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New Tax Treaty between Iceland and Switzerland has entered into Force

The new income and capital tax treaty between Iceland and Switzerland entered into force on 6 November 2015. The treaty, signed 10 July 2014, replaces the 1988 income and capital tax treaty between the two countries.

Taxes Covered

The treaty covers Icelandic income taxes to the state and to the municipalities. It covers Swiss federal, cantonal and communal taxes on income and capital.

Withholding Tax Rates

  • Dividends - 0% if the beneficial owner is a company directly holding at least 10% of the paying company's capital for at least 1 year prior to the payment, or is a pension fund; otherwise 15%
  • Interest - 0%
  • Royalties - 5% for the use of or the right to use any patent, trademark, design or model, plan, secret formula or process, otherwise 0%

A protocol signed with the treaty includes the provision that if the holding period for the dividends tax exemption is subsequently met after the payment is made, the beneficial owner will be entitled to a refund of the tax withheld.

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State;
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State; and
  • Gains from the alienation of shares deriving more than 50% of their value directly or indirectly from immovable property situated in the other State; although an exemption is provided for:
    • The alienation of shares quoted on a stock exchange established in either Contracting State; and
    • The alienation of shares in a company that carries on its business in the immovable property from which the value is derived

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Double Taxation Relief

Iceland generally applies the credit method for the elimination of double taxation, but if the income is only taxable in Switzerland under the treaty, Iceland will apply the exemption method.

Switzerland generally applies the exemption method, but in the case of income covered by Articles 10 (Dividends) and 12 (Royalties) Switzerland may apply the credit method, a lump sum reduction, or a partial exemption.

Limitation on Benefits

A protocol to the treaty includes a limitation on benefits provision whereby the benefits of the treaty provided by Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 21 (Other Income) will not apply for income paid under a transaction or derived by an entity if the main purpose of the transaction or establishment of the entity was to obtain the benefits of the treaty.

Effective Date

The treaty applies from 1 January 2016.

The treaty replaces the 1988 income and capital tax treaty between the two countries, although the 1988 treaty will continue to apply for tax years and periods that have ended before the new treaty applies.

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