Taxation / Salaries
Income and Capital taxation in Iceland
The taxation system in Iceland is the PAYE system - Pay-As- You-Earn. Taxes are deducted from all taxable incomes and consist of income taxes and municipal taxes (paid to municipal authorities). Residents are subject to unlimited tax liability on all their income, wherever earned. As a general principle, any individual staying in Iceland for 6 months or longer is considered a resident. An individual that stays in Iceland for less than six months in a twelve month period, has limited tax liability in Iceland. This means he has to pay tax on income arising from sources in Iceland although he still has unlimited tax liability in another country.
Employers are required to calculate and deduct taxes from all salaries and wages paid out to employees.
Taxable income includes, for example cash payments, wages, fees, sickness allowance and benefits in kind. He is allowed the same deductions for expenses as residents, i.e. the mandatory payments to pensions insurances funds 4% of total employment income and in addition voluntary pension insurance premiums of up to 4% of total employment income.
|For the income year 2016 the rate of income and municipal tax is calculated in three steps;|
|ISK 0 - 336.035 pr. month||37,13%|
|ISK 336.036 - 836.990 pr. month||38,35%|
|Income exceeding ISK 836.990 pr. month||46,25%|
Taxable income is salary minus the pension fund premium. Personal tax credit, which is ISK 51.920 pr. month is deducted from calculated taxes.
If the stay in Iceland is six months or longer in a twelve month period, the individual is considered to be a resident of Iceland, which means he has unlimited tax liability from the day of arrival to the country. In which case taxes are levied on world wide income. Former residents remain subject to unlimited tax liability for 3 years after leaving the country, unless they prove that they have become subject to taxation in another country.
If you are a non-resident staying in Iceland for temporary work you have to:
- be registered at Þjóðskrá (National Registry) and get Icelandic personal identity number
- And if you are not a resident of one of the Scandinavian countries, or a country that is a member of the European economic area, you must have a work- and residence permit. You can get information on that at Útlendingastofnun Íslands (The Directorate of Immigration), or at Vinnumálastofnun (Directorate of Labour).
The Tax Return
All individuals over the age of 16 who are permanent residents in Iceland are regarded as fully fledged tax payers. They are given tax cards and they must fill in their tax returns each year in March. The purpose of the tax return is to ensure that all individuals are taxed according to their wages, properties and debts. The tax return is sent to everyone in late February or early March. It is also possible to complete the tax return on the Net. Those who need assistance with understanding or completing their tax return should contact their trade union. It is also possible to speak to the local tax authority or the Internal Revenue Directorate (Laugavegur 166, Rvk). You can also seek the help of registered auditors (many Icelanders do so) but keep in mind that you need to pay for this service.
Double Taxation Agreements
Double Taxation Agreements (DTA) are treaties between two or more countries to avoid international double taxation of income and property. The main purpose of DTA is to divide the right of taxation between the contracting countries, to avoid differences, to ensure taxpayers' equal rights and security, and to prevent evasion of taxation.
Iceland has concluded several agreements on tax matters with other countries. Individuals with a permanent residence and with full and unlimited tax liability in either one of the contracting countries may be entitled to exemption/reduction from taxation of income and property according to provisions of the respective agreements, in absence of which the income would otherwise be subject to double taxation. Each agreements is different, and it is therefore necessary to check the respective agreement to ascertain where the tax liability of the respective person in fact lies, and which taxes the agreement stipulates. Provisions of tax agreements with other countries may mean that the Icelandic right to tax is restricted.
Tax benefits under DTA for payments can take place in two ways. On the one hand, there can be an exemption from tax payments or a reduced tax rate on respective payments. On the other hand, there can be a refund of deducted withholding payments.
To enjoy tax benefits in Iceland according to concluded DTA, a foreign taxpayer has to be subject to full and unlimited tax liability in the other contracting country with respect to his permanent residence or other circumstances.