US Company Formation from Iceland (2026): ehf. Subsidiaries, Capital Income at 22%, Icelandic CFC Rules, the US–Iceland Treaty and US LLC vs C-Corp for Games, Seafood and Tourism
How to set up a US company from Iceland: corporate tax at 20%, capital income and dividends at 22%, how Iceland treats a US LLC and when one managed from Reykjavík is Icelandic-resident, Iceland's CFC rules for low-taxed foreign entities, the 2007 US–Iceland treaty (dividends 15%/5%/0%, interest and royalties 0%), the end of capital controls, US LLC formation vs US C-Corp formation for game studios, seafood exporters, tourism and freelancers, króna examples, costs.
Iceland is a small economy with a few export industries that punch far above their size: seafood, aluminium, tourism, and a game industry anchored by one of the world's longest-running online games. Its companies have sold to American customers for decades, and since the last capital controls were lifted in 2017, Icelanders can invest abroad freely.
For an Icelander, a US company is usually about one of three things: a US subsidiary for an ehf. or hf. selling to the USA, a Delaware parent for a start-up raising US money, or a US contracting entity for a freelancer with American clients. This guide explains how Iceland taxes each case, how it treats a US LLC, its CFC rules, and the 2007 US–Iceland treaty. It goes further than our Nordic overview.
In short: Icelanders can own 100% of a US LLC or C-Corporation, formed remotely. An Icelandic ehf. pays 20% corporate tax. Capital income, including dividends, is taxed at 22% for individuals, and employment and business income at progressive rates. Iceland generally treats a US LLC with limited liability as a foreign company, and one managed from Iceland can be Icelandic-resident. Iceland's CFC rules can tax an Icelandic owner on the income of a low-taxed foreign entity. The US–Iceland treaty (2007) limits US withholding on dividends to 15%, 5% or 0%, and exempts interest and royalties. With UCB, a Delaware corporation with EIN is $358 and a Wyoming LLC with EIN is $249, all-in.
The Icelandic rules that matter
| Item | Rate |
|---|---|
| Corporate income tax (ehf., hf.) | 20% |
| Capital income of individuals (interest, dividends, gains, rent) | 22%, above a small annual allowance for interest |
| Employment and self-employment income | Progressive state and municipal rates, roughly 31% to 46% |
| Dividends received by an Icelandic company from a qualifying subsidiary | Generally exempt |
A self-employed person running a business must pay themselves a reasonable salary (reiknað endurgjald) set by guidelines, which is taxed as earned income. That rule also applies to owners who work in their own ehf., which limits how much income can be taken as lower-taxed dividends.
How Iceland treats a US company
Classification
Iceland compares foreign entities with Icelandic forms. A US LLC in which no member is personally liable is generally treated as a company for Icelandic tax, whatever the IRS classification. Distributions to an Icelandic individual are then dividends, taxed at 22%. The US withholds nothing on a disregarded LLC's distributions, so there is no US tax to credit.
Residence
A foreign company whose effective management is in Iceland is an Icelandic tax resident and pays 20% on its worldwide profits. A single-member LLC run by its owner from Reykjavík is managed from Iceland.
CFC rules
Iceland's CFC rules tax Icelandic residents who control a foreign entity in a low-tax situation on their share of its income. A disregarded US LLC that pays no US tax can fall within them unless it carries on genuine business activity of the kind the rules exempt. Ask your adviser before using an LLC from Iceland.
Example: a freelance sound designer in Reykjavík
These are illustrative figures, not a client case, at ISK 138 to the dollar.
Sóley is a sound designer in Reykjavík who works for US game studios and earns US$70,000 (about ISK 9.7 million) a year.
- Through an ehf., the company pays 20% on profit after her reasonable salary, and she pays 22% on dividends.
- Through a US LLC run from Reykjavík, the LLC is likely Icelandic-resident, or caught by CFC rules, so there is no saving, and she has US compliance costs too.
She keeps her ehf. A studio that wants a US vendor is offered a W-8BEN-E from the ehf. instead, which most accept.
US C-Corp formation from Iceland
US tax position
A US corporation pays 21% federal tax on its profits plus state tax, and files Form 1120 and Form 5472 every year (see the 21% corporate tax explained and the C-Corp guide for non-residents). Under the treaty, its dividends to an Icelandic company owning 10% or more carry 5% US withholding, or 0% for an 80% parent meeting the conditions, and are generally exempt in Iceland.
Example: a seafood exporter's US company
Take an illustrative case: an Icelandic fish processor in Grindavík sells frozen and fresh cod and haddock to US restaurant chains and retailers. It sets up a US company in Massachusetts, near the seafood trade around Boston, with a sales manager and cold storage contracts.
- It forms a Delaware corporation, registered in Massachusetts, which imports and sells the fish and pays US tax on its margin.
- The Icelandic hf. sells to the US company at arm's-length prices and is taxed at 20% in Iceland.
- Dividends carry 5% or 0% US withholding and are generally exempt in Iceland.
See US subsidiary for a foreign company.
Game studios and start-ups
Icelandic game and software start-ups that raise from US venture capital usually need a Delaware C-Corporation at the top. The Icelandic ehf. becomes a development subsidiary, and royalties or service fees paid by the Delaware company are free of US withholding under the treaty. Icelandic founders should take advice on how the share exchange is taxed. See raising US investment as a foreign founder and US LLC for app developers.
Tourism
Icelandic tour operators that sell heavily to American travellers sometimes set up a US company to sell packages through US travel agents and take US payments. If the US company has US staff, it pays US tax on its sales margin. If it only collects payments for tours delivered in Iceland, the revenue belongs to the Icelandic operator, and the US company is a payment tool. Keep the records clear either way.
US LLC formation from Iceland
US tax position
A single-member LLC with a non-resident owner pays no US income tax if the owner works from Iceland and the LLC has no US office, employees or dependent agents (see effectively connected income explained). It files Form 5472 with a pro forma Form 1120 every year, and the penalty for missing it is $25,000 (see Form 5472 explained).
When an LLC fits
- A small US contracting entity owned by an ehf., with an active business.
- US rental property, after Icelandic advice on classification and CFC rules (see real estate investment LLC for foreigners).
The US–Iceland treaty
The current treaty was signed in 2007 and replaced a much older one. It limits US withholding:
| Payment from the USA | Treaty rate |
|---|---|
| Dividends to an individual | 15% |
| Dividends to a company owning 10% or more | 5% |
| Dividends to a company owning 80% or more, meeting conditions | 0% |
| Interest | 0% |
| Royalties | 0% |
It limits US tax on business profits to a US permanent establishment and contains a modern limitation on benefits article. Claim it on Form W-8BEN or W-8BEN-E (see W-8BEN-E vs W-8BEN explained).
Capital controls are gone
After the 2008 banking collapse, Iceland imposed capital controls that made foreign investment by residents difficult for almost a decade. They were lifted for individuals and companies in 2017. An Icelander can now capitalise a US company and transfer funds without special permission. Icelandic banks still ask about the source and purpose of large transfers under anti-money laundering rules.
Which state
- Delaware for a start-up or subsidiary.
- Massachusetts, Washington or the state where staff and stock will be for seafood exporters.
- Wyoming for a small LLC owned by an ehf.
See best state for non-residents and the state selector.
What it costs
UCB's prices include state fees and the first year of registered agent service:
- Delaware corporation with EIN: $358.
- Wyoming LLC with EIN: $249, or $348 with a US bank account application.
A Delaware corporation costs $578 a year to keep active. A Wyoming LLC costs $121 a year, or $421 with the annual federal return. A US business address with your own suite number is $60 a year. See what a US LLC costs every year.
Documents and banking
For an ehf. or hf., a company register extract from Skatturinn (fyrirtækjaskrá) in English and a board resolution. For an individual, your Icelandic passport and proof of address. Icelandic names follow the patronymic system, so your US documents may show a surname that differs from family members'. That is normal; just use your passport spelling consistently, including letters such as Þ, Ð and Æ as they are transliterated in the passport's machine-readable zone. See US business bank accounts for non-residents.
Mistakes to avoid
- Running a US LLC from Iceland and forgetting it may be Icelandic-resident or caught by CFC rules.
- Not declaring LLC distributions at 22% because no US tax was withheld.
- Treating tour revenue collected in the USA as US revenue when the service is delivered in Iceland.
- Inconsistent name spellings with Icelandic characters.
- Missing Form 5472 in a year when no US tax was due.
Frequently asked questions
How does Iceland treat a US LLC? Generally as a foreign company. Distributions are dividends taxed at 22%, and an LLC managed from Iceland can be Icelandic-resident.
Is there a US–Iceland tax treaty? Yes, from 2007. Dividends 15%, 5% or 0%, interest and royalties 0%.
Can I move money to a US company freely? Yes. Iceland lifted its capital controls in 2017. Banks still ask about large transfers.
What is the best US structure for an Icelandic company? Usually a Delaware corporation as a subsidiary.
Does my US LLC pay US tax? Not if it has no US office, staff or agents. It files Form 5472 and a pro forma 1120 every year.
How UCB can help
We form US corporations and LLCs for Icelandic owners and companies remotely: the state filing, EIN, registered agent, US business address and bank application. We prepare W-8BEN-E treaty forms, and each year we file the US returns through our US tax filing service. See our formation, EIN and bank account package, and the Norway and Denmark guides.
Setting up a US company from Iceland? WhatsApp us at +1 315 961 2956 or email enquiries@ucbsolutions.com.
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This article is general information for non-resident business owners and is not legal or tax advice. Rules and fees change; contact us to confirm what applies to your situation.
