Sigurjón Gunnarsson and Erna G. Sigurðardóttir
When the ISK exchange rate weakens, we receive more queries about the methods by which financial income tax on currency gains on FX savings accounts that is withheld at source is calculated. This article sets out the rules and methods used to calculate the tax.
A 22% capital income tax is charged on foreign exchange rate gains that accrue to foreign currency denominated deposit accounts. The tax is withheld at source if the account is owned by a private person; domestic legal entities are exempt from withholding tax. Currency gains are created when the exchange rate of another currency appreciates against the ISK in the period from deposit until withdrawal.
Example: USD 1,000 are deposited to an account at the exchange rate of 100. The USD subsequently appreciates against the ISK and stands at 120 upon withdrawal. The equivalent value of USD 1,000 was ISK 100,000 upon deposit and has increased to ISK 120,000 upon withdrawal. Currency gains thus amount to ISK 20,000. The capital income tax levied on currency gains is 22%, or in this case ISK 4,400, which is equivalent to USD 36.67. This amount is deducted from the currency gains. The owner of the account, if he or she withdraws the entire amount, receives not ISK 120,000 but ISK 115,600.
Other factors than the exchange rate may come into play
The example above involves one deposit and one withdrawal. This becomes rather more complicated when there are several deposits. The rules are nevertheless clear and calculations not complicated. Exchange rate differential is calculated on the amount withdrawn each time by comparing the exchange rate that applies to the withdrawal with the rate of the oldest deposit, then the second oldest deposit and so on until the amount for comparison equals the amount for withdrawal. The withdrawn amount is based first on the oldest deposit, then the second oldest, etc. Currency gains on one withdrawal can therefore be based on more than one deposits and more than one exchange rate.
Currency loss can be offset against gains within the year
Balances in foreign currency do not always accrue currency gains. In the above example, the USD appreciated while the ISK depreciated. If it had been the reverse, and the USD had fallen from ISK 100 to ISK 80, the balance would have suffered an ISK 20,000 currency loss. Currency losses can be offset against currency gains within the year, on the same account. Currency loss cannot be set off against currency gains between years nor against interest to lower capital income tax on accrued interest.
Tax withheld upon withdrawal or transfer
For further information, Act No. 94/1996, on Withholding Tax on Capital Income, provides for the obligation of financial institutions who accept foreign currency deposits, to withhold a 22% tax on interest income, discounts and dividends and to remit this to the National Treasury. Withholding tax liability on interest income applies among other things to realised foreign exchange rate gains the year the tax is withheld, as well as realised foreign exchange rate gains accrued between payment periods within the year the tax is withheld. According to Act No. 90/2003, on Income Tax, included with interest payments as income is paid interest or payable interest and paid price-increase compensations on instalments and interest. Exchange rate gains on any kind of deposit accounts and claims in foreign currency in the year when withdrawals take place shall be counted as income and be based on the buying rate of exchange for the respective foreign currency from 1 January 2010 or later to the date of withdrawal or payment. As noted above, the exchange rate gain and loss on individual deposit accounts may be offset within the year.
According to Act No. 94/1996, withholding tax on interest is deducted when interest is paid out or remitted to the owner by deposit to his/her account. As a result, withholding tax on currency gains is collected upon withdrawal from an account, regardless of whether the withdrawal is in cash or in the form of a transfer to another account. This applies even though the recipient account is in the same currency. The withholding tax liability on foreign exchange rate gains is thus created immediately upon withdrawal.
Withholding of financial income tax on foreign exchange rate gains on deposits accounts is a provisional tax payment in accordance with law. Parties subject to such taxation who consider that they are entitled to reimbursement, based on for example the provisions of a double taxation treaty, can apply to the Directorate of Internal Revenue.
Erna is a lawyer in Landsbankinn’s Legal Department and Sigurjón is an analyst in Treasury.
See the article in Icelandic:
Hvernig er staðgreiðsla fjármagnstekjuskatts af gengishagnaði reiknuð?
Þær upplýsingar sem er að finna á þessu vefsvæði eru unnar af starfsmönnum Landsbankans og eru þær eingöngu veittar í upplýsinga- og fræðsluskyni. Efninu er ekki ætlað að vera ráðgefandi um fjármál einstaklinga en slík ráðgjöf er einstaklingsmiðuð og veitt hverjum og einum af þjónustufulltrúum, fjármálaráðgjöfum eða öðrum sérfræðingum Landsbankans.
Þær upplýsingar sem fram koma á þessu fjármálabloggi endurspegla á engan hátt skoðanir eða mat Landsbankans heldur einungis höfunda efnisins. Landsbankinn á allan höfundarétt að því efni sem er að finna á vefsvæðinu, nema annað sé tekið fram. Hvers konar misnotkun á efninu er með öllu óheimil.