Applying for exemption from tax payment or reduced taxes (tax percentage) under a double taxation convention

One can file for exemption from taxation in Iceland of earnings that are specified in Article 3(3), (6), (7) and (8) of the Income Tax Act on the basis of a valid Double taxation convention between Iceland and the applicants country.

Exemption/reduction from tax payments requires filling out and submitting to Director of internal revenue form RSK 5.42 "Application under Double Taxation Conventions for exemption/reduction from Icelandic Taxation". Special care shall be taken to complete all items of the form, as described in the directions on the form.

Applicant must present confirmation from the relevant foreign tax authorities of his residence and full and unlimited tax liability in the country concerned. Tax authorities in the domicile of the applicant sign and stamp in box 21 of the form. USA tax authorities chooses to use their own form (form 6166) to confirm residence and unlimited tax liability of their citizens.

An exemption from payment of taxes or a reduced tax rate according to an application becomes effective once RSK has confirmed the application and assigned a unique certificate number to it (box 20 of the application form). RSK is authorized to grant a tax exemption or lower taxes, effective from the date RSK received the application. An exemption from tax payment or reduced tax rate according to an application is not granted retroactively for previous payments made before RSK received an application.

To be exempted from withholding tax payments of public levies a confirmed certificate of exemption by RSK has to be presented to those responsible for withholding tax payments of public levies in Iceland.

Most often when an application is rejected it is because of missing information in box 6 (tax identification number) and box 21 (confirmation of the tax authorities on the applicant's country of residence).

An application for exemption ought to be timely presented, as it might take time to process it, both at RSK and at tax authorities of the applicant's country.