Desiring to conclude a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital, 　　Have agreed as follows: 　　　　　　　　　　　　　　ARTICLE 1 　　　　　　　　　　　　　Taxes Covered 　　(1) The taxes which are the subject of this Convention are: 　　(a) In the case of the United States, the Federal income taxes imposed by the Internal Revenue Code, hereinafter referred to as the "United States tax", and 　　(b) In the case of Iceland, the National income tax, National capital tax and municipal income tax, hereinafter referred to as the "Icelandic tax". 　　(2) This Convention shall also apply to taxes substantially similar to those covered by paragraph (1) which are imposed in addition to, or in place of, existing taxes after the date of signature of this Convention. 　　(3) For the purpose of Article 7 (Nondiscrimination), this Convention shall also apply to taxes of every kind imposed by the Contracting States, states, political subdivisions, or local authorities. For the purpose of Article 29 (Exchange of Information) this Convention shall also apply to taxes of every kind imposed by the Contracting States. ARTICLE 2 General Definitions 　　(1) In this Convention, unless the context otherwise requires: 　　(a) (i) The term "United States" means the United States of America; and 　　(ii) When used in a geographical sense, the "United States" means the states thereof and the District of Columbia. Such term also includes 　　(A) the territorial sea thereof, and 　　(B) the seabed and subsoil of the submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which the United States exercises sovereign rights, in accordance with international law, with respect to the exploration for, and exploitation of, the natural resources of such areas, but only to the extent that the person, property, or activity to which this Convention is being applied is connected with such exploration or exploitation. 　　(b) (i) The term "Iceland" means the Republic of Iceland; and 　　(ii) When used in a geographical sense the term "Iceland" includes 　　(A) the territorial sea thereof and 　　(B) the seabed and subsoil of the submarine areas adjacent to the coast thereof, but beyond the territorial sea, over which Iceland exercises sovereign rights, in accordance with international law, with respect to the exploration for, and exploitation of, the natural resources of such areas, but only to the extent that the person, property, or activity to which this Convention is being applied is connected with such exploration or exploitation. 　　(c) The term "one of the Contracting States" or "the other Contracting State" means the United States or Iceland, as the context requires. 　　(d) The term "person" includes an individual, a partnership, a corporation, an estate, a trust, or any body of persons. 　　(e) (i) The term "United States corporation" or "corporation of the United States" means a corporation which is created or organized under the laws of the United States or any state thereof or the District of Columbia or any unincorporated entity treated as a United States corporation for United States tax purposes; and 　　(ii) The term "Icelandic corporation" or "corporation of Iceland" means a corporation or any entity which is treated as a body corporate for tax purposes under the laws of Iceland and is created or organized under the laws of Iceland. 　　(f) The term "competent authority" means: 　　(i) In the case of the United States, the Secretary of the Treasury or his delegate, and 　　(ii) In the case of Iceland, the Minister of Finance or his authorized representative. 　　(g) The term "State" means the United States, Iceland, or any other National State. 　　(h) The term "international traffic" means any voyage of a ship or aircraft operated by a resident of one of the Contracting States except where such voyage is confined solely to places within a Contracting State. 　　(2) Any other term used in this Convention and not defined in this Convention shall, unless the context otherwise requires, have the meaning which it has under the laws of the Contracting State whose tax is being determined. Notwithstanding the preceding sentence, if the meaning of such a term under the laws of one of the Contracting States is different from the meaning of the term under the laws of the other Contracting State, or if the meaning of such a term is not readily determinable under the laws of one of the Contracting States, the competent authorities of the Contracting States may, in order to prevent double taxation or to further any other purpose of this Convention, establish a common meaning of the term for the purposes of this Convention. ARTICLE 3 Fiscal Residence 　　(1) In this Convention: 　　(a) The term "resident of Iceland" means: 　　(i) An Icelandic corporation, and 　　(ii) Any person (except a corporation or any entity treated under Icelandic laws as a corporation) resident in Iceland for purposes of its tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such person is subject to Icelandic tax as the income of a resident. 　　(b) The term "resident of the United States" means: 　　(i) A United States corporation, and 　　(ii) Any person (except a corporation or any unincorporated entity treated as a corporation for United States tax purposes) resident in the United States for purposes of its tax, but in the case of a partnership, estate, or trust only to the extent that the income derived by such person is subject to United States tax as the income of a resident. 　　(2) Where by reason of the provisions of paragraph (1) an individual is a resident of both Contracting States: 　　(a) He shall be deemed to be a resident of that Contracting State in which he maintains his permanent home; 　　(b) If he has a permanent home in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of that Contracting State with which his personal and economic relations are closest (center of vital interests); 　　(c) If the Contracting State in which he has his center of vital interests cannot be determined, he shall be deemed to be a resident of that Contracting State in which he has a habitual abode; 　　(d) If he has a habitual abode in both Contracting States or in neither of the Contracting States, he shall be deemed to be a resident of the Contracting State of which he is a citizen; and 　　(e) If he is a citizen of both Contracting States or of neither Contracting State the competent authorities of the Contracting State shall settle the question by mutual agreement. 　　For purposes of this paragraph, a permanent home is the place where an individual dwells with his family. 　　(3) An individual who is deemed to be a resident of one of the Contracting States and not a resident of the other Contracting State by reason of the provisions of paragraph (2) shall be deemed to be a resident only of the first-mentioned Contracting State for all purposes of this Convention, including　Article 4 (General Rules of Taxation). 　　　　　　　　　　　　　ARTICLE 4 　　　　　　　　　　General Rules of Taxation 　　(1) A resident of one of the Contracting States may be taxed by the other Contracting State on any income from sources within that other Contracting State and only on such income, subject to any limitations set forth in this Convention. For this purpose, the rules set forth in Article 6 (Source of Income) shall be applied to determine the source of income. 　　(2) The provisions of this Convention shall not be construed to restrict in any manner any exclusion, exemption, deduction, credit, or other allowance now or hereafter accorded: 　　(a) By the laws of one of the Contracting States in the determination of the tax imposed by that Contracting State, or 　　(b) By any other agreement between the Contracting States. 　(3) Notwithstanding any provisions of this Convention except paragraph (4), a Contracting State may tax a citizen or resident of that Contracting State as if this Convention had not come into affect. 　　The provisions of paragraph (3) shall not affect: 　　(a) The benefits conferred by a Contracting State under Articles 5 (Relief from Double Taxation), 7 (Nondiscrimination), 25 (Social Security Payments), 26 (Diplomatic and Consular Officers) and 28 (Mutual Agreement Procedure); and 　　(b) The benefits conferred by a Contracting State under Articles 21 (Teachers), 22 (Students and Trainees), and 23 (Governmental Functions), upon individuals who are neither citizens of, nor have immigrant status in, that Contracting State. 　　(5) The United States may impose its personal holding company tax and its accumulated earnings tax notwithstanding any provision of this Convention. However, an Icelandic corporation shall be exempt from the United States personal holding company tax in any taxable year if all of its stock is owned, directly or indirectly, by one or more individuals who are residents of Iceland (and not citizens of the United States) for that entire year. An Icelandic corporation shall be exempt from the United States accumulated earnings tax in any taxable year unless such corporation is engaged in trade or business in the United States through a permanent establishment at any time during such year. 　　(6) The competent authorities of the two Contracting States may each prescribe regulations necessary to carry out the provisions of this Convention. ARTICLE 5 Relief from Double Taxation 　　Double taxation of income shall be avoided in the following manner: 　　(1) In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the principles hereof), the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of Icelandic tax, and in the case of a United States corporation owning at least 10 percent of the voting power of an Icelandic corporation from which it receives dividends in any taxable year, shall allow credit for the appropriate amount of Icelandic tax paid by the Icelandic corporation paying such dividends with respect to the profits out of which such dividends are paid. Such appropriate amount shall be based upon the amount of tax paid to Iceland, but the credit shall not exceed the limitations (for the purpose of limiting the credit to the United States tax on income from sources within Iceland or on income from sources outside of the United States) provided by United States law for the taxable year. For the purpose of applying the United States credit in relation to taxes paid to Iceland, the rules set forth in Article 6 (Source of Income) shall be applied to determine the source of income. 　　For purposes of applying the United States credit in relation to the taxes paid to Iceland, the taxes referred to in paragraph (1) (b) of Article 1 (Taxes Covered) other than the national capital tax shall be considered to be income taxes. 　　(2) In the case of income derived from sources in the United States, relief from double taxation shall be granted in Iceland in the following manner: 　　(a) Where a resident of Iceland derives income or owns property which, in accordance with the provisions of this Convention may be taxed in the United States or may be taxed in both Contracting States according to Article 16 (Capital Gains), 18 (Independent Personal Services), or 19 (Dependent Personal Services), or is exempt from United States tax under Article 21 (Teachers) or Article 22 (Students and Trainees), Iceland shall, subject to the provisions of subparagraph (b) of this paragraph, exempt such income or property from tax but may, in calculating tax on the remaining income or property of that resident, apply the rate of tax which would have been applicable if the exempted income or property had not been so exempted. 　　(b) Except as provided in subparagraph (a), where a resident of Iceland derives income which, in accordance with the provisions of this Convention may be taxed in both Contracting States, Iceland shall allow as a credit against the tax on the income of that resident an amount equal to the tax paid in the United States. Such credit shall not, however, exceed that part of the Icelandic tax, as computed before the credit is given, which is attributable to the income derived from sources in the United States as determined under the rules set forth in Article 6 (Source of Income). ARTICLE 6 Source of Income For purposes of this Convention: 　　(1) Dividends shall be treated as income from sources within a Contracting State only if paid by a corporation of that Contracting State. 　　(2) Interest shall be treated as income from sources within a Contracting State only if paid by such Contracting State, a political subdivision or a local authority thereof, or by a resident of that Contracting State. Notwithstanding the preceding sentence: 　　(a) If the person paying the interest (whether or not such person is a resident of one of the Contracting States) has a permanent establishment in one of the Contracting States in connection with which the indebtedness on which the interest is paid was incurred and such interest is borne by such permanent establishment, or 　　(b) If the person paying the interest is a resident of one of the Contracting States and has a permanent establishment in a State other than a Contracting State in connection with which the indebtedness on which the interest is paid was incurred and such interest is paid to a resident of the other Contracting State, and such interest is borne by such permanent establishment, such interest shall be deemed to be from sources within the State in which the permanent establishment is situated. 　　(3) Royalties described in paragraph (2) of Article 14 (Royalties) for the use of, or the right to use, property or rights described in such paragraph shall be treated as income from sources within a Contracting State only to the extent that such royalties are for the use of, or the right to use, such property or rights within that Contracting State. 　　(4) Income from real property and royalties from the operation of mines, quarries, or other natural resources (including gains derived from the sale of such property or the right giving rise to such royalties) shall be treated as income from sources within a Contracting State only if such property is situated in that Contracting State. 　　(5) Income from the rental of tangible personal (movable) property shall be treated as income from sources within a Contracting State only if such property is situated in that Contracting State. 　　(6) Income received by an individual for his performance of labor or personal services, whether as an employee or in an independent capacity, shall be treated as income from sources within a Contracting State only to the extent that such services are performed in that Contracting State. Income from personal services performed aboard ships or aircraft operated by a resident of one of the Contracting States in international traffic, or in fishing on the high seas, shall be treated as income from sources within that Contracting State if rendered by a member of the regular complement of the ship or aircraft. Notwithstanding the preceding provisions of this paragraph, remuneration described in Article 23 (Governmental Functions) and payments described in Article 25 (Social Security Payments) shall be treated as income from sources within a Contracting State only if paid by or from the public funds of that Contracting State or a political subdivision or local authority thereof. 　　(7) Income from the purchase and sale of intangible or tangible personal (including movable) property (other than gains defined as royalties by paragraph (2) (b) of Article 14 (Royalties)) shall be treated as income from sources within a Contracting State only if such property is sold in that Contracting State. 　　(8) Notwithstanding paragraphs (1) through (7), industrial or commercial profits which are attributable to a permanent establishment which the recipient, a resident of one of the Contracting States, has in the other Contracting State, including income derived from real property and natural resources and dividends, interest, royalties (as defined in paragraph (2) of Article 14 (Royalties), and capital gains, but only if the property or rights giving rise to such income, dividends, interest, royalties, or capital gains are effectively connected with such permanent establishment, shall be treated as income from sources within that other Contracting State. 　　(9) The source of any item of income to which paragraphs (1) through (8) are not applicable shall be determined by each of the Contracting States in accordance with its own law. Notwithstanding the preceding sentence, if the source of any item of income under the laws of one Contracting State is different from the source of such item of income under the laws of the other Contracting State or if the source of such income is not readily determinable under the laws of one of the Contracting States, the competent authorities of the Contracting States may, in order to prevent double taxation or further any other purpose of this Convention, establish a common source of the item of income for purposes of this Convention. ARTICLE 7 Nondiscrimination 　　(1) A citizen of one of the Contracting States who is a resident of the other Contracting State shall not be subjected in that other Contracting State to more burdensome taxes than a citizen of that other Contracting State who is a resident thereof. 　　(2) A permanent establishment which a resident of one of the Contracting States has in the other Contracting State shall not be subject in that other Contracting State to more burdensome taxes than a resident of that other Contracting State carrying on the same activities. This paragraph shall not be construed as obliging a Contracting State to grant to individual residents of the other Contracting State any personal allowances, reliefs, or deductions for taxation purposes on account of civil status or family responsibilities which it grants to its own individual residents. 　　(3) A corporation of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which a corporation of the first-mentioned Contracting State carrying on the same activities, the capital of which is wholly owned or controlled by one or more residents of the first-mentioned Contracting State, is or may be subjected. 　　(4) The provisions of paragraph (2) shall not be construed as preventing Iceland from taxing the total profits attributable to a permanent establishment which is maintained in Iceland by a United States corporation. However, the amount of such tax shall not exceed the tax that would be imposed on an Icelandic corporation earning such profits that distributed to its shareholders the same percentage of its profits as such United States corporation maintaining such permanent establishment distributed to its shareholders from its total profits. ARTICLE 8 Business Profits 　　(1) Industrial or commercial profits of a resident of one of the Contracting States shall be exempt from tax by the other Contracting State unless such resident is engaged in industrial or commercial activity in that other Contracting State through a permanent establishment situated therein. If such resident is so engaged, tax may be imposed by that other Contracting State on the industrial or commercial profits of such resident but only on so much of such profits as are attributable to the permanent establishment. 　　(2) Where a resident of one of the Contracting States is engaged in industrial or commercial activity in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to the permanent establishment the industrial or commercial profits which would be attributable to such permanent establishment if such permanent establishment were an independent entity engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the resident of which it is a permanent establishment. 　　(3) In the determination of the industrial or commercial profits of a permanent establishment, there shall be allowed as deduction expenses which are reasonably connected with such profits, including executive and general administrative expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere. 　　(4) No profits shall be attributed to a permanent establishment of a resident of one of the Contracting States in the other Contracting State merely by reason of the purchase of goods or merchandise by that permanent establishment, or by the resident of which it is a permanent establishment, for the account of that resident. 　　(5) The term "industrial or commercial activity" includes the conduct of manufacturing, mercantile, insurance, agricultural, fishing or mining activities, the operation of ships or aircraft, the furnishing of services, the rental of tangible personal property, and the rental or licensing of motion picture films or films or tapes used for radio or television broadcasting. Such term does not include the performance of personal services by an individual either as an employee or in an independent capacity. 　　(6) (a) The term "industrial or commercial profits" includes income derived from industrial or commercial activity. Such term also includes income derived from real property and natural resources and dividends, interest, royalties (as defined in paragraph (2) of Article 14 (Royalties)), and capital gains but only if the property or rights giving rise to such income, dividends, interest, royalties, or capital gains is effectively connected with a permanent establishment which the recipient, being a resident of one of the Contracting States, has in the other Contracting State, whether or not such income is derived from industrial or commercial activity. 　　(b) To determine whether property or rights are effectively connected with a permanent establishment, the factors taken into account shall include whether the rights or property are used in or held for use in carrying on industrial or commercial activity through such permanent establishment and whether the activities carried on through such permanent establishment were a material factor in the realization of the income derived from such property or rights. For this purpose, due regard shall be given to whether or not such property or rights or such income were accounted for through such permanent establishment. 　　(7) Where industrial or commercial profits include items of income which are dealt with separately in other Articles of this Convention, the provisions of those Articles shall, except as otherwise provided therein, supersede the provisions of this Article. ARTICLE 9 Permanent Establishment 　　(1) For the purpose of this Convention, the term "permanent establishment" means a fixed place of business through which industrial or commercial activity is carried on. 　　(2) The term "fixed place of business" includes but is not limited to: 　　(a) A branch; 　　(b) An office; 　　(c) A factory; 　　(d) A workshop; 　　(e) A warehouse; 　　(f) A mine, quarry, or other place of extraction of natural resources; and 　　(g) A building site or construction or installation project which exists for more than 12 months. 　　(3) Notwithstanding paragraphs (1) and (2), a permanent establishment shall not include a fixed place of business used only for one or more of the following: 　　(a) The use of facilities for the purpose of storage, display, or delivery of goods or merchandise belonging to the resident; 　　(b) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of storage, display or delivery; 　　(c) The maintenance of a stock of goods or merchandise belonging to the resident for the purpose of processing by another person; 　　(d) The maintenance of a fixed place of business for the purpose of purchasing goods or merchandise, or for collecting information, for the resident; 　　(e) The maintenance of a fixed place of business for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the resident; or 　　(f) The maintenance of a building site or construction or installation project which does not exist for more than 12-months. 　　(4) A person acting in one of the Contracting States on behalf of a resident of the other Contracting State, other than an agent of an independent status to whom paragraph (5) applies, shall be deemed to be a permanent establishment in the first-mentioned Contracting State if such person has, and habitually exercises in the first-mentioned Contracting State, an authority to conclude contracts in the name of that resident, unless the exercise of such authority is limited to the purchase of goods or merchandise for that resident. 　　(5) A resident of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because such resident engages in industrial or commercial activity in that other Contracting State through a broker, general commission agent, or any other agent of an independent status, where such broker or agent is acting in the ordinary course of his business. 　　(6) The fact that a resident of one of the Contracting States is a related person (as defined in Article 11 (Related Persons)) with respect to a resident of the other Contracting State or with respect to a person who engages in industrial or commercial activities in that other Contracting State (whether through a permanent establishment or otherwise) shall not be taken into account in determining whether that resident of the first-mentioned Contracting State has a permanent establishment in that other Contracting State. 　　(7) The principles set forth in paragraphs (1) through (6) shall be applied in determining whether there is a permanent establishment in a State other than one of the Contracting States or whether a person other than a resident of one of the Contracting States has a permanent establishment in one of the Contracting States. ARTICLE 10 Shipping and Air Transport 　　(1) Notwithstanding Article 8 (Business Profits), income which a resident of the United States derives from the operation in international traffic of ships or aircraft registered in the United States shall be exempt from tax by Iceland. 　　(2) Notwithstanding Article 8 (Business Profits), income which a resident of Iceland derives from the operation in international traffic of ships or aircraft shall be exempt from tax by the United States. 　　(3) For the purposes of this Article, income derived from the operation in international traffic of ships or aircraft includes: 　　(a) Income derived by a domestic or international carrier from the lease of ships or aircraft either on a bareboat or full charter basis if such lease is incidental to its business as a carrier; and 　　(b) Income derived from the use and lease of: 　　(i) Containers, 　　(ii) Trailers for the inland transport of containers, and 　　(iii) Other related equipment, 　　if such income is incidental to other income described in paragraph (1). 　　　　　　　　　　　　ARTICLE 11 　　　　　　　　　　　Related Persons 　　(1) Where a resident of one of the Contracting States and any other person are related and where such related persons make arrangements or impose conditions between themselves which are different from those which would be made between independent persons, any income, deductions, credits, or allowances which would, but for those arrangements or conditions, have been taken into account in computing the income (or loss) of, or the tax payable by, one of such persons, may be taken into account in computing the amount of the income subject to tax and the taxes payable by such person. 　　(2) A person is related to another person if either person owns or controls directly or indirectly the other or if any third person or persons own or control directly or indirectly both. For this purpose, the term "control" includes any kind of control, whether or not legally enforceable, and however exercised or exercisable. ARTICLE 12 Dividends 　　(1) Dividends derived from sources within one of the Contracting States by a resident of the other Contracting State may be taxed by both Contracting States. 　　(2) The rate of tax imposed by one of the Contracting States on dividends derived from sources within that Contracting State by a resident of the other Contracting State shall not exceed: 　　(a) 15 percent of the gross amount actually distributed; or 　　(b) When the recipient is a corporation, 5 percent of the gross amount actually distributed if: 　　(i) During the part of the paying corporation's taxable year which precedes the date of payment of the dividend and during the whole of its prior taxable year (if any), at least 10 percent of the outstanding shares of the voting stock of the paying corporation was owned by the recipient corporation, and 　　(ii) Not more than 25 percent of the gross income of the paying corporation for such prior taxable year (if any) consists of interest or dividends (other than interest derived from the conduct of a banking, insurance, or financing business and dividends or interest received from subsidiary corporations, 50 percent or more of the outstanding shares of the voting stock of which is owned by the paying corporation at the time such dividends or interest is received). 　　(3) Paragraph (2) shall not apply if the recipient of the dividends, being a resident of one of the Contracting States, has a permanent establishment in the other Contracting State and the shares with respect to which the dividends are paid are effectively connected with such permanent establishment. In such a case, see paragraph (6) (a) of Article 8 (Business Profits). 　　(4) Dividends paid by a corporation of one of the Contracting States to a person other than a resident of the other Contracting State (and in the case of dividends paid by an Icelandic corporation, to a person other than a citizen of the United States) shall be exempt from tax by that other Contracting State. This paragraph shall not apply if the recipient of the dividends has a permanent establishment in that other Contracting State and the shares with respect to which the dividends are paid are effectively connected with such permanent establishment.