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Australia and Iceland have signed a new tax treaty, which following its entry into force, will represent the first tax treaty between the two countries.
The 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 and its associated Protocol was signed on 12 October 2022 in Reykjavik, Iceland by Her Excellency Kerin Ayyalaraju, Australia’s Ambassador to Denmark, Norway and Iceland.
The tax treaty will make it easier for Australian companies to access capital and export to Iceland through reduced withholding tax rates. The treaty will also provide more certainty and reduced compliance costs for Australians and Australian businesses who earn income here and in Iceland.
Further information on the signing of the treaty is available in Assistant Minister Leigh’s media release.
Main features of the new treaty
Tax certainty
The treaty will determine the allocation of profits between Australia and Iceland from cross-border dealings. This will improve tax certainty and remove double taxation for businesses looking to expand into Iceland and for other Australian taxpayers deriving income from Iceland.
Lower withholding tax rates on dividends
The treaty will provide Icelandic businesses with at least a 15 per cent reduction from Australia’s default 30 per cent dividend withholding tax rate. This will encourage greater investment in Australia by Icelandic businesses.
The withholding tax rate on dividends will be reduced by at least 5 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, as well as to dividends derived by governments (including government investment funds), central banks, tax exempt Icelandic pension funds or Australian recognised pension funds and other Australian residents carrying out complying superannuation activities.
Lower withholding rates on interest
Australians conducting business in Iceland will now have lower borrowing costs with withholding rates on interest to be reduced by 2 per cent.
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 and other Australian residents carrying out complying superannuation activities, and unrelated financial institutions.
Lower withholding rates on royalties
A 20 per cent reduction from Australia’s 30 per cent rate will incentivise greater utilisation of Australia’s intellectual property by Iceland. In Iceland, the rate will be reduced by at least 10 per cent which will lower 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, including exploration, exploitation, consultancy, and the use of substantial equipment.
Tax certainty for pensions
The tax treaty provides that non-Government periodic pension payments (superannuation) will be taxed only in the recipient’s country of residence. 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 or in certain life events (for example, disability or death). This will prevent instances of double non-taxation of lump sums and 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 or other public schemes organised for social welfare purposes of that country.
Preserving either country’s domestic anti-avoidance rules
The treaty maintains the integrity of Australia’s existing laws by providing that nothing in the treaty will prevent either country from applying its own domestic laws to prevent the evasion or avoidance of taxes.
Prevention of multinational tax avoidance
The treaty incorporates important integrity provisions consistent with the outcomes of the G20/OECD Base Erosion and Profit Shifting project to prevent tax evasion and avoidance through treaty abuse.
Non-discrimination
Australia and Iceland will now be prevented 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 and can compete on a level playing field with Icelandic businesses.
The non-discrimination article will not apply to any law of Australia that relates 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, and requires Australia and Iceland to endeavour to resolve the issue by mutual agreement.