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Iceland

General Information

Country Name: Iceland
Currency: Icelandic Króna (ISK, kr.)
Primary Tax Authority: Directorate of Internal Revenue (Ríkisskattstjóri)

Key Legislation:

  • Icelandic Constitution (Stjórnarskrá Íslands): Establishes the framework for Iceland’s governance, including principles of taxation.
  • Income Tax Act (Tekjuskattslög): Governs personal and corporate income taxes.
  • Value-Added Tax Act (VSK-lög): Sets the framework for VAT on goods and services.
  • Tax Collection Act (Innheimtulögin): Regulates the collection of taxes by the Icelandic authorities.
  • Act on the Tax Treatment of Businesses (Lög um skattlagningu fyrirtækja): Governs corporate taxation, deductions, and exemptions.

Tax Authority and Collection Competence

Fiscal Authority Allocation:
Iceland operates under a centralized tax system, with most taxes being administered and collected by the Directorate of Internal Revenue.

Taxes Collected by Central Authorities:
Income tax, corporate tax, VAT, and customs duties are all collected centrally by the Directorate of Internal Revenue.

Revenue Sharing Mechanisms:
Personal income taxes are shared between the central government and municipalities. Municipalities receive a portion of the income tax revenues to finance local services.

Corporate Income Tax (CIT)

  • Standard CIT Rate: 20%
  • Taxable Income Definition: Companies in Iceland are taxed on their worldwide income. Non-resident companies are taxed on Iceland-sourced income.
  • Deductible Expenses: Normal business expenses, such as salaries, depreciation, and interest, are deductible. Entertainment expenses are subject to restrictions.
  • Loss Carryforwards/Carrybacks: Losses can be carried forward for 10 years. Carrybacks are not allowed.
  • Tax Incentives: Special incentives exist for R&D and investments in renewable energy projects.

Value-Added Tax (VAT)

  • Standard VAT Rate: 24%
  • Reduced VAT Rate: 11% (applies to essentials like food, books, and certain services)
  • Exemptions: Education, healthcare, and financial services are VAT-exempt.
  • VAT Scope: Most goods and services are subject to VAT, with exemptions and reduced rates applying to specific sectors.

Personal Income Tax (PIT)

  • PIT Rates: Personal income tax is progressive, with combined national and municipal rates ranging from 36.94% to 46.24%.
  • Municipal Tax: This tax varies across municipalities but averages around 14.45%.
  • Deductions: Taxpayers can claim deductions for pension contributions, transportation costs, and union dues.
  • Foreign Income: Icelandic residents are taxed on their worldwide income. Non-residents are taxed on their Icelandic-sourced income.

Additional Mandatory Contributions

Overview:
Social security contributions in Iceland are mandatory for both employers and employees.

  • Employer Contribution: 6.35% of gross wages.
  • Employee Contribution: 4% of gross wages.
  • Pension Contributions: Employees must contribute at least 4% to a pension fund, with employers contributing 8-11.5%.

Withholding Taxes

  • Dividends: 20% withholding tax on dividends paid to non-residents.
  • Interest: 12% withholding tax on interest payments to non-residents.
  • Royalties: 20% withholding tax on royalties paid to non-residents.
  • Reduced Rates: Iceland has tax treaties with numerous countries, reducing withholding tax rates on dividends, interest, and royalties.

Transfer Pricing Rules

  • Documentation Requirements: Iceland follows the OECD guidelines on transfer pricing. Companies must document related-party transactions to ensure they comply with the arm’s length principle.
  • Penalties: Non-compliance with transfer pricing rules can lead to fines and adjustments in taxable income.

Special Tax Regimes

  • Holding Companies: Iceland offers favorable tax treatment for holding companies, particularly regarding dividends and capital gains.
  • Incentives for Renewable Energy: Companies investing in geothermal or other renewable energy sources can benefit from tax exemptions and deductions.

Other Taxes

  • Real Estate Transfer Tax: 1.6% of the property’s value, payable by the buyer.
  • Capital Gains Tax: 22% on capital gains from the sale of shares, real estate, and other assets.
  • Inheritance and Gift Tax: A flat rate of 10% applies to most inheritances and gifts.
  • Property Tax: Set by municipalities, ranging from 0.5% to 1.65% of the property’s value.

Double Taxation Agreements (DTAs)

Key Partner Countries:
Iceland has tax treaties with countries including the United States, United Kingdom, Germany, and other European Union member states, aimed at preventing double taxation and reducing withholding taxes on dividends, interest, and royalties.

Local Taxes

Municipal Income Taxes:
Local municipalities in Iceland levy income taxes, which average around 14.45% and are collected alongside national taxes.

Compliance and Reporting

  • Corporate Tax Filing Deadlines: Corporate tax returns are due by May 31st of the following year.
  • VAT Filing Requirements: VAT returns are generally filed every two months, with large companies required to file monthly.
  • Penalties: Late filing or underpayment of taxes results in interest charges and potential fines.

Recent Developments

Recent Tax Law Changes:
Iceland has recently made changes to its tax law to better align with international standards on transparency and anti-avoidance. Changes include increased scrutiny on transfer pricing and improved reporting requirements for multinational corporations.

Upcoming Reforms:
Iceland is considering reforms to encourage further investment in renewable energy, which is a growing sector in the country. Additionally, corporate tax rates may be reviewed to remain competitive in the global market.

Global Tax Initiatives:
Iceland supports the OECD’s Base Erosion and Profit Shifting (BEPS) initiatives and has implemented various measures to reduce tax avoidance and improve compliance.

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