The Double Taxation Relief (Taxes on Income) (Iceland) Order 1991

Explanatory Note

(This note is not part of the Order)

The Convention with the Republic of Iceland is set out in the Schedule to this Order.

Provision is made for business profits not arising through a permanent establishment to be taxed only in the country of the taxpayer’s residence. Profits attributable to a permanent establishment may be taxed in the country in which the permanent establishment is situated (Articles 5 and 7). Shipping and air transport profits are to be taxed only in the country in which the place of effective management is situated (Article 8). The Convention includes rules for determining taxable profits when a company in one country is related to a company in the other (Article 9).

The Dividends Article (Article 10) takes account of the imputation system of company taxation in the United Kingdom. Where the recipient is an individual resident of Iceland or an Icelandic company controlling less than 10 per cent of the voting power of the United Kingdom company, the tax credit payable will be equal to the tax credit which would be payable to a United Kingdom resident individual less a sum not exceeding 15 per cent of the aggregate of the dividend and the tax credit. The Article provides that entitlement to a tax credit may be withdrawn where the recipient of a dividend cannot show, if required to do so, that the shareholding was acquired for bona fide commercial reasons or in the ordinary course of making or managing investments and it was not the main object nor one of the main objects of that acquisition to obtain entitlement to the tax credit.

The Dividends Articles also provides that the rate of Icelandic withholding tax on dividends paid to a United Kingdom company controlling at least 10 per cent of the capital of the Icelandic company paying the dividend will be limited to a maximum of 5 per cent. In all other cases the Icelandic withholding tax will not be more than 15 per cent.

Subject to certain anti-abuse provisions the country of source will exempt from tax interest and royalties paid to a resident of the other country (Articles 11 and 12).

The earnings of temporary business visitors are, subject to certain conditions, to be taxed only in the country of the taxpayer’s residence (Articles 14 and 15). Fees received by a resident of one country in his capacity as a director of a company resident in the other may be taxed in the latter country (Article 16). Income derived from the activities of artistes and athletes may be taxed in the country in which these activities are exercised (Article 17). Government service salaries and pensions are normally to be taxed by the paying Government only (Article 19) while other pensions are to be taxed only in the country of the taxpayer’s residence (Article 18). Payments made to visiting students and business apprentices are, in general, to be exempt from tax in the country visited (Article 20).

Income from immovable property and gains derived from such property may be taxed in the country in which the property is situated (Articles 6 and 13). Capital gains arising from the disposal of movable property are normally to be taxed only in the country of the taxpayer’s residence. Gains arising from the disposal of assets of a permanent establishment or fixed base which the taxpayer has in the other country may be taxed in the other country.

Where income continues to be taxable in both countries, relief from double taxation will be given by the country of the taxpayer’s residence in respect of tax imposed by the other country (Article 22). There are provisions safeguarding nationals and enterprises of one country (Article 23). Provision is made for consultation and exchange of information between the taxation authorities of the two countries (Articles 24 and 25).

The Convention will enter into force when the legislative procedures in both countries have been completed and will have effect in the United Kingdom from 6th April in the following calendar year (Article 27). The date of entry into force will in due course be published in the London, Edinburgh & Belfast Gazettes.