In the Icelandic tax system, individuals are subject to tax on all personal income and capital income. Taxable income is divided into three main categories:
- Category A is comprised of wages and salaries, including presumptive employment income of self-employed individuals, employment-related benefits, retirement pensions, social security payments, grants, payments to copyright holders, royalties, etc.
- Category B is comprised of income from a business and income from an independent economic activity.
- Category C is comprised of capital income such as dividends, interest, and capital gains.
The concept of taxable income includes all kinds of payments made in cash and by other means where the monetary value can be ascertained.
Gains from the sale of privately owned property are subject to 22% capital income tax.
Gains from sales of private residential property are tax-exempt if the property has been in the taxpayer’s ownership for over two years.
In general, an individual’s capital gains from the sale of privately owned liquid assets are tax-exempt.
Dividends are subject to capital income tax. In the event of share decrease or the liquidation of the company, payments to shareholders exceeding the purchase price are treated as dividends and, as such, are subject to 22% tax.
Interest income derived from bank deposits, mutual and investment funds, bonds or other financial deeds, any kind of exchange rate profit, and any other income from monetary assets are subject to 22% capital income tax. No tax is calculated on the total interest revenue up to ISK 300,000 per year for an individual. This personal allowance is not applicable for withholding tax (WHT) but applies in the final tax assessment.
Rental income from residential properties and liquid assets is subject to 22% capital income tax. Note that only 50% of rental income is subject to taxation. Individuals renting out residential property for a limited period of time can deduct the rental cost of the property by netting the cost they incur for personal housing against the income generated.
No significant items of compensation are tax exempt in Iceland.