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

Non-residents are liable to pay taxes on their income from Icelandic sources. 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.

National Income Tax

The tax base for the national 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 23.75%. 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 23.75%.

Deductions and Credits

• Expense reimbursements relating to the use of the employee’s car, travel and meals, for the benefit of the employer’s business activities are not taxable
• Mandatory 4% pension insurance premium as well as voluntary pension insurance premiums up to 4% of total employment income
• Presumptive employment income, an amount comparable to the compensation a self-employed person would receive if the person were employed by an unrelated person, is deductible from business income as an operating expense
• All taxpayers are entitled to a credit of ISK356,180 (€4,075). If the credit is higher than the computed income tax liability, the excess will be offset against the municipal income tax liability of the individual.
• Interest compensation payments are made by the Treasury to individuals who incur interest with respect to the ownership of a residence for personal use.

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. The average rate is 12.97%.
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.

Contribution for the Construction Fund for the Elderly

Aside from the national and municipal income taxes, a contribution for the construction fund for the elderly is also imposed on income. All individuals between 16 and 69 years of age with income of at least ISK948,647 (€10,854) are liable to pay a lump-sum contribution of ISK6,314 (€72).

CAPITAL GAINS TAX

Capital gains from the sale of real estate property are taxable. The taxation depends on whether the gain was derived in the course of a business or the gain came from the disposal of private property.

If the gain was derived in the course of a business, then it will be taxed as business income, under category B, at 23.75%.

If the gain came from the sale of private property, then it will be taxed as investment income, under category C, at 10%.

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.

Iceland - more data and information

• Lawyers (attorneys) with property law practices in the Iceland

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