Computation of taxable income

20. Capital Gains

For corporations capital gains on the sale of assets is treated as ordinary taxable income. Taxation of capital gains from the sale of fixed assets can be deferred by purchasing other fixed assets that can be depreciated.

Capital gains for the sale of shares in the hands of a corporation are also treated as ordinary taxable income but can be deferred if new shares are purchased within two years from the sale.

21. Depreciation and Depletion

Annual depreciation is calculated as a percentage of the acquisition cost, but for other fixed assets the depreciation is calculated from depreciated book value.

Allowances for buildings and other structures are defined by the tax legislation, for example office buildings 1-3%, industrial plants 3-6%, storage tanks 3-6%, quays 6-8%, and drilling holes, electric transmission lines and temporary work camps 7.5-10%.

Various initial expenses as well as research and development costs may be deducted from taxable income in the year they accrue.

22. Treatment of Dividends

When a resident company that owns shares in another company receives dividends from the latter, the recipient company will not pay taxes on received dividends.

However when Icelandic companies pay out dividends they withhold 10% financial income tax at source. Where companies are concerned, this is considered a prepayment of regular income tax payable after assessment.

An individual shareholder, who is a resident of Iceland and receives dividends, pays a 10% investment income tax that is withheld at source by the company paying out the dividends.

The tax liability of a non-resident shareholder depends on whether he/it is treaty protected or not. In the case of there being no tax treaty, the domestic tax rules apply and normally this should result in a 10% tax for individuals and a 15% tax for companies, of which 10% is withheld at source.

23. Loss Carryovers

Operating loss carry forwards may be carried forward to the succeeding ten years. Carry backs are not permitted.

24. Transactions between Related Parties (Transfer pricing)

There are no special transfer pricing provisions in the Icelandic Tax Act but the “arms length principle” is implied in the Act. 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 a property is bought at an abnormally high price or sold at an abnormally low price.

The above provisions also apply to possible adjustments of taxable profits where an Icelandic business entity controlled by a foreign enterprise is subject to trade terms different from those that would apply between independent business entities.

25. Thin capitalization

Icelandic tax law does not include specific rules concerning thin capitalization of companies. However, Icelandic tax law contains a general anti-avoidance clause that may be applicable to such cases.

26. CFC legislation

There is no CFC legislation in Iceland.

27. Group taxation

Each entity is taxed separately. It is, however, possible to apply for Group taxation, if the minimum ownership requirements are fulfilled along with other requirements. The minimum ownership requirement is that the parent company holds, directly or indirectly, at least 90% of the shares of the subsidiary. The application is submitted in writing and has to be valid for the next 5 years from the application. If not, the tax authorities will not agree on joint taxation for the companies again for the next 5 years.

28. Permission to keep books and compile annual accounts in a foreign currency

Companies that meet certain requirements are allowed to seek approval to keep books and prepare annual accounts in a foreign currency. An application must be submitted to the Annual Accounts Register before the start of the fiscal year in question.

The text of accounting books shall be in Icelandic, English or Danish. A certain part of the books must always be in Icelandic because of reporting requirements of necessary information to the tax authorities. This applies to payroll accounting and invoicing for activities subject to VAT.

Companies that have received permission to keep books in a foreign currency shall nevertheless file a tax return in Icelandic krónur (ISK). The foreign currency amounts from the company books are to be converted into Icelandic krónur in a manner specified in the Income Tax Act.

29. Tax Periods

The calendar year is mandatory for all taxpayers, but subject to submitting an application, a corporate taxpayer may be granted a different fiscal year if special reasons exist.

30. Rulings

Advance rulings may be requested by companies on most aspects of the assessment of corporate income tax.