Transfer Pricing in Iceland

The legal framework

Iceland's transfer pricing rules occupy three paragraphs of a single article. Article 57(3) to (5) of the Income Tax Act No. 90/2003 was inserted by Act No. 142/2013 and has applied since 1 January 2014; Act No. 33/2015 trimmed it and Act No. 61/2021 later added an administrative fine regime. Article 57(3) requires that where terms between related legal entities depart from what unconnected parties would have agreed, the tax base be re-determined and the price corrected in either direction. It no longer points to the OECD Guidelines: the 2013 words that did were expressly repealed by Act No. 33/2015, and Iceland has told the OECD that Article 57 contains no reference to them. The entire OECD link now runs through Regulation No. 1180/2014, whose Article 2 defines the Guidelines to include later amendments and whose Article 3 requires documentation to follow their principles as they stand at any given time. OECD text a practitioner would cite in Oslo or Dublin is usable in Reykjavík, but through the regulation and as an aid to construction rather than as binding law.

Relatedness under Article 57(4) turns on group membership under company and accounting law, on direct or indirect ownership or control of more than 50%, or on common ownership by individuals joined by family-law ties — marriage or registered partnership, siblings and direct-line relatives. The wider limb that once reached individuals linked through joint business and investments was repealed in 2015, so a shared commercial interest alone no longer creates relatedness. The rule reaches transactions between related entities, dealings between an Icelandic entity and its own foreign permanent establishments, and transactions with residents of low-tax jurisdictions, and it binds entities carrying no documentation obligation at all. There are no statutory rules on attributing profit to a permanent establishment; the authorities apply the Authorised OECD Approach, including under the 40 treaties still carrying pre-2010 Article 7. With corporate tax at 20% and related-party interest above ISK 100 million capped at 30% of EBITDA under Article 57b, the framework is conventional in outline and thin in detail.

Methods, comparables and benchmarking

Regulation No. 1180/2014, Art. 9 recognises the five OECD methods with no hierarchy between them; the most appropriate method governs, and the taxpayer must justify the choice. Article 10 sets the comparability analysis in Chapter III terms: characteristics of property or services, functional analysis, contractual terms, economic circumstances and business strategies, drawing on internal comparables as well as external ones.

Beyond that the rulebook stops. No database is prescribed, no interquartile convention imposed, no tested-party rule stated, and no preference expressed for Icelandic over foreign comparables, which matters in a market where a genuinely local comparable set is often unobtainable. Ranges and statistical measures are accepted, but on the authority of the Guidelines rather than any domestic provision. Secret comparables are not permitted and, on Iceland's own account, have not been used. Comparability adjustments are nowhere compelled, yet the authorities expect them where differences are material, and Article 10 requires the adjustment, the selection criteria and the reasoning to be recorded.

Whole subjects are left to the Guidelines. Commodities attract no domestic guidance, paragraphs 2.18 to 2.22 being applied in practice; financial transactions none, with Chapter X treated as significant; cost contribution arrangements are permitted but sit outside Chapter VIII, there being no domestic rule to align. Intangibles get no pricing guidance and no adoption of Chapter VI. Article 8 imposes a disclosure duty instead: identify every group intangible bearing on the controlled transactions and record ownership, use, development and maintenance, likely resale price and the present value of expected income. Intra-group services follow Chapter VII under Article 7, which asks for proof that services were received, a transparent allocation basis and arm's length pricing, and applies the same discipline to intercompany interest. The low value-adding simplified approach has no legal basis, though the authorities would not challenge it where the services qualify.

Documentation: what Skatturinn expects

Documentation is mandatory but narrowly targeted. An entity is documentation-liable where operating revenues exceed ISK 1 billion in a financial year, or total assets exceed ISK 1 billion at either end of it, the duty biting from the following accounting year. It is cross-border only: dealings between Icelandic related entities need not be documented, although Article 57(3) still governs their pricing.

Iceland has not adopted the BEPS Action 13 architecture. There is no master file and no local file. Regulation No. 1180/2014 requires a single file whose contents are prescribed article by article: group and entity description, ownership and markets (Art. 4); three years of accounts with an explanation of losses (Art. 5); every related-party transaction and its commercial terms (Art. 6); cost sharing and services, including benefit received (Art. 7); intangibles (Art. 8); method and justification (Art. 9); comparability analysis (Art. 10); and contracts plus any advance pricing agreement concluded abroad (Art. 11). Article 15 permits the EU Code of Conduct format as an alternative, so a group already running an EU masterfile with country files may use it.

Nothing is filed with the return. The file must exist contemporaneously and be handed over within 45 days of a request, which cannot be made before the return deadline, in Icelandic or English, and kept for seven years. What is filed is schedule RSK 4.28: each foreign related party, its TIN and residence, the form of the relationship, transaction type and amount band, and confirmation whether the entity was documentation-liable and whether documentation exists. Minor transactions of limited economic weight escape the detailed content requirements but must still be reported and justified, and intangibles can never use the exemption. Country-by-country reporting bites at EUR 750 million of consolidated group revenue and is due 12 months after year end, in English, in the OECD XML schema.

Audits, penalties and the enforcement climate

Until 2021 the documentation duty had no dedicated sanction. Act No. 61/2021 supplied one: ISK 3 million per accounting year where documentation is not produced within 45 days of a request, and ISK 1.5 million where what arrives is insufficient and the demand for improvement is not met within a further 45 days. Fines reach back up to six income years before the decision, subject to an aggregate ceiling of ISK 6 million. They can then be cut by 90% if the default is cured within 30 days of the ríkisskattstjóri's ruling imposing the fine, by 60% within two months and by 40% within three — mitigation once the fine exists, not a way of avoiding it, since the 45-day production window has by then already closed. Appeal to Yfirskattanefnd does not suspend collection.

Behind the fines sits the ordinary 25% surcharge under Article 108(2) on any increase in the tax base. Iceland offers no documentation-based penalty protection: a compliant file does not switch the surcharge off. The only escape is the good-faith exculpation in Article 108(3), which compels cancellation where the taxpayer shows it is not to blame for the deficient return.

The Íslenska kalkþörungafélagið litigation shows how these combine. An Icelandic producer sold almost all its processed calcareous algae to its Irish parent and reported losses. Documentation prepared in 2020 used cost plus with a 50% mark-up but left wages and depreciation out of the cost base. The method was rejected, taxable income increased by ISK 487.5 million and the surcharge applied. Yfirskattanefnd upheld the assessment in ruling No. 156/2022 of 21 December 2022, Reykjavík District Court dismissed the claims in February 2025, and Landsréttur affirmed on 19 February 2026 in Case No. 213/2025, holding that Article 57(3) and (5) oblige the taxpayer to demonstrate arm's length pricing with documents, and that thin documentation can shift the practical burden of proof. Reassessment reaches six years back under Article 97(1), so a flawed method compounds quietly.

Dispute resolution and advance certainty

Iceland's most striking feature is what it lacks. There is no advance pricing agreement programme of any kind, unilateral, bilateral or multilateral; no ICAP participation; no co-operative compliance programme. Iceland has told the OECD in terms that its law does not permit the authorities to conclude APAs. Regulation No. 1180/2014, Art. 11 nevertheless requires any APA concluded abroad to sit in the Icelandic file, a reminder that Icelandic outcomes are often shaped elsewhere.

The nearest substitute is the binding ruling under Act No. 91/1998. The Director of Internal Revenue rules on planned transactions where the applicant has substantial interests, for a base fee of ISK 150,000 plus work-related charges, normally within four weeks and at most three months, and the ruling binds for five years if the transaction is carried out as described. It cannot address executed transactions and is a poor vehicle for valuation-heavy pricing questions, so it is no APA in disguise.

That leaves the mutual agreement procedure as the only relief route for double taxation. Skatturinn is competent authority, requests go in writing, and the general deadline is three years from when the taxpayer should have known of the double taxation, extended to five under the Nordic treaty. There is no fee, collection is not suspended unless agreed, and MAP may be pursued alongside or after domestic remedies, though a post-judgment request must rest on new material and the competent authority will not depart from a court decision. Volumes are small, four to seven cases a year. Downward corresponding adjustments outside MAP are not provided for; the alternative is asking under Article 101(2) for an assessment to be reopened within six years on fresh documents or information, which since Act No. 98/2025 also requires substantial interests to be at stake and yields a decision appealable to Yfirskattanefnd.

Pillar Two and what changes in 2026

Iceland's minimum tax legislation is still in motion. The Ministry of Finance and Economic Affairs consulted from June to August 2025 on a draft Act on supplementary tax for groups taxed below the minimum rate, proposing a qualified domestic minimum top-up tax and an income inclusion rule at 15% for groups above EUR 750 million of revenue, with no UTPR, and the bill sits on the Government's legislative programme for the 157th session. Passage and commencement should be confirmed against Alþingi's records before anyone relies on the timing; as an EEA state, Iceland is not bound by the EU Minimum Tax Directive. Amount B has a clearer answer: Iceland does not apply the simplified and streamlined approach and has selected no operating-expense ceiling, but has committed to respect Amount B outcomes reached by covered jurisdictions. Icelandic distributors therefore remain priced under Article 57 and Regulation No. 1180/2014, while a counterparty's Amount B result will not be second-guessed here. The OECD profile also records an amendment under consideration to align Icelandic legislation more closely with the Guidelines.

How practitioners should respond

Three practical conclusions follow. First, the 45-day clock is the design constraint. Because there is no APA route and no penalty protection, the file is the whole defence, and it must be finished before the request arrives, not assembled after it — the statutory reductions of 90, 60 and 40% only run once the fine has been imposed, so they discount a failure rather than prevent one. Groups running a global master file should map it against Articles 4 to 11 and close the gaps, particularly the loss explanation, the benefit test for services and the intangibles inventory.

Second, method selection deserves more attention than the benchmark. The only fully litigated Icelandic case turned on the composition of a cost plus cost base, not on the comparable set. Where a domestic rule is absent the Guidelines fill the space through Regulation No. 1180/2014, so a defensible file reasons from Chapters I to III rather than asserting a conclusion.

Third, plan for certainty to be obtained abroad. Bilateral APAs with an Icelandic leg are unavailable, so consistency has to be engineered through the counterparty jurisdiction's programme, with MAP held in reserve and the three-year deadline diarised. Given the pending alignment and minimum tax bills, Icelandic positions should be re-verified annually rather than rolled forward.