Iceland

Inventory valuation

The valuation method of raw materials and finished goods is on a first in first out (FIFO) basis or via the average cost method. When computing the value of produced goods, both direct and indirect production cost must be taken into account. For tax purposes, inventories can be further written down at a rate of 5% of calculated value.

Last in first out (LIFO) is not permitted.

Capital gains

Capital gains are treated as taxable income in the year that transfer of ownership occurs and, as such, taxed as part of the general corporate income. Capital gains are generally not subject to withholding tax (WHT). There are rules that allow full deduction of net capital gains from the sale of shares, so, in general, corporations are not subject to taxation on capital gains from sale of shares.

Dividend income

Dividend income is treated as taxable income and taxed as a part of corporate income. There are extensive rules that allow full deduction of the dividend, so, in general, corporations are not subject to taxation on dividends. Dividends are subject to WHT (currently 21%), which is a temporary payment towards the final tax assessment. However, dividends paid between resident limited liability corporations are not subject to WHT.

Interest income

Interest income derived from bank deposits, mutual and investment funds, bonds, or other financial deeds; any kind of exchange rate profit; and any other income from monetary assets are subject to 22% tax.

Interest income of foreign parties is subject to 13% WHT in Iceland.

Royalty income

Royalties paid to residents are taxed at the standard CIT rate. Gross royalties paid to a non-resident are taxable at the standard 22% CIT rate and subject to withholding.

Profit from derivatives

Profits from derivatives are treated as profits/losses from sales and are subject to 22% tax. Losses from derivatives can be used against profits from derivatives within the calendar year.

Foreign income

Income earned abroad is generally taxed as a part of corporate income since a resident company is subject to CIT on its worldwide income.

Controlled foreign company (CFC) rules stipulate that profits of companies in low-tax jurisdictions must pay income tax of such a profit in direct proportion to shares, regardless of distribution. A low-tax jurisdiction is defined as a jurisdiction where the CIT rate is less than two-thirds of Iceland’s CIT rate (i.e. 14%, being two-thirds of 21%). See Controlled foreign companies (CFCs) in the Group taxation section for more information.

Double taxation of foreign income is avoided either through tax treaties or domestic tax provisions.