Individuals with limited tax liability
Limited tax liability applies to individuals who are not domiciled in Iceland but are liable to pay income tax derived from income earned in Iceland, irrespective of any income they may be earning elsewhere at the same time or within the same calendar year. Double taxation treaties (DTTs) incorporate various clauses that allow for the exemption of income tax on such income, which, without such treaties, would be taxable in Iceland.
Tax rates/tax collection
Non-residents who stay in Iceland temporarily and earn an income are subject to local income tax on those earnings. The income tax rate is the same as for local taxpayers, which is 17% to 31.8%, depending on income. In addition to income tax, a municipal tax of 14.45% is levied. These individuals are entitled to personal allowance in direct proportion to the days they reside in Iceland.
Individuals in Iceland involved in operating a permanent business or receive a share from the profit of operating such a business pay 17% to 31.8% income tax on the income tax base. Municipal tax is paid to the municipality where the majority of the earnings were earned. No personal tax credits are available.
A 22% capital income tax is levied on capital gains from real estate, capital gains from shares, and dividends.
A 12% capital income tax is levied on interest income. No tax is levied on the first ISK 300,000.
Rental income from residential properties and liquid assets is subject to a 22% tax rate. However, no tax is levied on 50% of an individual’s income deriving from renting a residential property.
There is a 20% income tax, as well as municipal tax, levied on remuneration for directors, remuneration for financial advisors acting in a management position or other committee work, severance pay, funding, or equivalent payments for services or business in Iceland.
Pensions and payments from the national insurance fund are taxed as income (i.e. 17% to 31.8%) plus municipal tax. Personal tax credits may be used for income tax on pensions and insurance payments. If the personal tax credits are not used in full, the unused part can be used against municipal tax levied on the same income. Any personal tax credits remain unused become invalid and cannot be transferred between spouses unless both of them are receiving pensions or social insurance payments.
Individuals who receive payments for entertainment or sporting activities as profit shares pay a 15% income tax on gross payment, plus municipal tax.
Tax release on grounds of a DTT
To apply for exemption from tax liability in Iceland on grounds of provisions in a DTT, form RSK 5.42 must be completed and returned to the Internal Revenue Directorate.
In cases where taxes have already been withheld in spite of grounds for exemption, an application under DTTs for a refund of taxes paid in Iceland can be made by completing and submitting application form RSK 5.43 to the Internal Revenue Directorate.
Withholding tax collection
Income tax for individuals is divided into state income tax and municipal tax. Both state income tax and municipal tax are withheld at source monthly. Dividends, interest, and capital gains are also subject to WHT at source.
Assessment and payment of tax
Individuals working in Iceland as employees subject to limited tax liability must file a tax return when leaving the country and are subject to a tax assessment.