This article is a descriptive overview of the company legislation and the main tax planning opportunities in Iceland.
There are various different legal forms for business operations in Iceland and various laws and regulations apply to these forms. The most common business forms in Iceland are public or private limited liability companies. If certain requirements are met such limited liability companies can also be registered as international trading companies with only 5% income tax and other important benefits. It is also fairly common to establish partnerships in Iceland (taxable or non-taxable). The best choice, of course, depends on what kind of a business the chosen entity is supposed to carry out in Iceland. The foreign investor must consider, among other things, different rules regarding the liability of the owners, the procedural rules for the establishment of the entity, the rights and obligations of those in charge of the entity, and of course the domestic and international tax consequences of using each type of legal entity.
Different legal forms for business
Limited Liability Companies
The acts on public and private limited liability companies, respectively, are very similar to the Danish acts on such companies. Icelandic company legislation is in principle in line with the requirements of the company law provisions of the Agreement on the European Economic Area (EEA). The main difference is the lack of provisions on workers' participation in the Icelandic acts. Other companies with limited liability are cooperatives and partly limited associations (samlagshlutafélög), but they are discussed in a separate chapter.
Private limited liability companies have been an option in Iceland since 1995. A single party may establish a private company and be the sole shareholder. The share capital, IKr 500,000 ($5,000), must be paid into the company prior to its recording in the Registrar Office.
Stricter requirements apply to Public Limited Liability Companies as they are principally intended for business operations of many parties who intend to register the company at a stock exchange. The minimum share capital in public companies is IKr 4 million (approximately $40,000) and share certificates must be issued in the companies. There must be at least two founders, a minimum of two shareholders, at least one general manager for each company and no less than three persons on the board of directors.
The founders of an Icelandic company must mutually agree on a one memorandum of incorporation and the company's articles of association, which must contain information as specifically mentioned in the Company Act.
Shares are not issued in private companies, but the company can give its shareholders a certificate regarding their shareholding (not a commercial paper) and they can also get a certificate from the office of the registrar office concerning ownership. Public companies on the other hand issue stock shares, which are commercial papers (securities). Shares in both types of companies are freely transferable, unless limited by its own articles of association.
The board of directors of a private company must consist of at least three persons, unless there be four or fewer shareholders, then it is sufficient that the board consist of one or two persons. In case the board of directors of a company consists of one or two persons at least one reserve director must be selected. In a public company the minimum number of directors is always three.
A private company can hire one or more general managers, but it is not obliged to do so. However, a public company must have at least one general manager. General managers work under the authority of the board of directors and have various obligations according to the company legislation, the tax legislation and the company's article of associations, such as being responsible for the books of the company and signing tax returns.
Both directors of the board and general managers must fulfil certain personal requirements and at least the majority of them must be Icelandic, or from a country within the EEA or the OECD.
A shareholders' meeting wields supreme power in the affairs of a company in accordance with the company legislation and the company's articles of association. This does, however, not apply to a private company of a single party only. There a shareholder replaces a shareholders' meeting, makes decisions himself for and on behalf of the company and enters these in a record of minutes.
Branch offices
Foreign companies can generally establish a branch office in Iceland.
It is of course a much less complicated process to establish a branch than a limited liability company, but several basic requirements must be met before a foreign company can establish a branch in Iceland. All legal dealings resulting from the activities of a branch of a foreign company in Iceland will be subject to Icelandic laws and jurisdiction. Branch offices should in principle have the same rights and obligations in Iceland as domestic companies.
Each branch must have at least one branch manager to head the branch and at least one must have the power of procuration.
Partnerships
Partnerships (sameignarfélög) of two or more parties may be established with local district commissioners. The liability of members of partnerships is unlimited, i.e. they guarantee the company's liabilities by means of their entire assets. This form is among one of the oldest in Iceland. A partnership can elect to be taxable or non-taxable. The partnership agreement can be very flexible. Taxable partnerships can be very beneficial in structuring interest and royalty income.
Cooperative societies
Cooperative societies (samvinnufélög) can be registered in Iceland. There must be a minimum of 15 founders (the minister of commerce can provide for exemptions). The liability of members will be limited to the payment of a membership fee and the share of ownership of the society's funds. These companies are subject to the regular corporate tax rate and can benefit from the dividend deduction article of the tax law. Moreover there is no withholding tax on dividends distributions.
International trading companies
International trading companies (ITC), which fulfil certain requirements can receive a licence to operate as an ITC in Iceland. The rate of income tax levied on an ITC is 5% and it is exempted from net wealth tax and stamp duty on their activities.
An ITC can trade with foreign entities outside Iceland in goods which are not covered by the Agreement on the European Economic Area (mainly marine and agricultural products) and which do not originate in Iceland. An ITC can also act as an intermediary in the trading of services between foreign entities outside the Icelandic jurisdiction but may not provide other services nor provide such services to other parties. An ITC may also act as a holding company and have various other interests in intangible properties, and ships and aircraft.
Other forms of business
There are various other legal forms of conducting business in Iceland, than previously described, though not widely used, if used at all. This includes f.ex. the Act no. 159/1994, on European Economic Interest Grouping, which was passed by the Icelandic parliament to implement an EU directive on the subject. The Act provides for a limited scope of activities, but its main purpose is to develop the existing operations of the participating European companies. One can also establish companies (associations) that are a kind of a mixture between a limited liability company and a partnership (samlagsfélög and samlagshlutafélög). The latter type is treated as a limited liability company for corporate tax purposes, but the former is for tax purposes treated like partnerships and can therefore elect to be taxable or non-taxable associations.
Tax planning opportunities
Iceland can serve as a good location to manage various intra group activities for multinational enterprises. Iceland may also offer some tax advantages if it is used to channel certain types of income, such as dividends, interest and royalties.
Various multinational enterprises have already established Icelandic finance and holding companies, mainly for the following reasons:
combination of domestic and treaty law provides for tax free repatriation of EU profits to Iceland;
combination of domestic and treaty law provides for a minimal tax on interest income, royalties, etc. (Iceco with a Swiss branch);
based on a ruling, profits may be repatriated to the investor's home country with minimal Icelandic tax;
interim dividend payments possible;
no CFC legislation;
no thin capitalization rules;
0% withholding tax on interest;
interest deduction (without limits);
participation exemption for dividends;
over 20 tax treaties, including a US Treaty from 1975;
advance rulings available;
general corporate tax rate will be lowered down to 18% as January 1 2002 (along with various other tax benefits introduced in a new bill now pending before the parliament); and
Iceland is not, and is not likely to become, a member of the EU, and therefore not subject to proposed rules curtailing harmful tax competition.
Tax.is Law Office
Hamraborg 10
5th Floor
200 Kopavogur
Iceland
Tel: +354 555 6000
Fax: +354 554 3916