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Icelandic Parliament Passes Legislation on Measures Countering BEPS

On 13 October 2016, the Icelandic parliament passed legislation on government actions against tax evasion. Two of the main measures include new interest deduction limitations rules based on BEPS Action 4 and Country-by-Country (CbC) reporting requirements based on BEPS Action 13.

Interest Deductions

The legislation includes the introduction of an interest deduction limitation equal to 30% of EBITDA. However, certain exemptions are provided, including where:

  • The taxpayer's total related party interest expense/deduction is less than ISK 100 million (~USD 875,000);
  • The creditor is subject to tax in Iceland;
  • The equity ratio of the taxpayer is not lower than 2% below its group equity ratio (subject to certain restrictions); or
  • The taxpayer is a financial institution or insurance company, or a company owned by a financial institution or insurance company and involved in similar operations.

The interest deduction limitation will enter into force on 1 January 2017. Additional regulation on the implementation of the deduction limit will be issued by the Minister of Finance in the future.

CbC Reporting

The legislation includes the requirement that MNE groups operating in Iceland must submit a CbC report if meeting an ISK 100 billion (~USD 875 million) consolidated annual revenue threshold. The requirement to submit primarily applies to ultimate parent entities resident in Iceland. In cases where the ultimate parent of the group is not resident in Iceland, an Icelandic constituent entity of the group will be required to submit the CbC report if:

  • The ultimate parent is not required to submit a CbC report in its jurisdiction of residence;
  • The ultimate parent's jurisdiction of residence does not have an information exchange agreement with Iceland that provides for the exchange of CbC reports; or
  • The tax authority has notified the Icelandic constituent entity that there was a failure to exchange.

If there is more than one Icelandic constituent entity, only one is required to submit the report.

Whether the CbC report will be filed locally or overseas, notice of the reporting entity must be submitted to the tax authority by the end of the fiscal year concerned.

The CbC reporting requirements will enter into force 1 January 2017. Additional details of the requirements, such as content requirements, are not included in the legislation and will be issued through regulation from the Minister of Finance in the future.

Other Measures

The legislation also includes a number of other measures, including:

  • The introduction of a definition of permanent establishment into law based on the OECD Model;
  • The extension of the statute of limitations regarding reassessment and penalties in relation to taxable income and assets in low-tax countries from the standard six years to ten years; and
  • The strengthening of rules regarding customs.

Click the following link for the legislation on government actions against tax evasion (Icelandic language).

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