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Iceland: Living There - Tax Issues

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Living There

INDIVIDUAL TAXATION

Residents are taxed on their worldwide income. An individual staying in Iceland for six months or more is considered a resident. Married couples are taxed separately on certain types of income, and jointly on others.

INCOME TAX

Income is taxed at the national and municipal level. A contribution for the construction fund for the elderly is also being imposed on income.

Income is divided into three categories:

• Category A consists of wages, salaries, all employment-related income and benefits, old-age pensions,
• Category B includes income from a business and income from independent economic activities,
• Category C includes investment income of any description. The significance of the division lies in the treatment of deductions for each category.

Deductions that are expressly allowed by law may only be deducted from categories A and C, while operating losses may only be deducted from category B.

For residents, the first ISK1,191,000 (€7,226) is exempt from taxation.

State Income Tax

The tax base for the state income tax varies for taxpayers who are engaged in a business and for those who are not. In both cases, deductions allowed for the categories are applied before the tax is levied.

• For taxpayers not engaged in a business, income from categories A and B are aggregated after the allowed deductions have been taken, and then taxed at a flat rate of 22.75% for 2008. Income from category C is taxed separately by assessment at a rate of 10%.
• For taxpayers engaged in a business, income from all categories are pooled together, after their respective allowed expenses were deducted, and then taxed at the flat income tax rate of 22.75% for 2008.

CAPITAL GAINS
Gains realized from the sale of privately owned real properties by residents are subject to 10% withholding tax. Taxable capital gains are computed by deducting acquisition costs and improvement costs from the property’s value at the time it was sold (i.e. selling price).

Gains from the sale of a private residence are exempt from tax if the residence has been owned by the taxpayer for at least 2 years and the size of the property falls within certain limits. If a residence has been owned for less than 2 years, the gains may be rolled over through a reduction in the acquisition cost of another residence. The taxation of such gains may be deferred for 2 years.

Municipal Income Tax

Municipalities also levy their own taxes on income. The tax base also varies for individuals engaged in a business and those who are not.

For individuals who are not engaged in a business, the tax base is the aggregate of income from categories A and B. For individuals who are engaged in a business, the tax base is the aggregate of all categories of income.

The rate varies from municipality to municipality, from 12.10% to 13.03%. The average rate is 12.97% for 2008. The excess of the tax credit granted for national income tax that exceeds the national income tax liability may be offset against the taxpayer’s municipal income tax liability.

PROPERTY TAX

Real Estate Tax

Real estate taxes are levied at the municipal level. The tax is imposed on the officially assessed value of the property, at rates that vary depending on which municipality the property is located.

Iceland - more data and information

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