Israel – Iceland Tax Treaty

Business Activity in Iceland

Iceland is confined by the Atlantic Ocean, located between North America and Europe just below the Arctic Circle. Tourism, fishing, and aluminum production accounted for 26% of the total exports in 2022, manufacturing mainly alumni at 23%, and marine products- accounting for as much as 0.5%.

As a result, tourism has boomed in Iceland over the past decade which is now creating opportunities for luxury resort and hotel investments. Iceland has a vibrant startup and innovation community with several IT biotech startups that are focused on finding investors. The data center business hasn’t fully grown yet, but Iceland’s cold climate, safe environment, and 100% renewable energy make it an attractive option for lower power costs. As well, the film industry has expanded over the past decade, given that Iceland’s stunning landscapes are popular for international films and TV series. To attract production, Iceland offers tax incentives of up to 35%.

Applicability of the MLI

Both Iceland and the State of Israel have signed the Multilateral Convention, commonly known as the MLI. The MLI is a convention that is meant to fix double taxation treaties according to the BEPS framework. Israel signed the agreement on June 7, 2017, and ratified it on September 13, 2018. Iceland also signed the MLI on June 7, 2017, and ratified it on September 26, 2019.

Residency for Tax Purposes in Iceland

Residence of an Individual

A person is considered a resident of Iceland if they meet any of the following conditions:

• They have permanent residence in Iceland.
• They stay in Iceland for more than 183 days within any 12 months (including brief absences, such as vacations abroad).
• They work for more than 183 days within any 12 months on a ship or aircraft registered in Iceland.

To read about how an individual is considered a resident of Israel, click here.

Residency of a Company

A company is considered a resident of Iceland if:

• It is registered in Iceland.
• Its legal address, as stated in its articles of association, is in Iceland.
• Its place of effective management is in Iceland.

To learn about how a company is considered a resident of Israel, click here.

The Tax System in Iceland

Iceland Tax Authority is called the Iceland Revenue and Customs (Ríkisskattstjóri – RSK)

Income Taxation: 31.48%, 37.98%, 46.28%

Taxation of Companies and Branches: 21% and 37.6

VAT: 24%

Capital Gains Tax: 22%

Withholding Tax

Inheritance Tax and Estate Tax in Iceland

In Iceland, the inheritance tax is levied at 10%. By general rule, there is no inheritance tax on the first ISK 6,203,409 of an inheritance. Inheritance tax must be paid on all real estate in Iceland, regardless of whether the deceased or the payer lives in Iceland or abroad. As per Icelandic law, heirs must pay inheritance tax on any valuables they receive from an estate.

The tax also applies to:

• Prepaid inheritances or gift inheritances
• Gifts where the giver kept the right to use or benefit from the asset until their death or for a set period

When settling an estate, the deceased’s debts can be deducted from the assets. However, no deductions are allowed for prepaid inheritances.

Relocation to Iceland

Iceland follows the Nordic model, where employers, unions, and the government work together. Their goal is to improve areas like worker safety, wages, and working conditions. This collaboration encourages compromise and agreement, helping solve challenges while encouraging legitimacy in society.

Despite its small size, Iceland excels in innovation and creativity. Its strong Nordic welfare system, which provides healthcare, childcare, parental leave, and affordable education, empowers people to follow their passions and explore opportunities.

Iceland’s Jewish community is very small and has mostly stayed low-profile, though public signs of Jewish identity are starting to appear. Out of the country’s 300,000 people, only around 250 are believed to be Jewish, with most living in Reykjavik.

Real Estate Taxation in Iceland

Property rates are charged annually on all real estate, unless exempt by law, with the current owner always responsible for payment. Property rates include property tax, land rent, waste collection fees, and recycling center fees.

Type of Property and Tax Rates:

Residential Housing: 0.18% of the house and lot value         0.20% of the land value

Commercial Properties 1.60% of the building and land value   1.00% of the land value

Transfer of Funds from Israel to Iceland

According to section 170(a) of the Israeli Income Tax Ordinance, all payments transferred to non-Israeli residents are subject to a 25% withholding tax. However, this tax can be reduced or even waived if certain conditions are met.

In addition to assisting with withholding tax matters, our firm also helps with other issues related to transferring funds abroad. This includes providing an accountant’s approval regarding the payment of taxes, reviewing additional actions required under the CRS standard, and more.

Moreover, banks often raise many difficulties and charge high fees for converting shekels into other currencies. Therefore, consulting with a specialist before transferring the funds is highly recommended, click here to contact us.

For more information on money transfers abroad, click here.

Types of Business Entities in Iceland

Sole Proprietorship: A sole proprietorship is owned and managed by a single individual who is personally responsible for all debts and obligations of the business. The advantages include ease of setup, full control over business decisions, and all profits going directly to the owner.

Limited Liability Company: The most common form of business entity in Iceland is the Limited Liability Company. A limited liability company can be founded by one or more individuals or legal entities. The liability of the shareholders is limited to their contribution to the company’s share capital.

Partnership: In a limited partnership, at least one partner has unlimited liability while other partners have liability limited to their investment in the partnership. Partnerships offer flexibility in management and profit-sharing but require clear agreements to define the roles and responsibilities of each partner.

Private limited companies: At least one founder, one shareholder, and one director are required if there are four or fewer shareholders, and a manager is not necessary. In single-member private limited companies, board and shareholder meetings are not held. The rules for branches are similar for both private and public limited companies, but public companies have stricter disclosure requirements. Private limited companies must also state whether they have one or more shareholders upon establishment.

Public limited companies: Are designed for multiple shareholders and aim to raise capital from the public, such as through the stock market. They require a minimum of two founders, two shareholders, three directors on the board, and a manager is mandatory.

Incentive Laws in Iceland

Foreign specialists working in Iceland enjoy tax incentives, with only 75% of their income being taxed during the first three years. This does not apply unless they have been employed by an Icelandic business, they were not residents in Iceland during the last five years, and they have specialist knowledge rare in the country.

Iceland offers research and development incentives through tax credits for innovative companies, as outlined in Act Number 152/2009 and approved by the European Free Trade Association Surveillance Authority. Small and medium-sized companies receive a 35 percent credit on research and development costs, while other companies receive 25 percent. The annual cost limit is 1,100 million Icelandic krónur, with outsourced costs capped at 200 million Icelandic krónur. Companies can apply for these credits through the Icelandic Centre for Research.

The Icelandic government prioritizes sustainability, so investment projects that align with its climate goals and promote sustainable development will receive special support from Business Iceland.

Iceland offers a 5% tax discount on the purchase of eco-friendly assets, including machinery, vehicles, and vessels.

Iceland Double Tax Treaties