Iceland reads, from a distance, as a small and manageable jurisdiction. The corporate rate is moderate, the company law is European, and an investor who has dealt with Norway or Denmark expects nothing unfamiliar. That expectation survives contact with the tax rates and does not survive contact with the reporting duties.
What surprises people is not the tax. It is that Iceland kept, in permanent statutory form, an apparatus built during a decade of capital controls, and that it operates on ordinary cross border transactions in ordinary times. Below is what that apparatus requires.
What the capital controls became
The Foreign Exchange Act, law 70 of 2021, opens with the opposite of a control. Article 1 provides that foreign exchange transactions shall be free unless otherwise follows from law, and that the same applies to cross border payments and capital movements. It then adds the sentence that matters: measures under Chapters II and III may nonetheless be taken to prevent serious disruption to stability in exchange rate and monetary matters and to financial stability.
That structure is the point. The controls were not repealed into nothing. They were converted into standing powers held by the Central Bank, exercisable by rules rather than legislation, with the freedom stated first and the exceptions immediately after.
The definitions in article 2 matter for anyone structuring through Iceland. A domestic party includes not only a legal person registered here but one that treats Iceland as its home under its own articles, or that has its actual management here, and branches in Iceland of foreign legal persons. The Act therefore reaches an entity that never intended to be Icelandic, on the same test tax law uses for residence.
The reserve requirement that can be switched back on
Article 4 authorizes the Central Bank, with the minister’s approval, to impose a special reserve requirement on inflows of foreign currency invested and reinvested in bonds issued in krónur, deposits in krónur, and units in funds that invest in either. It extends to investments or lending connected with an inflow made in order to invest, directly or indirectly, in those assets.
The mechanics are specific. The requirement is met by a financial undertaking buying a special deposit certificate from the Central Bank for the amount to be tied up, with a simultaneous forward sale back at a price determined by the rate on the certificate, and the forward contract cannot be varied during the term. The amount tied up may be as much as 75 per cent of the investment, and the holding period as long as five years.
The Act obliges the Central Bank to report to the minister and publish, at least every six months while the requirement is in force, a statement of why it needs to remain. The rules made under the article are numbered 223 of 2019. A carry investor should read the provision as a standing instrument with published parameters, not a historical curiosity.
The emergency switch, and what is on the list
Article 7 is the successor to the controls proper. In emergency conditions involving a substantial risk that financial stability will be disrupted by unrestricted capital movements, and where no other remedy is available, the Central Bank may with the minister’s approval make rules restricting or halting, for up to 60 days, a long list of transactions.
The list is broader than the phrase capital controls suggests. It covers cross border capital movements connected with dealings in and issues of financial instruments and of share capital that is not one, deposits into and withdrawals from credit institutions, lending, borrowing and guarantees not connected with trade in goods and services, prepayments and early repayments, imports and exports of securities and of currency, real estate transactions, investments in monetary claims, dealings in patents and other intellectual property rights, and gifts and grants. Under the second head it covers cross border payments for goods and services and, expressly, dividend payments.
Two further powers sit in the same article. The rules may require domestic parties and their branches abroad to deposit foreign currency they acquire, whether for goods and services sold or otherwise, into an account with a financial undertaking in Iceland. And where the transaction is between related parties, the amount subject to that repatriation duty may be measured by the terms general between unrelated parties. Transfer pricing is not confined to the tax code.
The reporting that happens in ordinary times
Article 10 is the provision that catches investors who never expected to file anything in Iceland at all, and it operates whether or not any restriction is in force.
Financial undertakings, payment institutions, electronic money undertakings and currency exchange offices operating in Iceland, and anyone intermediating foreign exchange transactions, must report all foreign exchange transactions, all cross border capital movements and all cross border payments, in domestic and in foreign currency, to the Central Bank in the form it determines. That is a comprehensive feed, not a sample.
Icelandic legal persons then carry a duty of their own, for transactions carried out without such an intermediary, to be notified within three weeks. It covers borrowing and lending between them and foreign parties of at least the equivalent of 100 million krónur, amendments to the terms of such loans, guarantee commitments and issues of bonds and other debt instruments where the principal reaches that figure. Derivative transactions with foreign parties are notifiable with no threshold at all.
Customs authorities report movements of currency across the border. Confidentiality provisions in other statutes do not limit the duty. The Central Bank may pass what it receives to the police and the tax authorities, and the police, the tax authorities and Statistics Iceland have access for their own statutory functions. Failure to provide information carries daily fines under article 13 of between 10,000 and 1,000,000 krónur, and unpaid fines do not lapse merely because the party later complies.
That feed is not the only one. Icelandic financial institutions run due diligence on their account holders and report to Skatturinn under the Common Reporting Standard, brought in by regulation 1240 of 2015 on the authority of article 92 of the Income Tax Act. Legal persons carrying on business in Iceland or entered in the company register, branches of foreign limited companies included, must separately register their beneficial owners with Skatturinn under law 82 of 2019, which is Directive (EU) 2015/849 arriving through Annex IX to the EEA Agreement.
The tax rates are the least surprising part
Against that background the tax is mild. Corporate income tax under the Income Tax Act, law 90 of 2003, is 20 per cent of the tax base for the ordinary corporate forms, with 37.6 per cent reserved for other legal persons.
Skatturinn publishes that non-resident companies pay 20 per cent withholding on dividends, and that a limited liability company resident in a state of the European Economic Area which received a dividend from an Icelandic limited liability company after 1 June 2008 can claim a full refund of the tax withheld, by filing the relevant return. Where a convention gives a lower rate, an exemption or refund can be applied for instead. The convention with the Netherlands, in force since 26 December 1998, sets that rate at zero where the beneficial owner is a company other than a partnership holding directly at least 10 per cent of the capital, and at 15 per cent otherwise, subject to a qualification in the same article for dividends deductible in Iceland.
That refund comes from Icelandic law, not from an EU directive. Iceland is a party to the Agreement on the European Economic Area and not a member state of the Union, and the Parent-Subsidiary Directive, Council Directive 2011/96/EU, cannot supply the same result: its article 2 confines it to companies taking one of the forms listed in its Annex I, and those are forms of the Member States.
For individuals the capital income rate is 22 per cent, applying to sales profits, dividends and interest. None of this is where the compliance cost of an Icelandic structure sits.
The low tax country rule, and the way out of it
Article 57 a attributes to an Icelandic taxpayer the profits of any company, fund or institution resident in a low tax country in which the taxpayer holds a direct or indirect interest, in proportion to that interest and without regard to distribution. It applies equally to a taxpayer who controls such an entity and derives a benefit from it, and the attributed income is taxed as comparable Icelandic activity would be.
A jurisdiction is a low tax country where the income tax on the entity’s profit is lower than two thirds of the tax that would have been imposed had the entity been resident in Iceland. The rule bites where at least half of the ownership is held directly or indirectly by Icelandic taxpayers, or where managerial control has existed at any point within the income year.
There are two exits. The first applies where the entity is covered by a convention between Iceland and the low tax country or another international agreement, provided all necessary information can be obtained under it and the entity’s income does not consist mainly of asset income. The second applies where the entity is formed and registered in another state of the European Economic Area, a member state of the EFTA convention or the Faroe Islands, carries on genuine economic activity there, and Icelandic authorities can obtain all necessary information under a convention. Where there is none, the burden of providing the information rests on the taxpayer. The minister is directed to define genuine economic activity by regulation, and the Act cites regulation 1102 of 2013.
Transfer pricing documentation and what failure costs
Article 57 imposes documentation on a legal person whose operating revenue in an accounting year, or whose total assets at the start or end of it, exceed 1 billion krónur. The obligation begins from the following accounting year and covers transactions with related legal persons. It does not apply where all parties to the transaction are resident in Iceland.
The duty is to record the nature and extent of the transactions, the nature of the relationship and the basis on which the transfer price was set, and to preserve the underlying material. The taxpayer confirms at filing that it is subject to the duty and that adequate documentation exists, must respond to a request for access within 45 days, and must keep the material for seven years from the end of the accounting year.
Above it sits the country-by-country report in article 91 a, which an Icelandic parent of a multinational group must file within twelve months of the end of its accounting year unless consolidated group revenue for the preceding year was below 750 million euro, the threshold used in the OECD implementation package for BEPS Action 13.
The sanction is administrative and it applies regardless of intent or negligence. The fine may reach 3 million krónur for each accounting year, is set at 3 million where nothing is produced within 45 days and 1.5 million where what is produced is inadequate and not remedied within 45 days, may reach back over the six income years preceding the decision, and is capped at 6 million in total. It falls by 90 per cent if the defect is cured within 30 days of the ruling, by 60 per cent within two months and by 40 per cent within three.
What this adds up to for an investor
Article 57 b completes the picture on the financing side. Interest and discounts above 100 million krónur on borrowing from related parties are deductible only up to 30 per cent of profit before tax, financial items, depreciation and write-downs. The exceptions are narrow: intra-group interest where the group qualifies for Icelandic joint taxation and all its companies are resident here, an equity ratio no more than two percentage points below the group’s, and financial and insurance undertakings.
Read together, these provisions describe a jurisdiction that decided, after a decade of controls, to keep the visibility rather than the restrictions. Money moves freely and every movement is reported. The rates are unremarkable; the filing obligations are not.
That is a workable place to invest and a poor place to improvise. The sequence is to identify, before any capital moves, which entity will be a domestic party under the Foreign Exchange Act, which transactions will cross the 100 million krónur line, whether the group will pass the 1 billion krónur documentation threshold, and who inside the structure is responsible for a three week notification that nobody will remind them about.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.