Appeal court clears Icelandic state in tax surcharge case

Iceland’s Court of Appeal has dismissed a claim against the state by Börkur Arnviðason and Inga Dóra Sigurðardóttir, who made billions of Icelandic krónur from selling shares in Danish technology company ChemoMetec, mbl.is reports. The dispute concerned whether tax authorities were allowed to impose a 2.5 percent surcharge on their reassessed capital income tax.

The court upheld a ruling by Reykjavík District Court from May 12 last year. The family, including Inga Dóra’s two sons, made about ISK 2.5 billion from the share sale in 2020. Inga Dóra, a well-known mathematics teacher at the Commercial College of Iceland, was subsequently named Iceland’s tax queen for the 2020 tax year.

Börkur and Inga Dóra received dividends from Arctic Technology ApS in 2019 and 2020 as shareholders in the company. Because the company was then considered tax resident in Denmark, the couple paid 15 percent capital income tax to Denmark and an additional 7 percent in Iceland under the Nordic double taxation agreement.

After Iceland’s director of internal revenue ruled that the company was tax resident in Iceland, Danish tax authorities refunded the Danish portion. The refund was based on the view that the couple’s capital income was fully taxable in Iceland.

The couple challenged the 2.5 percent surcharge added when their capital income tax was reassessed for the 2020 and 2021 assessment years. The Court of Appeal found that tax authorities were required to add the surcharge to the difference between assessed income or capital income tax and tax paid through withholding.

The court said the surcharge was not a penalty. Its purpose was to ensure that tax not paid through withholding retained approximately its real value by the time it was assessed, making it equivalent to inflation compensation.

The couple had sought to have an April 2024 decision by the Internal Revenue Board annulled in relation to the surcharge. They also sought ISK 23,210,169 from the Icelandic state, with interest and default interest.

The court noted that the dividends were paid between November 2019 and December 2020, while the capital income tax and surcharge were not fully paid in Iceland until October 2023. It concluded that the purpose of the law would be undermined if the couple had only paid the principal amount of the tax.