Companies may opt for consolidated taxation if a company owns at least a 90% share in another company. Consolidated taxation means, among other things, that losses of one company can be offset against profits of other companies. Consolidated taxation cannot be extended to non-resident companies or PEs of foreign companies.
When pricing or terms of business or financial arrangements between related parties are different from what might be expected to be in similar transactions between unrelated parties, tax authorities have the power to evaluate what the correct pricing should be and reassess taxes of the party in question. This applies to the general purchase and sale of goods and services, tangible and intangible assets, and any financial instruments. Tax authorities can reassess taxes for up to six years prior to the year in which the reassessment takes place.
Legal entities are considered related when they are part of a group, when they are under the direct and/or indirect majority ownership or management control of two or more legal entities within the group, when majority ownership of one legal entity over another is present in a direct or indirect manner, or when they are entities directly or indirectly majority owned or under the administrative control of individuals who have family ties (e.g. individuals in a marriage or registered partnership, siblings and persons related to each other in a direct line).
If a legal entity’s operating revenues in one fiscal year, or total assets at the beginning or at the end of the fiscal year, exceeds ISK 1 billion, it is bound to documentation duties from the next fiscal year regarding transactions with related legal entities abroad. The legal entity in question must then record information about the nature and extent of transactions with the related legal entity and information on what the price is based on.
The legal entity is obligated to keep data regarding transactions with related legal entities for seven years. If the tax authorities request access to documentation, the legal entity has 45 days to respond.
In addition to specific rules regarding transfer pricing in domestic law, it should be noted that there are also certain provisions in domestic law that contain the so-called ‘arm's-length principle’, which states that when a deal or transaction between the parties significantly differs from the norm in such transactions, the tax base can be determined and reassessed according to what the tax authorities consider to be normal in such circumstances.
Country-by-country (CbC) reporting regime
If applicable, CbC reports have to be filed no less than 12 months after the end of the company’s fiscal year.
Thin capitalisation rules are included in the Income Tax Act. The rules limit interest deduction to 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA). The rules apply in excess of ISK 100 million of interest expenses etc.
The rules do not apply if:
- interest expenses are paid because of intra-loan transactions within a group that is authorised for joint taxation in accordance to the Icelandic Income Tax Act or if the group fulfills the requirements for joint taxation, when all companies are resident in Iceland;
- it is demonstrated that the equity ratio does not deviate more than 2% from the equity ratio of the group, or
- the taxpayer is a financial institution or insurance company or a company owned by such parties and conducts similar operations.
Controlled foreign companies (CFCs)
Any individual who either directly or indirectly owns a share in any kind of a company, fund, or organisation domiciled in a low-tax jurisdiction must pay income tax on the profit of such corporations in direct proportion to one's own share, regardless of distribution.
The same applies to taxpayers chairing companies, funds, organisations, or associations in a low-tax jurisdiction from which they receive direct or indirect benefits. In order for the above to apply, the foreign party must be domiciled in the low-tax jurisdiction, half the ownership of the foreign party must be directly or indirectly in the hands of Icelandic taxpayers, or they must have effective management and executive control within the income year.
CFC regulations do not apply if a fund or an organisation is protected by a double tax treaty (DTT) between Iceland and the low-tax country or if such entities are registered in another EEA member country where they have legitimate business operations and the countries have assigned a DTT between them.