Deductible operating expenses are comprised of all the expenses and costs needed to provide, insure, and maintain income (e.g. interest expense, employee expense, travel expense, insurance expense).
|Assets||Depreciation rate (%)|
|Ships, ship equipment, and personal vehicles||10 to 20*|
|Aircraft and accessories||10 to 20*|
|Heavy machinery, industrial machinery, and equipment||10 to 30*|
|Rigs, pipeline systems, and more for the use of research and production of hydrocarbons||10 to 30*|
|Office equipment||20 to 35*|
|Machinery, equipment, and vehicles that are not covered in the above categories||20 to 35*|
|Residential, commercial, and office accommodation||1 to 3|
|Factory buildings, garages, warehouses, etc.||3 to 6|
|Greenhouses, piers, and lots connected to these assets||6 to 8|
|Boreholes, powerlines, and temporary work camps||7.5 to 10|
|Purchased proprietary rights for ideas and trademarks, such as copyrights, publishing rights, information rights, patents, and logos||15 to 20|
|Purchased goodwill||10 to 20|
* The depreciation base for these assets is their purchase value less earlier depreciations (book value).
The method used to calculate depreciation is the straight-line method.
Purchased goodwill can be written down at 10% to 20% per year.
Purchased fishing rights (quotas) cannot be depreciated.
Start-up costs for agricultural production rights can be depreciated without revaluation over five consecutive years. The following assets can be depreciated in full in the year they are initiated or paid with steady payments over five years:
- Start-up costs, such as enterprise registration and obtaining operation licences.
- Cost of research, developments, marketing, and obtaining patents and trademarks. If the use of individual assets does not fall into the same depreciation category, the depreciation base will be dependent on how much of it is used, so that if an asset is used for three-quarters or more for the same operation, the whole asset will have the same depreciation percentage.
Interest expenses are deductible, provided that the loan was taken for business purposes. It shall be kept in mind that interest limitation rules apply between related parties if certain conditions are fulfilled. See Thin capitalisation in the Group taxation section for more information.
As a general rule, 5% of bad debt can be written off. Certain conditions must be met in order to write off a higher percentage of bad debts.
Charitable contributions at up to 1.5% of total income are deductible.
Payments to obligatory pension funds for employees at a minimum of 11.5% of wages (or according to the minimum contribution in a collective agreement) are deductible.
Fines and penalties
Fines and penalties are not deductible.
Taxes levied on business profit are not considered to be deductible; consequently, CIT is not deductible. However, social security contributions and other labour taxes are deductible.
Net operating losses
Operating losses may be deducted from income from business and independent economic activity. Tax losses can be carried forward for ten years and utilised over ten years from the year that the loss was incurred.
No carryback of losses is allowed.
Payments to foreign affiliates
An Icelandic corporation can claim a deduction for royalties, management fees, and similar payments made to foreign affiliates, provided that such amounts are made on an arm’s-length basis and reflect services received. Interest at normal commercial rates paid to foreign affiliates generally will be allowed as a deduction on the condition that the loan terms are comparable to those that would have been agreed upon by unrelated parties.