As a member of the OECD, Iceland has developed its internal legislation on transfer pricing (TP) regulations in the spirit of the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines).
Currently, the TP legislation is provisioned in two main legal acts: (i) Income Tax Act No. 90/2003 (ITA) (Article 57), which establishes the foundation for transfer pricing regulations but does not explicitly reference the OECD Transfer Pricing Guidelines; and (ii) Regulation No. 1180/2014 (the Regulation), which covers TP documentation and transfer pricing between related legal entities and explicitly incorporates the OECD Transfer Pricing Guidelines.
Arm’s Length Principle
The arm’s length principle in Iceland is governed by Income Tax Act no. 90/2003 which provisions that the arm’s length principle is key to transfer pricing laws, ensuring that businesses under common control set their prices as if they were independent companies. Article 57 of ITA lays out this rule, stating that transactions between related companies must reflect fair market value. If prices in these transactions are too high or too low compared to what unrelated businesses would agree upon, tax authorities have the power to adjust taxable income to correct the difference. This applies to all types of transactions, including goods, services, assets, and financial agreements.
To help businesses follow this rule, Regulation No. 1180/2014 provides guidelines and directly refers to the OECD Transfer Pricing Guidelines.
Related Party Definition
In Icelandic tax law, related parties are businesses or individuals that have a close financial or managerial connection, which could affect how they set prices in their transactions. Article 57 of ITA defines related parties based on ownership, control, or family ties to ensure fair taxation and prevent profit shifting. According to the law, a party is considered related if:
- They are part of the same corporate group under Icelandic accounting laws.
- One company owns or controls the other, either directly or indirectly.
- Both companies are controlled by the same business or person.
- The owners are closely related by family, such as spouses, siblings, or direct descendants.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Iceland are provisioned in Article 9 of the Regulation, as follows:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
Iceland does not prioritize methods but rather relies on the most appropriate method. However, the tax authority – Iceland Revenue and Customs (IRC) recommends that the three traditional methods (i.e., CUP, RPM, and CPM) should be used over the other methods (i.e., PSM and TNMM) wherever suitable. It also allows for the application of other methods.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Iceland:
In Iceland, the comparability analysis in transfer pricing is in line with the guidelines in Chapter III of the OECD Transfer Pricing Guidelines and supported by Article 10 of the Regulation. According to the law, both internal and external comparables are evaluated based on several key factors, such as (i) characteristics of the property or services; (ii) functional analysis; (iii) contractual terms; (iv) economic circumstances, and (v) business strategies.
Icelandic regulations do not prioritize domestic comparables over foreign ones, thus allowing for more freedom when selecting the appropriate comparables. Comparability adjustments, though not regulated by law, are commonly applied in practice to ensure the reliability of the analysis.
Documentation Requirements
In Iceland, the transfer pricing documentation requirements are aligned with the OECD Guidelines and provisioned in the Regulation, articles 3-11. The documentation consists of:
- Ordinary TP Reporting, and
- Country-by-Country (CbC) report.
Ordinary TP Reporting
According to the rules, in Iceland, the transfer pricing documentation does not require a Master file or Local file to be filed separately, but instead, general reporting is conducted together which provides information typically found in both files, such as the nature and extent of related-party transactions; the nature of the relationship between related entities; the pricing method used and how it complies with the arm’s length principle, financial statements, functional analysis, comparative analysis, and contracts impacting the transactions.
In Iceland, companies are required to maintain transfer pricing documentation if they either earn more than ISK 1 billion in a fiscal year or have total assets exceeding ISK 1 billion at the beginning or end of the year. The documentation can be prepared in Icelandic and/or English, and need to be submitted within 45 days to the tax authority. Transfer pricing documentation should be kept for seven years from the end of the financial year.
Country-by-Country Reporting
- Multinational enterprise (MNE) groupings having consolidated income of more than EUR 750 million in the preceding fiscal year are subject to CbC reporting in Iceland.
- Key financial information to be included in the reporting includes total income, profit or loss before taxes, income tax paid, stated capital, accumulated profits, number of employees, and tangible assets (apart from cash).
- Typically, an MNE group’s Icelandic parent company has 12 months from the end of the fiscal year to submit the CbC report to the IRC. As an alternative, the group may designate a surrogate parent organization to submit on its behalf in a different jurisdiction.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
Iceland uses only MAP to manage and resolve international tax disputes, in compliance with OECD guidelines. Taxpayers can settle disagreements about the interpretation or implementation of tax treaties using the MAP, which aims to guarantee the proper application of tax treaties and handle related issues. Important features of Iceland’s MAP include:
- Application of treaty anti-abuse provisions, transfer pricing cases, and circumstances where domestic anti-abuse laws are enforced are only a few of the concerns for which taxpayers may seek MAP assistance. A taxpayer may still apply for MAP assistance even if they have settled an audit or pursued domestic legal remedies.
- Taxpayers can start a MAP request by getting in touch with the IRC, even though Iceland hasn’t released official guidelines on the MAP procedure yet. In cooperation with the pertinent authorities of the treaty partner nation, the IRC is in charge of managing and resolving MAP cases.
- To efficiently settle disagreements, the IRC collaborates with its international counterparts. The objective is to eliminate double taxation and other problems resulting from varying interpretations by coming to a mutual agreement that complies with the terms of the relevant tax treaty.
Penalties
In Iceland, if a company fails to comply with transfer pricing documentation requirements, it may face the following fines as regulated in the ITA:
- Not maintaining required documentation → Fine of up to ISK 3 million.
- Failure to provide documentation within 45 days when requested → ISK 3 million fine.
- Providing insufficient or incomplete documentation within 45 days → ISK 1.5 million fine.
These fines can be applied for up to six prior fiscal years, with a maximum total penalty of ISK 6 million.
Taxation at a Glance
Iceland, a European island, located in the North Atlantic Ocean is home to a population of 360,000 and operates with the local currency of the Icelandic króna (ISK). Fiscal policies are administered by the official tax authority named the Iceland Revenue and Customs. The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 21% and 37.6% |
VAT | 24% |
Withholding tax on dividends to non-residents | 21% |
Withholding tax on interest to non-residents | 13% |
Withholding tax on royalties to non-residents | 22% |
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