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12.4.1. Main Rules

Iceland formally introduced specific transfer pricing rules in 2014. The rules were incorporated in Art. 57 of Act 90/2003 on Income Tax (Income Tax Act), and are effective from 1 January 2014. Prior to that, the tax authorities relied on a general anti-avoidance rule embedded in the same Art. 57 of the Income Tax Act to readjust related party pricing.  The new rules establish that transactions between related parties must be conducted at arm’s length, and require certain associated parties to substantiate their transfer prices through adequate documentation.

On 13 October 2016, the Icelandic parliament passed legislation on government actions against tax evasion including documentation requirements and Country-by-Country (CbC) reporting.

Definition of Related Parties

The law initially did not distinguish between resident and non-resident related persons, and the transfer pricing rules therefore also applied in purely domestic situations. A June 2015 law amendment explicitly clarified that the transfer pricing rules apply only to transactions between a resident and a non-resident. Purely domestic situations are now, therefore, outside the ambit of the rules. Parties are deemed to be associated, if:

  • They are part of a consolidated group, or under direct or indirect majority ownership or managerial control by two or more enterprises within a consolidation;
  • One entity holds, directly or indirectly, majority ownership in another entity; or
  • Both entities are, directly or indirectly, majority owned by or under the administrative control of individuals related by marriage or family ties.

Applicable Transfer Pricing Methods

The following TP methods apply to transactions between related parties:

  • Comparable uncontrolled price (CUP) method;
  • Resale price method;
  • Cost-plus method;
  • Transactional net margin method (TNMM);
  • Profit split method; and
  • Other methods.

There is no hierarchy of methods prescribed under the domestic law, instead, a transfer pricing method can be selected based on the most appropriate method criterion and based on the OECD transfer pricing guidelines.

Use and Availability of Comparables

A fresh benchmarking study is recommended every three years based on the OECD transfer pricing guidelines. There is no formal requirement regarding the inclusion of local comparables in the benchmarking set, and no obligation to use a particular database. The tax authorities do not resort to secret comparables.

The use of comparables depends on the facts and circumstances of the transactions. Taxpayers may use internal or external comparables for determining the arm’s length price.