Iceland Tax & Business Guide - Deloitte

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Basic facts
Population 310,000 Inflation 6.7% (2006)*
Main languages Icelandic, English GDP per head US$49,150*
Currency Iceland krona (ISK) GDP growth 2.2% (2006)*
Economic communities European Economic Area, European Free Trade Association, OECD, WTO
GDP sources 8.4% agriculture, 15.7% industry, 75.9% services
*Economist Intelligence Unit estimates.
Political environment

Iceland is a parliamentary republic, in which the parliament (Althing) holds legislative power. The government is led by a prime minister selected on the basis of the party composition of parliament and formally named by the president. The current government is a coalition between the centre-right Independence Party and the centrist Progressive Party.

The prime minister, currently Geir H Haarde, has held office since Halldor Asgrimsson resigned in June 2006. The presidency is largely ceremonial, with limited powers; the current president is Olafur Ragnar Grimsson. The next elections will be held in May 2007 (legislative) and June 2008 (presidential).
Foreign trade and investment
Exports US$3.3bn (2006)* Imports US$5.1bn (2006)*
*Economist Intelligence Unit estimates.

Leading export markets: European Economic Area (EEA) and the EU (primarily the UK, Germany and the Netherlands).

Just over 78% of Icelandic exports go to the EEA,whereas 70% of imports originate in the region, evidence of IcelandÌs dependence on trade with the EU and Norway under the EEA agreement.

Major exports: Marine products, aluminium and manufacturing products.

The government encourages foreign investment to diversify away from marine products, particularly in energy-intensive industries that can take advantage of IcelandÌs abundant energy resources.
Business and financing
Business forms Public limited company, private limited company

The most common and economically important type of business in Iceland is the limited company. Other business vehicles are partnerships, co-operative societies, businesses run by the self-employed and branches of foreign limited companies.
Labour environment
Unemployment rate 1.3% (2006) Minimum wage None

Iceland is a member of the EEA and therefore incorporates all EU employment and social directives into its laws.

The workforce is heavily unionised. Although a minimum wage is not stipulated by law, a minimum wage for each position is determined by agreement made by each trade union with the employersÌ representatives. Salaries are negotiated on an individual Ïmarket wageÓ basis under the union contracts.
Taxation
Corporate tax
Main rate 18%

Resident companies pay tax on their worldwide income; non-resident companies are taxed only on income sourced in Iceland. Companies are resident in Iceland if they are registered with the company registry in Iceland, if their legal seat is in Iceland or if their place of effective management is in Iceland. The rate of tax is 18%, with a lower 5% rate for international trading companies (ITCs). The ITC regime will be repealed from 2008 and no new licences are being granted. Partnerships registered as taxable entities pay tax at 26%. Resident companies are allowed to deduct dividends received from other resident companies.
Individual tax
Main rate 22.75%

Resident individuals are taxed on their worldwide income; non-residents are taxed only on income sourced in Iceland. An individual is considered resident for tax purposes if that person stays in Iceland for six months or more. The tax rate on income other than investment income is 22.75% in 2007. Investment income is taxed at a flat rate of 10%.
Capital gains
Business gains taxed as income

Capital gains of companies are taxed as income, although deferral is possible in certain cases. Rollover relief is possible for gains of companies on the sale of shares. Gains derived by individuals on non-business property are taxed as investment income, as are gains on the disposition of shares. Gains on business property are included in business income, with provision for rollover relief where applicable. Gains on the sale of a private residence are generally exempt if the property has been owned for more than two years.
Indirect tax
VAT standard rate 24.5% Lower rate 14%

Value-added tax (VAT) applies to most transactions at the 24.5% standard rate. Exports are zero-rated. A lower rate of 7% applies to certain foodstuffs, hotel accommodation, books and newspapers, and warm water, electricity and fuel oil used in domestic heating. Exemptions include medical services, vehicles using environmentally friendly power, insurance and a number of financial services.

Non-residents without a fixed place of business in Iceland must appoint a local VAT representative. Registration for VAT is compulsory for businesses, including representatives of foreign enterprises.
Tax administration and compliance
Tax year Calendar year

The tax year is the calendar year. Companies must make monthly advance tax payments, calculated on the basis of the previous yearÌs assessment. The tax return is due by May 31st following the end of the tax year. An assessment is raised by October 31st, and final tax due may be paid by further monthly instalments.

Employment income of individuals is taxed by withholding. Individual tax returns must be filed by a notified date, generally between two and three months after the end of the tax year. Tax is collected by an assessment that is raised by July 31st following the tax year.
Additional tax information
Withholding taxes Dividends 10% (in general; non-treaty rates may be increased up to 18% in some cases), Interest 0%, Royalties are taxed at normal corporate or income tax rates. The rates may be reduced by provisions in an applicable double tax treaty.
Tax treaties Iceland has concluded more than 20 double tax treaties.
Dividends Dividends are taxable on individuals at a 10% rate.
Revenue protection There are transfer-pricing rules but no anti-tax-haven (CFC) legislation.
Groups Group consolidation is possible for 90%-owned groups.
Incentives International trading companies (to be phased out by 2008).
Other taxes Customs duties, Inheritance tax, Local income tax, Net worth tax, Real estate tax.