There is no special legislation on holding companies in Iceland. Therefore, all types of business forms may be used for a holding company, such as limited liability company, both private and public, a partnership or a limited partnership and a branch. If the holding company is used for the holding of shares, the profits of the company may never be taxed as long as the company is a going concern. Received domestic dividends are allowed as a deduction from the profits, thus resulting in a zero tax. The same applies to received dividends from abroad if certain requirements are met. Furthermore, net wealth taxes have been abolished in Iceland and Icelandic holding companies enjoy treaty benefits under the double taxation conventions entered into by Iceland.

Advantages and tax benefits of locating a holding company in Iceland can be summarized as follows:

• Icelandic companies can be used for both active business and holding simultaneously
• No specific corporate form is required
• No net wealth taxes
• Dividends received by corporations are deductible.
• No requirements relating to percentage of stock ownership in the corporate payer apply
• Deferred taxation on realized capital gain available;·
• No foreign-exchange controls;·
• Consolidated returns available for corporations subject to at least 90% common control
• No branch profits tax levied on repatriated profits from branches
• Double taxation treaties available
• Foreign tax credit available to avoid double taxation in the absence of tax treaties
• No general anti-avoidance rule for direct corporation taxation
• Fair legislation on controlled foreign corporations
• No legislation on “thin capitalization”
• No basket system regarding the foreign tax credit.

The majority of the current holding companies in Iceland have chosen the partnership for their financial transactions in Iceland. The reasons for their choice of location are attractive tax environment and smooth administration.

Icelandic tax law does not contain participation exemption regarding sales profits on shares. However, business entities are authorized to defer taxation of realized capital gain of the sales of shares, including other changes of ownership, for two years. If the relevant business entity reinvests the capital gain in shares within the two years time limits, the taxation of the capital gain will be further deferred. If the purchase price of the new shares is lower than the capital gain, the difference will be subject to 20% corporate tax for a corporate shareholder and 22% for a partnership shareholder given the partnership is registered as a taxable entity. If the capital gain is not used to reinvest in other shares within two years, the capital gain, if deferred, will be subject to tax on the second year from the time it was realized with 20% additional tax.

Received dividends by resident corporate shareholders are exempt from tax by being deductible. Partnerships, whether or not limited, pay 22% income tax on received dividends.

This taxation also applies to received foreign dividends of corporations incorporated abroad if the recipient business entity can demonstrate that the relevant dividends are received from a corporation whose profits have been taxed under provisions, which do not substantially deviate from those prevailing in Iceland. Furthermore, it is required that the profits of the corporate-payor have been subject to income tax rate, which is not lower than the general income tax rate in some of the OECD countries.

Dividends paid from an Icelandic company to a domestic company are subject to 22% withholding tax. Taxes withheld from source are credited against the assessed income tax.

Dividends paid to a company in a non-treaty country are subject to 20% withholding tax at source.

Dividends paid to a company in a treaty-country are subject to withholding taxes described in the relevant tax treaty. In that case the foreign company has to prove its recidence and tax liability in the treaty country with a certification from the relevant tax authorities.