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).