The tax year for individuals equals the calendar year.
Individuals must file their tax returns before the end of 10 March in the consecutive year after the tax year. Extensions may be granted for up to five days.
Payment of tax
Individual income taxes are withheld at source each month. Any difference between income tax withheld and the assessed income tax (national and municipal) is refunded, increased by 2.5% of the difference; any deficit is collected, increased by 2.5%, on five due dates each year. The due dates are the first day of July to December. Payments must be made within 30 days from the due date.
Withholding requirements for sale of property, dividends, interest, and royalties
Gains from sale of property and royalties are not subject to WHT in Iceland.
Dividends and interest income are subject to WHT withheld at source and filed/returned on due date. The payment periods are three months, January to March, April to June, July to September, and October to December. Due dates are 20 April, 20 July, 20 October, and 20 January. Payments must be made within 15 days from the due dates.
Tax audit process
Individuals receive a pre-drafted tax return from the tax authorities to be confirmed or corrected.
Dividends and interest income are capital gains and liable to WHT. Rental income, capital gains, and other income from assets are not liable to WHT.
When the tax return deadline has expired, the Internal Revenue Directorate calculates a taxpayer’s income tax according to the tax return submitted. WHT on salary and capital income is deducted from the final tax assessment. If these items are higher than the final tax assessment, the difference is used towards tax debt repayment and/or the taxpayer is refunded.
The final tax assessment for each year should be completed no later than ten months after the end of the income year, but, in general, the assessment will be finalised on 31 May.
Most of the filing process is electronic. The assessment notice is also electronic in most cases, but individuals can also file in paper. Tax authorities place a general notice of the assessment in the local gazette.
A complaint regarding the assessment can be sent to the Internal Revenue Directorate within 60 days, and the final ruling of that authority can be appealed to the State Internal Revenue Board within three months.
Statute of limitations
Tax authorities in Iceland have the right to reassess tax returns for six years prior to the year of the assessment, i.e. the statutory period of limitation is six years. The statutory period only reaches a maximum of two years in time if tax returns have been filled out properly and all necessary information presented for tax authorities to establish a correct assessment. This means that in the year 2021, tax authorities can, in theory, reassess the tax of individuals back to income year 2015.
Topics of focus for tax authorities
The topic of focus for tax authorities in Iceland is tax avoidance in general.