Tax on property income in Iceland
October 17, 2018
Effective Tax Rate on Rental Income
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Global Property Guide research
Nonresident individuals are taxed on their Icelandic-sourced income. Nonresidents are allowed the same deductions and credits as residents. Married couples are taxed jointly on certain types of income, and taxed separately on others.
Nonresidents are liable to tax on income from Icelandic sources. 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: (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.
|TAXABLE INCOME, ISK (€)||TAX RATE|
|Up to 10,724,553 (€93,257)||22.50%|
|Over 10,724,553 (€93,257)||31.80%|
Municipal Income Tax
Municipalities in Iceland also levy their own taxes on income. The rate varies according to the municipality. The average municipal income tax is 14.44%.
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 fromthe other categories. For individuals engaged in a business, the tax base is the aggregate of income from all categories.
Income from category C of nonresidents, however, is not subject to municipal income tax.
Rental income is classified as investment income, and taxed by way of assessment at a flat rate of 22%. Expenses incurred in generating rental income are not deductible.
For income earned from leasing residential properties, only 50% of gross rent is taxable.
Gains from the sale of real estate property are taxable. Capital gains are generally computed as selling price less depreciated book value. The taxation of the gain depends on whether the gain will be classified under category B or C.
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%.
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.