CORPORATE TAXES
SIGNIFICANT DEVELOPMENTS
There were no significant regulatory or tax developments in 1998. A hydrocarbon tax law was enacted in April 1999.
TAXES ON CORPORATE INCOME
The company tax rate is 27%. The tax deriving from the income year ended in 1998 will be due in three equal parts in the months of October, November and December 1999.
CORPORATE RESIDENCE
A corporation is resident in Faroe lslands for tax purposes if it is incorporated in Faroe lslands and registered in the Companies Register as having a place of business in Faroe lslands.
OTHER TAXES
Value-added tax/The VAT rate is 25% of the price charged (exclusive of VAT).
Stamp taxes/There are few stamp taxes, and the amounts are insignificant.
Hydrocarbon tax/A hydrocarbon tax was instituted by new legislation in April 1999.
Employer's taxes/For unemployment security and other social security, the employer is obliged to pay 2.65% of salaries and wages. Companies that are exempt from VAT pay an employer's tax calculated on the total annual cost of salaries and wages. The rate can be up to 5%, which is the rate for banks and other financial institutions, the most significant sector paying
the employer's tax. These taxes are deductible for income tax purposes.
Social security charges of 2.5% on salaries and wages are borne by employees.
BRANCH INCOME
The tax on branch income is the same as on corporate profits. The employer's taxes also apply to branches. No tax is withheld on transfers of profits to a foreign head office.
INCOME DETERMINATION
Inventory valuation/Inventories are generally stated at the lower of cost or market value (replacement cost). Obsolete stock with an anticipated sales value below cost can be valued at the anticipated sales value.
Capital gains/Capital gains are normally included in ordinary taxable income. Capital losses are in many cases not deductible or deduction is restricted to particular types of capital gains. For a minority shareholder, gains on sale of shares within the first three years after acquisition are included in ordinary taxable income. Losses within the first three years can be deducted only from gains arising from other
shares that are sold within the first three years of ownership (losses may be carried forward for five years). For sale after the third year of ownership, neither gains nor losses are included in taxable income.
For a majority shareholder that is selling shares within the first three years of ownership, the same rules apply as for minority shareholders. Gains on sales of shares after three years but within ten years of ownership are taxed at a fixed rate of 25%. Losses on shares owned between three and ten years are deductible only from gains on shares owned between three and ten years. If the sale takes place more than ten years after the acquisition, gains are not taxed and losses are not deductible.
Gains on sales of bonds are included in ordinary taxable income. Losses can be set off only against gains on sales of bonds.
When computing capital gains on real estate, the original cost will be adjusted with the change in the price index since the property was acquired. Capital gain arising from normal inflation is thus not taxed.
Intercompany dividends/Dividends received from domestic companies are taxed at a rate of 35%. The company declaring the dividend is obliged to withhold and pay this tax. However, provided the recipient company owns at least 25% of the total share capital, dividends from a domestic company are tax exempt.
Dividends received from a foreign company are taxed as part of ordinary taxable income.
Foreign income/Faroese corporations are taxed on their worldwideincome. A corporation can claim relief for taxes imposed by foreign countries on income that is included in ordinary taxable income in Faroe lslands. Foreign dividends received by Faroese corporation are (as described above)
included in ordinary taxable income.
Undistributed income of a subsidiary is not taxed in Faroe Lslands.
Stock dividends/Stock dividends (bonus shares) are not possible.
DEDUCTIONS
Depreciation and depletion/Annual depreciation allowances on fixed assets other than buildings may be claimed by the diminishing-balance method at a rate of up to 30%. The depreciation base is the cost of fixed assets less
(1) sales proceeds of disposals and (2) depreciation allowances previously claimed.
Depreciation allowances on buildings (other than those used for dwelling purposes) may be claimed on the straight-line basis. Depreciation may be claimed at a rate of 7% (industrial buildings) or 4% (office and other buildings) per annum for the first ten years and after that at a rate of 2% (1%) until accumulated depreciation is 100%.
An advance allowance of up to 45% (though not in excess of 15% a year) may be claimed on a
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