Double Taxation Agreements

Double Taxation Agreements (DTA) are treaties between two or more countries to avoid international double taxation of income and property. The main purpose of DTA is to divide the right of taxation between the contracting countries, to avoid differences, to ensure taxpayers' equal rights and security, and to prevent evasion of taxation.

Iceland has concluded several agreements on tax matters with other countries. Individuals with a permanent residence and with full and unlimited tax liability in either one of the contracting countries may be entitled to exemption/reduction from taxation of income and property according to provisions of the respective agreements, in absence of which the income would otherwise be subject to double taxation. Each agreements is different, and it is therefore necessary to check the respective agreement to ascertain where the tax liability of the respective person in fact lies, and which taxes the agreement stipulates. Provisions of tax agreements with other countries may mean that the Icelandic right to tax is restricted.

Tax benefits under DTA for payments can take place in two ways. On the one hand, there can be an exemption from tax payments or a reduced tax rate on respective payments. On the other hand, there can be a refund of deducted withholding payments.

To enjoy tax benefits in Iceland according to concluded DTA, a foreign taxpayer has to be subject to full and unlimited tax liability in the other contracting country with respect to his permanent residence or other circumstances.

NOTE: Exemption/reduction from taxation in Iceland according to agreements in force can only been achieved by applying for exemption/reduction on form 5.42 to the Director of Internal Revenue. Until there is an approved exemption with registered number one has to pay taxes in Iceland.