Income tax in Iceland

October 17, 2018


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 jointly on investment income and separately on other categories of income.

Former residents of Iceland must prove that they have become subject to another country´s taxation jurisdiction after leaving Iceland. Otherwise, former residents remain subject to unlimited tax liability for three years after leaving the country.


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: (1) wages and salaries, benefits, and self-employment income; (2) income from business; and (3) investment income.

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 the other categories are aggregated and taxed after the allowed deductions have been taken. Investment income is taxed separately by assessment at a rate of 20%.
  • For taxpayers engaged in a business, income from all categories is pooled together, after their respective allowed expenses were deducted.


Up to 10,724,553 (€93,257)  22.50%
Over 10,724,553 (€93,257)  31.80%

Resident taxpayers are entitled to the following 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 tax credit. Tax credit is ISK634,880 (€5,521) for tax year 2017 (assessment year 2018), and it is ISK646,739 (€5,624) for tax year 2018 (assessment year 2019). 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 rate varies according to the municipality. The average municipal income tax is 14.44%.

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 the other categories. For individuals who are engaged in a business, the tax base is the aggregate of all categories of income.

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.

Rental income is classified as investment income, and taxed by way of assessment at a flat rate of 22%. For income earned from leasing residential properties, only 50% of gross rent is taxable.

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 property that was sold was business property, then the gains will be considered as business income and taxed as ordinary income.

If the gains come from private real estate property, then the gains are considered as investment income, and taxed at a flat rate of 22%.

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.


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. The maximum real estate tax rate is 1.65%.



Income and capital gains earned by companies are taxed at a flat rate of 20%. When calculating taxable income, expenses incurred in acquiring and maintaining income are all deductible. When calculating taxable capital gains, depreciated book value is deducted from selling price or market value of the property.