The application of tax to interest earnings made by foreign companies in Iceland is a direct violation of the European Economic Area treaty, which Iceland is party to — according to a leading tax law specialist.
The interest tax is discouraging for foreign investors who are already challenged by the ongoing currency exchange restrictions which mean that foreign investors cannot get their money back until the restrictions are lifted.
According to Vala Valtysdottir, the head of the tax and legal department at Deloitte, despite the fact that income tax laws have been changed for the taxation of profit on investment, they are still not in accordance with European law. Tax charges are gross; meaning that the interest payments are taxable instead of pure profit (which is the case for domestic investors) — there is a clear discrimination against non-Icelandic business interests, which runs counter to EEA legislation, she says.
According to Visir.is it is commonplace in neighbouring countries to exempt foreign companies from taxes on interest — especially when the foreign company is also based in the EEA/EU or if there is a double taxation treaty in place between the two countries.