Income Tax in Iceland

Resident individuals are fully liable for tax payments in Iceland on their worldwide income.

Non-resident individuals staying temporarily in Iceland, who derive income from employment during their stay, are subject to national income tax on such income. They are also subject to municipal income tax in the same manner as residents. Other non-resident individuals are subject to national income tax and municipal income tax on their income from Iceland. Non-residents are allowed the same deductions for expenses as residents.

Personal income tax rates:

Personal income is a net income tax base with a progressive state income tax rate and municipal tax.

Monthly income (ISK*)	Income tax (%)	Municipal tax** (%)	Total tax (%)
On the first ISK 834,707 (ISK 10,016,484 per year)	22.5	14.44	36.94
On any income over ISK 834,707 (ISK 10,016,484 per year)	31.80	14.44	46.24

* Icelandic króna

** The municipal income tax withheld at source is 14.44% but varies from 12.44% to 14.52% in the final assessment, based on the decision of each municipality.

Icelandic-source income in the form of remuneration to non-resident directors and committee members, grants, or remuneration for independent personal services and art performances is taxed by assessment at a rate of 20% plus the average municipal income tax rate, which is 14.44% in 2017.

Capital income tax:

The tax rate on an individual’s capital income is 20%.

Income determination:

In the Icelandic tax system, individuals are subject to tax on all personal income and capital income. Taxable income is divided into three main categories:

 ·  Category A is comprised of wages and salaries, including presumptive employment income of self-employed individuals, employment-related benefits, retirement pensions, social security payments, grants, payments to copyright holders, royalties, etc.

· Category B is comprised of income from a business and income from an independent economic activity.

· Category C is comprised of capital income such as dividends, interest, and capital gains.

The concept of taxable income includes all kinds of payments made in cash and by other means where the monetary value can be ascertained.

Capital gains:

Gains from the sale of privately owned property are subject to 20% capital income tax.

Gains from sales of private residential property are tax-exempt if the property has been in the taxpayer’s ownership for over two years.

In general, an individual’s capital gains from the sale of privately owned liquid assets are tax-exempt.

Dividend income:

Dividends are subject to capital income tax. In the event of share decrease or the liquidation of the company, payments to shareholders exceeding the purchase price are treated as dividends and, as such, are subject to 20% tax.

Interest income:

Interest income derived from bank deposits, mutual and investment funds, bonds or other financial deeds, any kind of exchange rate profit, and any other income from monetary assets are subject to 20% capital income tax. No tax is calculated on the total interest revenue up to ISK 125,000 per year for an individual. This personal allowance is not applicable for withholding tax (WHT), but applies in the final tax assessment.

Rental income:

Rental income from residential properties and liquid assets is subject to 20% capital income tax. Note that only 50% of rental income is subject to taxation. Individuals renting out residential property for a limited period of time can deduct the rental cost of the property by netting the cost they incur for personal housing against the income generated.

Exempt income:

No significant items of compensation are tax exempt in Iceland.

Individual – Residence:

Any individual who stays in Iceland for more than 183 days during any 12-month period is considered a resident from the date of arrival.

Non-residents are individuals who stay temporarily in Iceland for 183 days or less.

Discontinuance of tax residency:

Tax liability ends as soon as the individual leaves Iceland. However, former domiciles remain fully tax liable in Iceland for three years after leaving the country, unless they prove that they have become subject to taxation in another country.

Tax administration:

Taxable period:

The tax year for individuals equals the calendar year.

Tax returns:

Individuals must file their tax returns before the end of 15 March in the consecutive year after the tax year. Extensions may be granted for up to five days.

Payment of tax:

Individual income taxes are withheld at source each month. Any difference between income tax withheld and the assessed income tax (national and municipal) is refunded, increased by 2.5% of the difference; any deficit is collected, increased by 2.5%, on five due dates each year. The due dates are the first day of July to December. Payments must be made within 30 days from the due date.

Withholding requirements for sale of property, dividends, interest, and royalties:

Gains from sale of property and royalties are not subject to WHT in Iceland.

Dividends and interest income are subject to WHT withheld at source and filed/returned on due date. The payment periods are three months, January to March, April to June, July to September, and October to December. Due dates are 20 April, 20 July, 20 October, and 20 January. Payments must be made within 15 days from the due dates.

Tax audit process:

Individuals receive a pre-drafted tax return from the tax authorities to be confirmed or corrected.

Dividends and interest income are capital gains and liable to WHT. Rental income, capital gains, and other income from assets are not liable to WHT.

When the tax return deadline has expired, the Internal Revenue Directorate calculates a taxpayer’s income tax according to the tax return submitted. WHT on salary and capital income is deducted from the final tax assessment. If these items are higher than the final tax assessment, the difference is used towards tax debt repayment and/or the taxpayer is refunded.

The final tax assessment for each year should be completed no later than ten months after the end of the income year, but, in general, the assessment will be finalised on 30 June.

Most of the filing process is electronic. The assessment notice is also electronic in most cases, but individuals can also file in paper. Tax authorities place a general notice of the assessment in the local gazette.

A complaint regarding the assessment can be sent to the Internal Revenue Directorate within 60 days, and the final ruling of that authority can be appealed to the State Internal Revenue Board within three months.

Statute of limitations:

Tax authorities in Iceland have the right to reassess tax returns for six years prior to the year of the assessment, i.e. the statutory period of limitation is six years. The statutory period only reaches a maximum of two years in time if tax returns have been filled out properly and all necessary information presented for tax authorities to establish a correct assessment. This means that in the year 2017, tax authorities can, in theory, reassess the tax of individuals back to income year 2011.

Corporate - Taxes on corporate income:

Resident corporations pay tax on their worldwide income less operating expenses. Deductible operating expenses are comprised of all the expenses and costs needed to provide, insure, and maintain income.

Corporate income tax (CIT) for limited liability companies (LLCs) and limited partnership companies is assessed at a rate of 20%. CIT for other types of legal entities (e.g. partnerships) is assessed at a rate of 36%.

Non-resident corporations receiving payments for services or business operations carried out in Iceland, as well as corporations operating a PE in Iceland or receiving a profit from such establishments, are subject to CIT for their Icelandic income at the same rate as applies to resident corporations.

Corporate residence:

In general, all corporations incorporated and registered in Iceland are considered to be tax residents in Iceland. The same applies to corporations that have their home address in Iceland according to their articles of association or if the management of the company is carried out in Iceland.

Foreign corporations are regarded as Icelandic tax residents if the effective management is carried out in Iceland.

The Internal Revenue Directorate can decide with a ruling whether a corporation’s residence is in Iceland. The ruling can be appealed to a court of law.

Permanent establishment (PE):

Definition of a 'permanent establishment' was, for the first time, added to the Icelandic Income Tax Act and is applicable as of 1 January 2017. The definition is in order with the Organisation for Economic Co-operation and Development (OECD) definition of a PE in Article 5. The main difference is that a building site or construction or installation project constitutes a PE only if it lasts more than six months, not 12 months as in the OECD Model Treaty. Another difference is that if a foreign company owns servers or similar computer systems to support the business’s primary field of business, that in itself does not constitute a PE if used in relation to data storage and gathering.

Income determination:

Inventory valuation:

The valuation method of raw materials and finished goods is on a first in first out (FIFO) basis or via the average cost method. When computing the value of produced goods, both direct and indirect production cost must be taken into account. For tax purposes, inventories can be further written down at a rate of 5% of calculated value.

Last in first out (LIFO) is not permitted.

Capital gains:

Capital gains are treated as taxable income in the year that transfer of ownership occurs and, as such, taxed as part of the general corporate income. Capital gains are generally not subject to withholding tax (WHT). There are rules that allow full deduction of net capital gains from the sale of shares, so, in general, corporations are not subject to taxation on capital gains from sale of shares.

Dividend income:

Dividend income is treated as taxable income and taxed as a part of corporate income. There are extensive rules that allow full deduction of the dividend, so, in general, corporations are not subject to taxation on dividends. Dividends are subject to WHT (currently 20%), which is a temporary payment towards the final tax assessment.

Interest income:

Interest income derived from bank deposits, mutual and investment funds, bonds, or other financial deeds; any kind of exchange rate profit; and any other income from monetary assets are subject to 20% tax.

Interest income of foreign parties is subject to 10% WHT in Iceland.

Royalty income:

Gross royalties paid to a non-resident are taxable at the standard 20% CIT rate and subject to withholding.

Profit from derivatives:

Profits from derivatives are treated as profits/losses from sales and are subject to 20% tax. Losses from derivatives can be used against profits from derivatives within the calendar year.

Foreign income:

Income earned abroad is generally taxed as a part of corporate income since a resident company is subject to CIT on its worldwide income.

Controlled foreign company (CFC) rules stipulate that profits of companies in low-tax jurisdictions must pay income tax of such a profit in direct proportion to shares, regardless of distribution. A low-tax jurisdiction is defined as a jurisdiction where the CIT rate is less than two-thirds of Iceland’s CIT rate (i.e. 13.3%, being two-thirds of 20%). See Controlled foreign companies (CFCs) in the Group taxation section for more information.

Double taxation of foreign income is avoided either through tax treaties or domestic tax provisions.

Tax administration:

Taxable period:

The tax year is the calendar year. However, in certain circumstances and upon application, the Internal Revenue Directorate can allow a different fiscal year from the calendar year.

Tax returns:

At the beginning of every year, the Internal Revenue Directorate determines the time limit for taxpayers to submit their tax returns and supporting documentation. The deadline for receipt of tax returns from corporations is generally 31 May each year. This deadline is extended upon application. Those who have their tax returns prepared by professional services can generally have the deadline extended until 10 September each year.

The final assessment must be completed no later than ten months after the end of the income year. Tax assessments for corporations will be available at the end of October.

Payment of tax:

Advance tax payments are due on the first day of every month, except January and October. Corporations pay income tax in advance, which is in turn deducted from the final tax assessment in October each year. The advance tax is collected in the months of February to September and amounts to 8.5% of the income tax on each due date. In total, the advance tax payments amount to 68% of the income tax. Any deficit remaining when final tax is assessed must be paid in equal instalments by 1 November and 1 December.

Income tax payments on dividends and interest income are due every quarter. Due dates are 20 January, 20 April, 20 July, and 20 October, and the final deadline for payment is 15 days later.

Tax audit process:

The Icelandic tax authorities select returns for examination using a variety of methods. Some returns are selected based on electronic selection; some are selected based on a formal supervisory plan. A tax audit can also be traced to information obtained by the tax authorities through efforts to identify participants of tax avoidance transactions.

The examination generally takes place by formal, written communication. The rules of the procedure are very strict, and the process can take from a few weeks to a year/years.

Appeal rights involve two administrative levels and also two judiciary levels.

Statute of limitations:

Tax authorities in Iceland have the right to reassess tax returns for CIT six years prior to the year of the assessment (i.e. the statutory period of limitation is six years). The statutory period only reaches a maximum of two years in time if tax returns have been filled out properly and all necessary information presented for tax authorities to establish a correct assessment. This means that in the year 2017, tax authorities can, in theory, reassess the company´s tax back to income year 2011.

However, the limitation has been prolonged to ten years in case of income and assets in low-tax jurisdictions.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.