TAX NEWS - January 2010

Iceland: Parliament approves tax proposals

The Icelandic Parliament has introduced new tax legislation and approved extensive changes to the tax law, including new taxes on natural resources, changes to the income tax rules on companies and individuals, an increase in the VAT rate and a new tax on the net wealth of individuals.


Environmental and natural resources tax

New rules aimed at taxing natural resources came into effect on 1 January 2010 and will apply until 31 December 2012. A fee will be imposed on parties that manufacture and/or import carbon products for resale or for their own use. The term "carbon products" encompasses gas, gasoline, diesel oil, jet fuel and combustion oil. The fees are as follows:

- ISK 2.90 per liter of gas and diesel oil;
- ISK 2.60 per liter of gasoline;
- ISK 2.70 per liter of jet fuel; and
- ISK 3.60 per kilo of combustion oil.

A tax also will apply to parties that sell electricity or hot water to end users at the following rates:

- ISK 0.12 per sold kW hour of electricity; and
- 2% of the retail price of hot water.


Special tax deductions / aid for R&D companies

Individuals purchasing shares in R&D companies may deduct the purchase price from their taxable income, up to ISK 300,000 for individuals and ISK 600,000 for couples, provided the shares are held for three years. Legal entities may deduct their net investment in R&D companies (i.e. total shares purchased in R&D companies minus total shares sold in such companies) from taxable income, up to ISK 15 million. R&D companies may deduct 15% of R&D costs from their income tax due. If the tax due is lower than the calculated R&D deduction or if there is no assessed income tax, the deduction will be paid out to the company. The R&D cost base may not exceed ISK 50 million (ISK 75 million in specific cases) in any fiscal year.


Income tax

The Parliament approved the following changes to the Act on Income Tax on 21 December 2009:

- Currency gains – Foreign currency exchange rate gains from foreign deposit accounts are considered income and are based on the currency rate at the end of the year or on the date of withdrawal. Foreign currency exchange rate losses may be set off against gains. Foreign currency exchange rate gains are taxable at 18% for legal entities and individuals, although the first ISK 100,000 is exempt from tax for individuals.

- Companies – The income tax rate for limited liability companies is increased from 15% to 18% and for other legal entities from 23.5% to 32.7%. The capital gains tax rate is increased from 10% to 18%. A restriction is placed on deductions from business income for dividends received, which are only allowed once current and carryforward losses have been exhausted.

- Individuals – A number of changes have been made to the tax rules affecting individuals:
     . The individual income tax rates are increased as follows: income up to ISK 2,400,000 at 24.1% (37.22%, including the municipal income tax); income from ISK 2,400,001 – 7,800,000 at 27% (40.12%, including the municipal income tax); and income from ISK 7,800,001 and over at 33% (46.12%, including the municipal tax).
     . The tax on capital gains and interest is increased from 10% to 18%, with an exemption for interest under ISK 100,000.
     . 70% of an individual's income from real estate rental is taxable at 18%.
     . The personal tax credit for individuals is increased from ISK 506,466 to ISK 530,466.
     . Employer contributions to pension funds that are higher than 12% of the employee's premium calculation base plus ISK 2 million per year are taxable as the employee's income.
     . A new net wealth tax is introduced under which net wealth below ISK 90 million for individuals or ISK 120 million for couples is exempt from taxation, but net wealth above these limits is taxable at a rate of 1.25%.

- Entities and individuals with limited taxability –
     . Income from interest, royalties and capital gains is taxable on the gross amount without deductions (previously tax was imposed on net income).
     . Gross royalties are taxable at 18% for legal entities and gross dividends, interest and capital gains are taxed at a rate of 15%.
     . Gross dividends, interest, royalties and capital gains are taxable at 18% for individuals. Interest below ISK 100,000 is tax exempt.
     . Parties that have a permanent establishment or participate in the operation of a permanent establishment in Iceland are taxed in the same manner as residents, although individuals with limited taxability are not eligible for a personal tax credit.
     . Legal entities receiving payment for services in Iceland are subject to an 18% income tax (32.7% for entities other than limited liability companies) on the gross amount of the payment. Individuals receiving payment for services in Iceland are subject to a 15% income tax on the gross amount of the payment.
     . Legal entities are taxable at the general corporate rate on net profits from real estate; individuals are taxed at a rate of 18% on income from real estate, although 30% of income from real estate rental is exempt from taxation.


VAT (Value Added Tax)

A 1% increase in Value Added Tax rate from 24.5% to 25.5% became effective on 1 January 2010.