Value-added tax (VAT)
VAT is a consumption tax levied on all stages of domestic business transactions. VAT is levied on all goods and services, as well as on the imports of goods and services, unless specific exemptions apply.
The general VAT rate is 24%.
The following goods and services are subject to a reduced VAT rate of 11%:
- Rental of hotel and guest rooms and other accommodation.
- Campground facilities. Access to electricity, toilets and showers at a campground is considered part of the property service and is therefore subject to VAT at the reduced rate whether the service is included in the entrance fee for camping or sold separately to guests of the camp site.
- Transportation of passengers, such as for whale watching, horseback riding, and snowmobile tours.
- The services of travel agencies and tour operators for services used in Iceland.
- Subscription to radio and television.
- Newspapers, periodicals, and magazines.
- Books, both Icelandic and translated, musical notation as well as their audio recordings. Same applies to compact discs and other similar media as well as electronic media.
- Geothermal hot water, electricity, and fuel oils used for heating houses and swimming pools.
- Food and other consumables for people as detailed in an addendum to the VAT Act.
- Access to roads and other transport-related constructions.
- Compact discs, records, audio cassettes, and other equivalent mediums for music only and not videos. Same applies to electronically published music without video.
- Condoms, reusable cloth diapers, and diapers inserts.
- Admission fees to baths, saunas, and spa areas that are not subject to exemption due to sporting activities.
- Guiding services.
Certain services and goods are zero-rated, which means that there is, in fact, no VAT charge. Zero-rated VAT mainly applies to exported goods and services provided abroad.
Businesses engaged in the trade of taxable goods and services for business purposes must register and collect VAT.
Services exempt from VAT
The VAT Act details certain services that are exempt from the tax, such as healthcare services, social services, the operation of schools, various education services, cultural activities, athletic activities, public transportation, postal services, sale of real estate (not including the rental of hotel and guest accommodation), rental of car parking lot, insurance activities, services of financial banks (as well as securities trading), lotteries and betting pools, artistic activities, funeral services, and all services of ministers of the church.
Those selling taxable goods and services totalling less than 2 million Icelandic króna (ISK) per 12-month period are also exempt from collecting and remitting VAT.
Agent for non-resident parties
Non-residents who are engaged in taxable transactions in Iceland but are neither domiciled nor have permanent residence in Iceland must appoint a VAT agent with residence in Iceland to report on their behalf. Both parties are liable for the VAT payments (responsible for ensuring remittance of VAT). If a non-resident does not appoint a VAT agent, the purchaser of the services/goods is responsible for paying the VAT (reverse charge).
If the non-resident is only providing e-services, one can apply for an Icelandic ID number to report/pay the VAT oneself (i.e. without a VAT agent).
VAT accounting periods and due dates
VAT is generally filed and paid on a bimonthly basis. The due date for payment of VAT is one month and five days after the end of the settlement period. For example, the due date for the January and February payments is 5 April.
If the VAT is not paid on the due date, a 1% penalty charge is added for every day up to a total of 10%. Late penalty interests also apply as of one month after the due date.
A special fee for late filing, ISK 5,000, applies if the tax authorities have estimated the VAT due to non-filing.
Foreign enterprises, which are neither residents of Iceland nor have a PE, may obtain reimbursement of VAT paid on goods and taxable services that have been purchased or imported for the commercial purposes of such enterprises in Iceland.
Such reimbursement can be effected to foreign enterprises that would be subject to registration in Iceland according to Article 5 and Article 6 of the VAT Act if the enterprises in question were engaged in such business in Iceland. This means that such enterprises as travel agencies, insurance companies, banks, and other financial institutions cannot obtain such reimbursement.
Another prerequisite is that the enterprise shall neither have sold goods nor taxable services in Iceland during the period to which the application refers.
Parties domiciled abroad can get partial VAT reimbursement on goods they have bought in Iceland if they take them abroad with them within three months from the date of purchase. They then must provide the goods, along with any necessary documents, to the appropriate reimbursement company or to the customs authorities on the date of departure, and the purchase price must amount to at least ISK 6,000.
The Directorate of Customs controls import, transit, and export and also collects duties, taxes, and various state revenue. The general rule is that import duties (customs, excise duties, VAT, and various other charges) are to be paid on imported goods unless otherwise stated in the law. For import of some products, other conditions, such as an import licence, may need to be submitted.
Iceland, Liechtenstein, Norway, and Switzerland are members of the European Free Trade Association (EFTA). The EFTA Convention established a free trade area among its member states. In addition, the EFTA states have jointly concluded free trade agreements with a number of countries in Central and Eastern Europe as well as in the Mediterranean region, Mexico, and Singapore. Also, the EFTA states entered into the Agreement on the European Economic Area (EEA) in 1992. The current contracting parties are, in addition to the three EFTA states, the European Community (EC) and the 25 EC member states. Iceland also has a bilateral agreement with its two neighbouring countries, Greenland and Faeroe Islands.
There is no excise tax in Iceland.
A municipal property tax is applied annually on the assessed value of real estate in Iceland.
Stamp duty is levied on documents regarding change of ownership of real estate and land and ships registered in Iceland. However, stamp duty is not applicable when the change of ownership is related to a merger or division of a company.
The stamp duty rate is 0.8% and 1.6%, depending on whether the rightful owner is an individual or a legal entity.
When issuing deeds and purchase agreements of real estate and land, the stamp duty is levied on the officially registered value of the real estate and land. The same applies to the deeds and purchase agreements of ships.
All other documents bear no stamp duty.
There was an agricultural charge of 1.2% of agricultural turnover, but it was abolished as of tax assessment 2017 (i.e. for turnover in 2016).
There are no payroll taxes applicable other than those that apply for social security contributions, pension contributions, and rehabilitation fund (see below).
Social security contributions
Employers are responsible for social security contribution. The general rate is 6.35%. An additional social security contribution for fishermen is 0.65%. The social security contribution for taxpayers who have submitted the A1 form is 0.425%.
The minimum contribution by employers into their employees’ pension fund is 10% of each employee’s salary until 30 June 2018. The contribution increases to 11.5% on 1 July 2018. An employer’s additional contribution into private pension funds is 2% against a maximum 4% contribution from the employee.
Employers must pay 0.1% of all salaries to VIRK, The Icelandic Rehabilitation Fund.
Taxes on natural resources
Excise duties on fuel
An excise duty for liquid fossil fuels is paid to the treasury. In this context, liquid fossil fuels are oils and petrol.
The duty is levied as ISK per litre, as follows:
|Excise duty||ISK per litre for the year 2019||ISK per litre for the year 2020|
|General excise duty on petrol||28.05||28.75|
|Specific excise duty on petrol||45.2||46.35|
|Excise duty on oils||62.85||64.4|
Tax on electricity/hot water
A special tax is collected from parties selling electricity and/or hot water at the last stage of trading (i.e. sales to users). Parties are exempted from the tax if the sale amount is less than ISK 500,000 per year.
Carbohydrate tax is paid on liquid fossil fuel (i.e. gas and diesel oil, petrol, aviation fuel, and petroleum gas). Corporations licensed for carbohydrate research, and/or processing, as well as anyone who directly or indirectly participates in the processing or distribution of carbohydrates, must pay a processing tax, which is independent of processing performance, and a carbohydrate tax on profits.
The tax is levied as ISK per litre or kg, as follows:
|Carbohydrate tax||ISK per litre or kg for the year 2019||ISK per litre or kg for the year 2020|
|Gas and diesel oil||10.4/litre||11,45/litre|
Financial services permitted to operate as banks and savings banks are subject to 0.318% tax on total debt exceeding ISK 50 billion at year-end for the tax year 2020, 0,261% for the tax year 2021, 0,203% for the tax year 2022 and 0,145% for the tax year 2023 and later.
Financial Activities Tax (FAT)
A 5.5% tax is levied on all salary payments made by financial institutions, including insurance companies. The tax is collected monthly.
An additional 6% is levied and collected on total salary payments in excess of ISK 1 billion. This tax is paid by the same entities that are subject to the general FAT.
Those who sell accommodation that is subject to VAT are liable to collect and return a tax of ISK 300 for each sold night. The tax increased from ISK 100 to ISK 300 on 1 September 2017.
National Broadcasting Fee
There is a National Broadcasting Fee of ISK 17,900 per year. The fee shall be paid by all taxable individuals from the age of 16 to 70 years old. Additionally, all domestic parties are required to pay the tax.