Iceland tax treaty

Australia and Iceland signed a new tax treaty – the Convention between Australia and Iceland for the Elimination of Double Taxation with respect to Taxes on Income and the Prevention of Tax Evasion and Avoidance.

When it enters into force, it will be the first tax treaty between the 2 nations.

Her Excellency Kerin Ayyalaraju, Australia’s Ambassador to Denmark, Norway and Iceland signed the new tax treaty and its associated Protocol on 12 October 2022 in Reykjavik, Iceland.

The tax treaty will reduce withholding tax rates. This makes it easier for Australian companies to access capital and export to Iceland. The treaty gives more certainty and reduced compliance costs for Australians and Australian businesses who earn income here and in Iceland.

Main features of the new treaty

Tax certainty

The treaty will determine where profits from cross‑border dealings are allocated between Australia and Iceland. This will improve tax certainty and relieve double taxation for:

• businesses looking to expand into Iceland
• other Australian taxpayers deriving income from Iceland.

Lower withholding tax rates on dividends

The dividend withholding tax rate is reduced by at least 15 per cent for Icelandic businesses (from Australia’s 30 per cent default). This will encourage them to invest in Australia.

The withholding tax rate on dividends will be reduced by at least 15 per cent for Australian businesses investing in Iceland. This will lower the cost of conducting business for Australians in Iceland.

The treaty also provides for a zero per cent dividend withholding tax rate for:

• intercorporate dividends paid to companies that hold at least 80 per cent or more of the paying company throughout a 365‑day period
• dividends derived by:
  • governments (including government investment funds)
  • central banks
  • tax‑exempt Icelandic pension funds
  • Australian recognised pension funds
  • other Australian residents carrying out complying superannuation activities.

Lower withholding rates on interest

The treaty reduces withholding rates on interest by 2 per cent. This lowers borrowing costs for Australians conducting business in Iceland.

Australia’s tax will remain at 10 per cent for non‑government Icelandic investors.

A zero per cent rate will be provided for interest derived by:

• governments (including government investment funds)
• central banks
• tax‑exempt Icelandic pension funds
• Australian recognised pension funds
• other Australian residents carrying out complying superannuation activities
• unrelated financial institutions.

Lower withholding rates on royalties

The treaty reduces Australia’s 30 per cent tax rate by 20 per cent. This incentivises Iceland to utilise Australian intellectual property.

This reduces the rate by at least 10 per cent in Iceland. This lowers the cost for Australians accessing Iceland’s intellectual property.

Protection over natural resources

The treaty preserves Australia’s source country taxing rights over income from natural resources. This includes exploration, exploitation, consultancy and the use of substantial equipment.

Tax certainty for pensions

The tax treaty provides that only the recipient’s country of residence can tax non‑government periodic pension payments (superannuation). This means Australia can tax non‑government pension payments where an Icelandic citizen has retired in Australia.

The source (paying) country may tax any pension lump sum payments from:

• certain pension funds
• retirement benefit schemes
• life events (for example, disability or death).

This will prevent instances of double non‑taxation of lump sums. It allow Australia to tax eligible termination payments paid by Australian employers and pension funds.

The source (paying) country may also tax any pensions paid under:

• the social security legislation
• other public schemes organised for social welfare purposes of that country.

Preserving either country’s domestic anti‑avoidance rules

The treaty provides it will not prevent either country from applying its own domestic laws to prevent the evasion or avoidance of taxes. This maintains the integrity of Australia’s existing laws.

Prevention of multinational tax avoidance

The treaty incorporates important integrity provisions. These provisions are consistent with the outcomes of the G20/OECD Base Erosion and Profit Shifting project. They prevent tax evasion and avoidance through treaty abuse.

Non‑discrimination

The treaty prevents Australia and Iceland from treating each other’s nationals and businesses less favourably. This means that Australian businesses will not be subject to any discriminatory tax measures in Iceland. This allows them to compete on a level playing field with Icelandic businesses.

The non‑discrimination article will not apply to any Australian law relating to a rate of taxation for working holiday makers.

Rules relating to the exchange of taxpayer information

The treaty will ensure the exchange of taxpayer information is consistent with Australia’s existing policies and international obligations.

Rules to resolve tax disputes

The treaty will provide mechanisms for taxpayers to present a case if they believe they are not, or will not be taxed, in accordance with the treaty, subject to certain criteria. It requires Australia and Iceland to endeavour to resolve the issue by mutual agreement.

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