Chapter 16: Taxation Code of Conduct

1. Chapter 16: Taxation Code of Conduct Country Session 3-4 March 2011

2. Code of Conduct EU - Principles Code of Conduct - Political Committment Assessment of potentially harmful tax regime Five Code criteria for harmfulness Elimination of „bad behaviour“ by MS MS should not try to attract non-resident companies with „unfair“ tax rules Code of Conduct Group – Technical Group

3. Business Taxation Legal Framework Act no. 90/2003 on income taxation General rules – both corporate and personal income taxation Specific Acts on business taxation Act no. 155/2010 on special tax on financial institutions Act no. 99/2010 on concessions for new investment in Iceland Act no. 152/2009 on support for innovation companies Act no. 170/2008 on taxation of hydrocarbon extraction Act no. 86/2007 on taxation of merchant vessel activities

4. Act no. 90/2003 on Income TaxGeneral rules • Resident companies are taxable on their world wide income • The corporate income tax rate is the same on all types of income • The tax rate for corporate taxpayers: • 20% for limited liability companies, both public and private • 36% for non-transparent partnership and other legal entities • Tax base – net corporate profit (income – expenses) • Full and unlimited liability • Residency-registered companies • Deemed residency – real management in Iceland

5. Act no. 90/2003 on Income TaxDeductions • Business expenses linked to the taxable income • Loss from outstanding business claims • Write-down of goods held in stock • Lost shares in bankrupt companies • Depreciations of assets – declining balance method • Operating losses –carry forward up to 10 years

6. Act no. 90/2003 on Income TaxDividends • Participation exemption – certain conditions • Dividends are included in taxable income • Dividends are deductible if the receiving company owns at least 10% of the payer • Operating losses must be used before deduction

7. Act no. 90/2003 on Income TaxCapital Gains of Shares • Participation exemption – certain conditions • Capital gains are included in taxable income • Capital gains are deductible if the receiving company owns at least 10% of the payer on the selling date • Operating losses must be used before deduction

8. Act no. 90/2003 on Income Tax Entities exempt from taxation • Treasury, government institutions and government enterprises run by the Treasury and under full state guaranty • District and local governments, also companies and institutions operated by them under full guaranty • Foreign states and institutions, from immovable property linked to their recognised activities in Iceland. • Legal entities domiciled in Iceland if their net income is only spent for public goods and their sole aim is to conduct such work. • Companies, fund and institutions that are not economic operators. • Those exempt from taxation via specic Acts. • Those entities, except foreign states and institutions, are nonetheless to pay 20% tax on capital income

9. CFC - rules • Profits of companies located in low tax jurisdictions are taxed in the hands of an Icelandic owner whose holding is at least 50% • A jurisdiction is considered to be low tax region if the income tax levied are lower than 2/3 of the Icelandic income tax. • CFC – rules do not apply: • DTA or TIEA between Iceland and the jurisdiction • The foreign company is founded or registered in EU, EEA or Faroe Islands with real business activities. DTA with new OECD Art 26 must also be in place. Without a DTA the taxpayer him/herself shall provide necessary information on his/hers residence.

10. General Anti-Abuse Rule • If a legal entity liable to tax enters into a contract that differs considerably from what is considered to be normal in such business, the tax authorities have the power to treat the contract as transparent and levy the tax according to what would be considered normal on the basis of the arm‘s length principle.

11. Rulings • Both resident and non-resident companies may request advance rulings on most aspects of corporate income taxation from the Directorate of Internal Revenue. A ruling can only be obtained on tax consequences of a future transaction and is only issued if it is of substantial importance.

12. Special Tax on Banks and other financial institutions • Act no. 155/2010 – In force from January 2011 • Will be reviewed before the end of the year. • Taxable entities: Banks, credit- and savings institutions operationg under a license. Furthermore, all branches of foreign banks and financial institutions that accept deposits in Iceland. • Exempt entities: Institutions established under a special law and wholly owned by public bodies. Also entities that have officially filed for bankruptcy. • Tax base: Total liabilities. No deduction is allowed. • Tax rate: 0,045%

13. Concessions for New Investment in Iceland • Act no. 99/2010–In force from July 2010 until December 2013 • Notified and accepted by EFTA Surveillance Authority (ESA) • Special economic and regional assistance • Based on Commission Regulation No 800/2008 • Certain tax concessions under specific conditions • The income tax rate is fixed at a maximum level for 10 years. • Lower stamp duties – max 0,15%. • Depreciation allowed down to zero – no residual value. • 40% rebate from social security levies. • 30% rebate from real estate taxes levied by local governments.

14. Support for Innovation Companies • Act no. 152/2009 – In force from 2010. • Under consideration by ESA. • Applies to companies that are owners of research and development projects certified by the Icelandic Center for Research • Tax concessions: • Special tax credit against assessed income tax of the company amounting to 20% of the R&D cost paid. Maximum amount. • Reimbursement if 20% of R&D cost exceeds the assessed income tax. • Also tax credit for buyers of new shares of R&D companies, both for individuals and companies. Maximum amount.

15. Taxation of Offshore Hydrocarbon Extraction • Act no. 170/2008 – In force from January 2010. • No activties yet. • Taxation in form of a production fee and hydrocarbon tax. • Production fee: Progressive fee on the basis of number of barrels. The first 10 million barrels per year are exempt. • Hydrocarbon tax: The rate is progressive from 5.5% to 55%. The tax base varies considerably from the corporate income tax base (broader). • The company are also to pay general corporate income tax. • No activties yet. • Present taxation under complete review.

16. Taxation of Merchant Vessel Operations „Tonnage Tax“ • Act no. 86/2007 – In force from January 2009 • Under consideration by ESA • Shipping companies can opt for tonnage tax instead of ordinary corporate income tax. Minimum three years. • Tax base: Net tonnes (NT) • Tax rate: Up to 25 thous 30 Ikr per 100 NT • Registration of merchant vessels by application. Icelandic International Ship Register (IIS) • No applications. Hence, no shipping company subject to tonnage tax in Iceland.

17. Summary • No harmful tax measures in Iceland according to EU criteria • Iceland being an OECD MS is committed the standards set by the OECD project on harmful tax measures

18. Thank you for your attention !