In April 2009 Iceland introduced its first Controlled Foreign Company (CFC) regime in order to prevent tax evasion. The regime will be executed as of assessment 2011 for income year 2010 and assets at year end 2010.
According to the new CFC rules, a resident of Iceland who is a shareholder of a non-resident company of any kind will be taxed on the profit of the foreign subsidiary, regardless of whether the non-resident's income is distributed to the Iceland resident or not. However, it is stipulated that the Icelandic shareholder must own at least 50% of the capital or voting rights of the non-resident entity and the entity must be resident in a low tax jurisdiction.
The same rules applies for direct and indirect ownership as well as if an Iceland resident controls a foreign company resident in a low-tax jurisdiction due to a dominating managing position within the income year.
A low-tax jurisdiction for the purposes of the CFC rules is defined as a country where the corporate income tax rate is less than two-thirds of the Iceland's tax rate which is currently 15% (but under scrutiny for possible rise as the government has announced).
The taxable income will be subject to taxation in Iceland as if it derived from a local operation - 15% tax for limited liability entities, 23.5% for partnerships and limited partnerships and 37.2% for individuals on net income.