Parent-Subsidiary March 3 rd 2011

The dividend concept Withholding tax on dividends Joint taxation Qualified participation Brief gap analysis Introduction

According to Art. 11 of Act No 90/2003 on income tax – dividends are defined as: normal dividend payments, any transfer of valuables to share owner with limited or unlimited liability or shareholders that must be regarded as income deriving from the ownership of the company if registered public limited companies or private limited companies, are liquidated and companies are not being merged, as noted in Article 51 of the Income Tax Act, the difference between the money received by the shareholders and their original purchase price is to be regarded as dividends. Reduction beyond the purchase price of the share capital paid out to shareholders is also to be regarded as dividend. The dividend concept

Act No 94/1996 on Withholding Tax on Financial Income a state income tax of 20% shall be withheld at source on dividend payments to companies with a full and unlimited tax liability in Iceland it is the company paying the dividends that is the withholding agent the withholding tax is a provisional payment of income tax, unless otherwise expressly stated and is deducted from the income tax levied in the final tax assessment. The withholding tax is refunded if no income tax is levied Withholding tax on dividends

An exemption from the general rule on withholding tax on dividends No withholding tax on dividends if a parent company is taxed jointly with it’s subsidiary Companies can opt for a joint taxation if the parent company owns at least 90% of a subsidiary The duration of joint taxation is for a minimum of five years Only Icelandic companies Withholding tax cont.

Dividend payments to companies with limited tax liability in Iceland is also subject to withholding tax Act No 45/1987 on the Withholding of Public levies at Source the withholding rate is 18% it is the company paying the dividends that is the withholding agent the rule described earlier for non-withholding if companies are taxed jointly does not apply as Icelandic law does not provide for joint taxation unless both/all companies are subject to a full and unlimited taxation in Iceland the withholding tax is the final payment of tax unless the recipient qualifies for a qualified participation deduction Withholding tax cont.

Withholding tax on dividends is to be paid quarterly if the recipient is a company with a full and unlimited tax liability. The tax payment period is three months, ie January-March, April- June, July-September and October-December. Due dates are 20th April 20th July, 20 October and 20th January and the deadline is 15 days later. Withholding tax on dividends is to be paid in the month following the dividend payment if the recipient is a company with a limited tax liability in Iceland The due date for payment is the first day of each month and the final date for payment is 14 days later Withholding tax cont.

Art. 31 para 1 point 9 of Act No 90/2003 on income tax public limited liability companies and private liability companies can deduct from their business income dividends received dividends are declared as income and then deducted dividends received from Icelandic companies dividends received from foreign companies if the profits of the dividend paying company are taxed in a similar manner as company profits in Iceland and the tax rate is not lower than the tax rate in an OECD-member state, EEA-member state or the Faroe Islands Qualified Participation

Conditions: the parent company has to hold at least 10% of the subsidiary’s shares at the end of the year when dividends are paid losses that have been carried forward from previous years as well as loss incurred in the course of the income year have to be set off first Qualified Participation cont.

The qualified participation rules also apply for public limited liability companies and private limited liability companies that are registered in an EEA-member state, EFTA-member state or the Faroe Islands same conditions as for domestic companies foreign companies have to file a tax return to Icelandic tax authorities taxes withheld at source are then reimbursed when the final tax assessment is ready Qualified Participation cont.

Joint taxation only available to Icelandic companies Qualified participation is only available to certain types of companies public limited liability companies and private liability companies not partnerships dividends paid to a partnership who bears a full and unlimited tax liability in Iceland are taxed at a lower rate than other income types received. Brief gap analysis