Iceland enacted its own Transfer Pricing legislation, which entered into force on January 1, 2014. Transfer pricing rules are now regulated by Article 57 of Act No. 90/2003 on income tax based on the Arm’s Length Standard.

Related Parties

Legal entities are considered related when:

  1. They constitute part of a group, according to Article 2 of the Annual Accounts Act No. 3/2006, or are under direct/indirect majority ownership or administrative control of two or more legal entities within the same group.
  2. A legal entity has direct or indirect majority ownership over another legal entity.
  3. Whether the legal entities are directly or indirectly majority owned or under the administrative control of family-related persons, e.g., married or equivalent persons, siblings, and persons directly related (e.g., children, parents, grandparents).

Transfer Pricing Methods

In order to determine the market value of related party transactions, one of the following five methods may be employed:

  • Comparable Uncontrolled Price Method.
  • Cost Plus Method.
  • Resale Price Method.
  • Profit Split method.
  • Transactional Net Margin Method.

Likewise, the methods are set out in Regulation 1180/2014. The regulation allows the implementation of other methods.

Transfer Pricing Documentation

According to Article 57 of the Icelandic Income Tax Act, the Transfer Pricing documentation is mandatory for companies with income or assets exceeding ISK 1000 million and related party cross-border transactions.

The Master File and Local Report are not required to be filed separately, given that there is no distinction between both in the legislation. Conversely, the same information must be filed but not required to be on the MF/LF form.

The Transfer Pricing documentation does not need to be filed unless requested by the tax authorities. Conversely, taxpayers must file an information statement on related party transactions when filing their annual tax return and confirm that the Transfer Pricing documentation requirements have been complied with.

Transfer Pricing Penalties

The penalties are as follows:

  • ISK 3 million for each tax year in which a company has partially or completely failed to comply with its documentation obligation.
  • ISK 3 million if the company does not comply with its documentation obligation within 45 days after the tax authority’s request.
  • ISK 1.5 million if the company has filed documentation that DIR considers unsatisfactory and the company has not performed corrections accordingly to DIR’s requirements within 45 days.

The penalty is reduced by 90%, 60%, and 40% respectively, if the deficiencies in the documentation are remedied within 30 days, two, and three months after being issued by the DIR.

Source: Iceland Revenue and Customs (IRC)

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 Author:       Wolfgang Hartl
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