icelandic tax law:
Corporate income tax of 20% on net income levied by the state only
Dividends received by corporations are not taxable
No requirements relating to percentage of stock ownership in the corporate payer apply
Consolidated returns available for corporations under 90% common control
Participation exemption available to domestic legal entities
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 legislation on “thin capitalization”
No basket system regarding the foreign tax credit
Taxes on Businesses
Companies which reside in Iceland, and Icelandic branches of foreign resident companies, are liable for corporate income tax (national income tax) on their net earnings. The corporate tax rate is 20% and no local corporate tax rate is applied. All businesses are charged a specific fee to Ríkisútvarpið ohf. (the National Radio). Net worth taxes on companies in Iceland have been abolished. Real estate taxes are paid locally by businesses, along with local service charges. Financial companies are liable for a specific tax on their total liabilities.
Personal Income Taxes
Individuals resident in Iceland are subject to income tax at the following rates:
Up to ISK 209,400.............................37.31%
ISK 209,401- ISK 680,550..................40.21%
Over ISK 680,551 ..............................46.21%
Personal income tax is withheld at source and paid as you earn. It is divided into national income tax (22.9-31.8%) and municipal income tax (averaging 14.41%), making a total of three progressive income tax rates of 37.31%, 40.21% and 46.21%. Personal allowance is granted in the amount of ISK 44.205 pr. month, which makes an annual income of ISK 1,481,004 (USD 12,903) tax-free. Financial income of individuals is taxed at the rate of 20%. Resident individuals are taxed on their worldwide income. Non-resident individuals become tax residents if they stay in the country for more than 183 days out of a 12-month period. A non-resident individual is taxed on Icelandic-sourced income.
A.4 Financial Reporting and Audit Requirements
Every company which resides and operates in Iceland must submit annual accounts that comply with statutory accounting rules and disclosures, and reflect a true and fair view of the company’s assets, liabilities, results and financial position. Presentation is modelled upon standard EU requirements. The requirement of adjustments being made to revalue assets and liabilities on the principles of inflationary accounting was abolished in 2001. Companies that are above a certain size, and are publicly traded and have subsidiaries, are required to prepare consolidated group accounts. Tax returns are filed with local tax authorities. Corporations registered in Iceland, with the main part of their income from foreign sources, can apply to keep their books of accounts and records in a foreign currency. Publicly traded companies are allowed to issue their share capital in a foreign currency. Other non-publicly traded limited liability companies, with the main part of their income from foreign sources, are also allowed to issue their share capital in a foreign currency provided that certain requirements are met.
Source: Doing Business in Iceland 2011 brochure from http://www.invest.is