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Iceland: Taxes and Costs

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Rental income taxes are quite low in Iceland

INDIVIDUAL TAXATION

Non-resident individuals are taxed only on their Icelandic-sourced income. Married couples are taxed jointly on certain types of income, and taxed separately on others.

INCOME TAX

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

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.

RENTAL INCOME
Rental income is classified as investment income, under category C and taxed by way of assessment at a flat rate of 10% for non-residents. Expenses incurred in generating rental income are not deductible.

CAPITAL GAINS
Gains realized from the sale of privately owned real properties by non-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).

Municipal Income Tax

Municipalities in Iceland also levy their own taxes on income. The rate varies according to the municipality, from 12.10% to 13.03%. The average rate for 2008 is 12.97%.

The taxable base is also different for those who are 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 engaged in a business, the tax base is the aggregate of income from all categories.

Income from category C of non-residents, however, is not subject to municipal income tax.

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.

CORPORATE TAXATION

INCOME TAX

Corporate income in Iceland is taxed at a flat rate of 18%. Expenses incurred in acquiring and maintaining income are all deductible.

CAPITAL GAINS
Capital gains derived from the sale of real estate property are taxed as ordinary corporate income at 18%. The taxable gain is computed as selling price less its depreciated book value.

Iceland - more data and information

• Guide to buying houses and registering property sales in Iceland

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