Iceland Info
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Home Country: iceland
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 Posted: Sun Oct 22, 2006 6:23 am Post subject: DOING BUSINESS IN ICELAND |
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DOING BUSINESS IN ICELAND
TYPES OF BUSINESS PRESENCE
The most common and economically important type of business in Iceland is the limited company. Other structures are partnerships, co-operative societies, businesses run by the self-employed and branches of foreign limited companies.
Limited Companies and Branches of Foreign Companies
There are two types of limited companies in Iceland, public and private, regulated by two separate Acts. These Acts are in line with the requirements of the company law provisions of the EEA agreement.
Foreigners investing in Iceland have customarily chosen to establish limited companies or branches of limited companies. Tax considerations have historically played a large role in that decision. Furthermore, corporate form offers the benefits of limited liability, while partnerships entail full and unlimited liability for all partners.
Foreign public or private limited companies and companies in a corresponding legal form having legal domicile within the European Economic Area may engage in activities with the operation of a branch in Iceland.
Corporate income tax: 18%.
Limited companies and companies in a corresponding legal form domiciled outside the European Economic Area may operate a branch in Iceland, if this is permitted in an international treaty to which Iceland is a party or by the Minister of Commerce.
Corporate income tax: 18%.
Limited companies and branches are registered with the Register of Enterprises (Fyrirtækjaskrá).
Establishment Procedures
Incorporation Fees
The registration fee is ISK 174,980 (USD 2,800) for a new public limited company and ISK 98,480 (USD 1,400) for a new private limited company.
Number of Founders
A public limited company must have at least two founders, at least one of whom must reside in Iceland or be a resident and a citizen of an EEA or OECD country. A private company may be founded by one or more persons. At least one entity must reside in Iceland or be both a citizen and resident of an EEA or OECD country.
Maximum Number of Shareholders
No limits are set on the number of shareholders.
Initial Capital Requirements
A public limited company must have an initial capital of at least ISK 4 million (USD 64.800), and a private limited company at least ISK 500,000 (USD 8,100).
Articles of Association for Limited Companies
When a limited company is established a memorandum of association must be prepared containing a draft of articles of association, names and addresses of founders, subscription price of the shares and deadline for subscription and payment of subscribed capital. The draft of articles must contain information including the name and location of the company, its objectives, share capital, board of directors, legal venue, auditors and financial year. The articles of association are adopted by the shareholders at the first general meeting and the company must be registered with the Register of Limited Companies within six months of the date of the memorandum of association in the case of a public limited company or two months in the case of a private limited company. An unregistered company can neither acquire rights nor assume duties.
Other distinctions between public and private limited companies are as follows:
Public Limited Companies
Public limited companies are mainly aimed at seeking capital from a wide number of shareholders among the public at large, for example on the stock market. The minimum stock required for a public limited company is ISK 4 million (USD 64,800). Other minimum requirements are that the company has two founders, two shareholders, three directors on the board of directors, and a manager. The provisions on branches are similar for both public and private limited companies, except that disclosure requirements for the Register of Enterprises are somewhat stricter with respect to public limited companies.
Publicly Listed Companies
For companies quoted on Iceland Stock Exchange, a number of specific rules apply in addition to the Companies Act requirements. These rules, which are determined by the Ministry of Commerce and the Board of Iceland Stock Exchange, have become stricter in recent years. Two independent auditors must be appointed and at least one must be a state-authorised public accountant.
Private Limited Companies
Rules for private limited companies are simpler than for the public ones. The minimum stock required is ISK 500,000 (USD 8,100). Other minimum requirements are to have one founder, one shareholder, and one director (with one deputy) in cases where shareholders are four or less. There is [spam word detected] to have a manager.
On their establishment, private limited companies must state whether they have one or more shareholders. In one-party private limited companies, meetings of the board of directors and shareholders are not obligatory.
The Minister of Commerce can grant an exemption from the otherwise general principle that the majority of the board of directors and the general manager of a limited company must be domiciled in Iceland or in a country within the European Economic Area or OECD.
Branches of Foreign Companies
Branches of limited companies are registered with the Register of Enterprises and the head office must file the following documents:
*A copy of the articles of association of the head office.
*The incorporation certificate of the head office.
*A written commitment from the head office to abide by Icelandic law and Icelandic jurisdiction.
*A letter of representation for the branch manager together with documentation that the branch manager meets the requirements as to residency, citizenship and solvency.
*The Financial Statements of the head office for the preceding year.
A registered branch must have a name which includes the name of the foreign limited company.
Note that documentation filed with the Icelandic authorities must be submitted in certified Icelandic translation.
The registration fee is ISK 174,980 (USD 2.800)
Partnerships
A partnership is an association of two or more persons, including individuals, corporations or other legal entities, who operate a business as co-owners for profit. Many professions operate as partnerships.
No specific legislation governs the operation of a partnership, but relations between the partners usually require the preparation of a formal set of agreements (bylaws). Minimum accounting requirements are set out in the Accounting Act.
The tax percentage on those partnerships that pay income tax (some partnerships divide the income and assets between the partners) is 26% instead of 18% for companies, but then distribution of profit to the owners is not taxed.
Under Icelandic law, partners in a partnership have full and unlimited liability in solidum (“one for all and all for one”) which generally means that this is not an attractive choice of form for a foreign investor.
Sole Proprietorships/Self-Employed
Sole proprietorships are mainly confined to self-employed in Iceland and the form is rare for large enterprises. Sole proprietors are taxed on business income and any other [spam word detected].
Iceland traditionally has a higher level of self-employed persons than in neighbouring countries.
Residence Requirements for Board of Directors and Management
A public limited company must have a board of directors consisting of at least three persons, and must appoint at least one managing director. The managing director(s) and at least half of the members of the board must reside in Iceland or be residents and citizens of any other EEA or OECD country, but an exemption may be granted by the Minister of Commerce.
A private limited company shall have one or two persons on its board of directors if it has four shareholders or fewer; otherwise, the minimum is three persons. One or more managing directors may be appointed by the board, and if there is only one person on the board of directors he may also serve as managing director. The managing director(s) and at least half of the members of the board must reside in Iceland or be residents and citizens of any other EEA or OECD country, but an exemption may be granted by the Minister of Commerce. If there is only one person on the board of directors, he must fulfil the residence qualification.
Annual Requirements for Corporations
Income Tax Filing
Corporations and registered branches of non-resident entities must file an annual income tax return by the end of May, irrespective of whether or not they have any taxable income.
Audit Requirements
Every limited company in Iceland is required to elect an auditor or inspector and have its annual accounts audited. For public limited companies, a state-authorised public accountant must perform a full-scale audit. Publicly listed companies must elect two auditors, one of whom must be a state-authorised public accountant.
Mergers and Acquisitions
The Competition and Fair Trade Authority (Samkeppnisstofnun) is entitled to take action including the imposition of limiting conditions if a company which is created by a merger is likely to acquire a dominant market position. Planned or possible mergers may be referred to the Authority for consideration, and it can do so on its own initiative. An appeal against the Authority’s ruling may be lodged with its appeals board. Laws on competition are implemented by the Minister of Commerce.
A shareholder owning nine-tenths of stock in a company and controlling the same proportion of votes may jointly decide with the board of directors to redeem the holdings of other shareholders.
If one shareholder owns nine-tenths of stock in a company and controls the same proportion of votes, any of the other minority shareholders may insist on their shares being redeemed.
If a company’s articles of association do not stipulate how to determine the buying price of shares and no agreement can be reached, the value of the shares for redemption is assessed by officials appointed by a court.
Provisions concerning takeover bids
If a holding in a company which has publicly listed one or more classes of its shares on a stock exchange has been taken over, directly or indirectly, all the shareholders in the company shall be given the opportunity of relinquishing their holdings on comparable terms to a party who:
*has acquired 40% of the voting rights in the company or a comparable portion of its share capital;
*has acquired the right to appoint or remove a majority of members of the company’s Board of Directors;
*has received the right to direct the company on the basis of its statutes or through other means by agreement with the company; or
*has, on the basis of an agreement with other shareholders, the right to control 40% of votes in the company.
INCOME TAXES FOR CORPORATIONS
1. Rates
The income tax rate for corporations for 2005 is 18% on net income and 26% for partnerships with independent tax liability. For International Trading Companies the rate is 5%.
2. Local Income Taxes
None.
3. Capital Gains Taxes
Capital gains are added to other taxable income and taxed at the regular corporate rate.
4. Branch Profit Taxes
Branches of foreign corporations are taxed at the regular corporate rate of 18% on Icelandic sourced income.
5. Foreign Tax Relief
Double taxation relief is given for taxes paid by a resident of Iceland in those countries with which Iceland has double taxation treaties (see item 15). If a treaty does not exist a relief is given on the basis of domestic credit rules. No credit is granted for underlying corporate taxes paid in another country.
6. Classification of Corporations
There is no difference in tax rates based on classification of corporations, except for the difference in rates between corporations and partnerships described in item 1.
There are however two types of partnerships, one with independent tax liability, which pays the 26% income tax mentioned above, and the other, while not subject to tax liability, where income and assets are split between the partners and taxes are levied on them.
7. Payment of Taxes
All taxes are paid in the assessment year, which is the year after the operational year. The taxes are remitted in ten payments, due on the first day of each month, but no payments are made in January and in the month the assessment takes place.
Until the assessment takes place, which in recent years has been in October, a corporation must pay a proportion of the taxes levied in the previous year. In 2005, corporations must pay each month an amount equal to 10% of the tax levied for 2004 until assessment.
INCOME TAXES FOR INDIVIDUALS
1. Rates
The state income tax withholding rate for 2005 is 24,75% and the local income tax rate is 12,98%. The income tax is paid as the income is earned and withheld at source by the employer. A monthly tax deduction of ISK 28.321 is allowed. A 2% state income tax (surtax) is calculated on an individual's income over ISK 4.191.686 (ISK 8.383.372 for a married couple). This surtax is not withheld at source.
Investment income earned by individuals, such as interest, dividends and capital gains is subject to a financial income tax at the rate of 10%.
Seamen receive an additional tax deduction, amounting to ISK 768 per day spent at sea.
An employee’s contribution to a pension fund 4-8% is deductible from taxable income.
The monthly deduction of ISK 28.321 is transferable between married couples and people in common-law marriage.
2. Local Income Taxes
Local municipal taxes are withheld at source along with the state income taxes. They can vary from 11,24% to 13,03% between municipalities. An average figure is used for the purpose of calculating withholding tax. For 2005 the average rate is 12,98%. After the income tax year, the tax authorities assess the appropriate local tax rate for each individual, who then either is entitled to a refund or pays the difference to the tax authorities.
3. Capital Gains Taxes
Capital gains from the sale of homes are not taxed if the homes were owned for more than 2 years.
Capital gains derived from the sale of shares are taxed at the rate of 10%.
Capital gains for the sale of liquid assets, which does not represent a business income and is not obtained merely to sell with profit, is tax-free for individuals.
4. Foreign Tax Relief
Relief from double taxation is granted either in accordance with tax treaties or on the basis of domestic credit rules.
5. Tax Period
The tax period for individuals is the calendar year.
INCOME TAXES FOR NON RESIDENTS
Non-resident Individuals.
Non-resident persons are subject to tax on income from Icelandic sources, including but not limited to salaries, wages, and pensions paid by Icelandic sources, income derived from business carried out in Iceland, and from real property.
According to domestic rules, individuals staying in Iceland for longer than 183 days out of a 12 month period are subject to tax on their worldwide income. Individuals staying in Iceland on a temporary basis, i.e., less than 183 days, are taxed only on Icelandic-source income.
Tax rates and payment terms can vary depending on the type of income.
Exemptions from the above rules can be provided in double taxation agreements.
Non-resident Companies
Non-resident companies and other entities are subject to tax on their income from Icelandic sources at the regular corporate rate, subject to relief under a double taxation treaty. They are taxed in conformity with the rules applicable to companies domiciled in Iceland on income derived from business activities or participation in business activities with a permanent establishment in Iceland.
Withholding Tax Rates
Withholding tax rates on payments to non-residents are as follows: 15% on dividends paid to companies and 10% on dividends paid to individuals, 37,73% on royalty payments to individuals, 18% on royalty payments to limited liability companies and 26% to Partnerships. There is no withholding tax in Iceland on interest payments to non-residents.
Tax Treaties
Iceland has concluded double taxation treaties with the some countries.
OTHER SIGNIFICANT TAXES
Value Added (Sales) Tax
A 24.5% value-added tax is levied on any sale of goods, power, or services with various exceptions including the following:
*All export sales.
*Public health-care services.
*Schools and other educational institutions.
*Domestic and international passenger transportation and cargo transport between Iceland and foreign countries.
*Postal services.
*House rentals and sales and rentals of trade aircraft and vessels.
*Insurance services.
*Banking, the operation of other financial institutions and sales of bonds.
*Services to foreign entities if the services are rendered outside Iceland or if the operations of the non-resident company would be subject to VAT under the Icelandic VAT Act.
A 14% value-added tax is levied on the sale of the following goods and services:
*Groceries
*Hotels and other accommodations.
*License, for television and radio stations.
*Books, magazines and papers.
*Hot water, electricity and fuel oil used for domestic and commercial heating.
All corporations, individuals, and state and municipal entities that sell or grant any kind of taxable goods or services in Iceland are assessable.
The regular VAT assessment period is two months, and the tax is due within 35 days after the end of each period.
VAT must be paid along with custom duties when goods are imported.
Inheritance and Gift Taxes
The receiver is taxed for gifts on the same basis as normal income.
There is a general inheritance tax of 5%.
Payroll Taxes (Social Security)
The employer pays a social security fee that is assessed on all salaries and wages on a monthly basis. It is also calculated on taxable fringe benefits in kind, such as a companycar and housing. This tax includes a contribution to the Icelandic National Insurance Scheme as well as a contribution to the unemployment fund. The rate is 5,73%. For fishermen there is an additional insurance fee of 0.65% added to the 5,73% rate, which makes the total fee 6,38%.
Other Taxes
Industrial Fee. This is assessed on all industrial activities carried on by individuals, corporations, and other taxable entities. The rate is 0.08% on all operating income.
Property Tax. Land and property taxes at nominal rates are paid to the municipal authorities; the rates vary between municipalities and also with respect to use. The principal taxes and rates are those for property, water use, fire insurance and disaster insurance.
Net Worth Tax (Capital Tax). From the year 2005 the net worth tax has been abolished. |
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