Taxation in Iceland

Iceland is one of the countries that wants to stand out from the crowd and distinguish itself as a favored investment destination. The tax rates in the country are moderate, neither too high nor too low. It is always a difficult decision for governments, whether in Iceland or any other country. They have to strike a balance between revenue and the need to attract investors to locate their companies in the country. Taxes in Iceland must be viewed from this perspective. This applies to taxes on the income of both private individuals and companies.

Tax Rates for Individuals in Iceland

Individuals earning up to ISK 11,125,044 or about $80,000 are taxed on about 37% of their income, of which 22.5% is taxed at the national level and the rest at the municipal level. For incomes above this level of around $80,000, this rate can rise to 46%+. The split here is 32% + 14%. These are approximate figures. This applies to resident Icelanders. For non-resident Icelanders, the rates are not very different. There are clear definitions of what is a resident and what is a non-resident citizen.

There are also clear definitions for the different types of income that are considered taxable. These include salary, bonuses, living expenses, housing benefits, employer contributions to the pension fund and so on. There are some exceptions to taxes in Iceland, such as the increase in the value of a person's assets through the inheritance of property. There is a separate inheritance tax that must be paid in such cases. There are also tax exemptions for insurance and compensation payments.

Individuals may pay tax on other income such as capital gains, investment income and long-term rental income. The average tax rate on all this income will also hover around the 22% mark.

Corporate Income Taxes in Iceland

Companies with different shareholdings have to pay different taxes in Iceland. If it is a limited liability company or a limited partnership, the tax rate is 20% on its income. Other corporations have to pay a rate of 37.6%.

When companies sell their shares during the year, they must pay a capital gains tax of 22% on the profits realised from these share sales. In addition, all companies must pay an amount of 6.85% to the Treasury on the total costs they incur for their employees' salaries. This amount is earmarked for social security. The government has linked two other items, the bankruptcy fund and the market fee, to this 6.85% contribution.

Employers must also pay a further 8% of the salary they pay their employees into the pension fund. There are the usual clauses that allow companies to write off their total income. Some other sectors, such as the financial sector, are taxed by the so-called financial activity tax. This stands at 5.5%.

Value Added tax

The piece on taxes in Iceland cannot be complete without mentioning value added tax, or VAT. It is a major source of revenue for the government and the VAT rate in Iceland is 24%. The government has allowed a few items and services to be taxed at a lower rate of 11%. These include newspapers and books as well as services such as electricity and fuel supplies. Hotel accommodation and food also fall under the 11% VAT rate category.

It helps potential investors in Iceland to know how the country's tax structure works. Some of these tax rates may seem steep, but a country of this small size and population needs to supplement its revenues to fund the various projects in the capital and revenue streams. Some sectors are also generously supported by the government. Film production companies are reimbursed 20% of their total costs for filming in Iceland.

If you plant to enter Iceland for any business activity contact Swapp Agency for assistance.