Iceland

Foreign currency financial statements/Accounting in foreign currencies

Companies can apply to the Registry of Annual Accounts for an authorisation to keep their books and prepare their annual accounts in a foreign currency. An application must be filed no later than two months before the beginning of the company’s fiscal year. The authorisation is valid for five years, and the Registry of Annual Accounts is responsible for ensuring that the authorised companies continue to fulfil one or more of the following necessary conditions:

• The company’s main business operations take place abroad or the company is a part of a foreign company group.
• The company owns foreign subsidiaries or shares in foreign companies, and its main business transactions are with those companies.
• The company’s main place of business is Iceland, while a considerable number of their transactions are in foreign currencies.
• A considerable portion of the company’s investments and related debts are in foreign currencies.
• The functional currency is registered at the Central Bank of Iceland or the company’s commercial bank.

If the company deems that it no longer fulfils the conditions, it must notify the Registry of Annual Accounts. The Registry can postpone its decision of the authorisation’s discontinuance for two fiscal years if the situation that is causing the fact that the company does not continue to fulfil the necessary conditions is deemed to be temporary.

The average exchange rate for the fiscal year must be used when converting income and expenses, depreciations included, into Icelandic króna. The exchange rate at the end of the fiscal year must be used when converting assets, debts, and capital. Exchange rate differences that may arise do not affect income on profit and loss accounts.

Rules of Foreign Exchange

In 2008, the Central Bank of Iceland issued rules on foreign exchange in order to restrict or temporarily prevent certain types of cross-border capital movements or foreign exchange transactions related thereto, which, according to the Central Bank of Iceland, can cause serious and considerable instabilities in exchange rates and financial matters. These rules were later added to Act No. 87/1992 on Foreign Exchange.

The Act on Foreign Exchange defines capital movements as:

• The issue, sale, or purchase of shares, debt instruments, drafts, unit shares in mutual funds, and other long-term and short-term securities.
• Deposits in and withdrawals from accounts with depository institutions.
• Lending, borrowing, and the issue of securities not related to international transactions with goods and services.
• The import and export of share certificates and domestic and foreign currencies.
• Forward contracts, options, currency and interest-rate swaps, and other related foreign exchange transactions in which the Icelandic króna is one of the denominated currencies.
• Presents, grants, or other transactions equivalent to the ones detailed above.

With new rules, which entered into effect on 14 March 2017, the restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency have largely been lifted. Restrictions on the following will remain in place, however: (i) derivatives trading for purposes other than hedging, (ii) foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking, and (iii) in certain instances, foreign-denominated lending by residents to non-residents.

Cross-border mergers

Rules regarding taxation in relation to cross-border divisions and cross-border mergers between Icelandic LLCs and LLCs from EEA and EFTA countries are now in the Icelandic Tax Act. Tax will be levied on uncapitalised profit, which can be postponed for five years.

Base Erosion and Profit Shifting (BEPS)

The Icelandic government participated in full in formulating and approving the G20/OECD BEPS Action Plan.

The government has implemented Action 4 on interest limitation, Action 7 on definition of permanent establishment, and Action 13 on transfer pricing documentation and CbC reporting. Additionally, Iceland participated in the creation of the multilateral instrument (MLI) as represented in Action 15, and the MLI was been signed by the Icelandic government on 7 June 2017.

Although Iceland is not a European Union (EU) member state, it is a member of the European Economic Area, so its legislation must comply with EEA rules and avoid infringement of the four freedom principles as provided in the EEA Agreement.

Common Reporting Standard (CRS)

Icelandic authorities have implemented the CRS in its domestic legislation. The Standard is in accordance to The Standard for Automatic Exchange of Financial Account Information as developed by the G20/OECD in the year 2014.