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Taxation / Salaries


Taxation and salaries 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). As a general principle, any individual staying in Iceland for 6 months or longer is considered a resident and has to pay tax on all of their income, whereever earned. An individual that stays in Iceland for less than six months in a twelve month period, has limited tax liability in Iceland. This means this individual has to pay tax on income arising from sources in Iceland although still having 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. Employers are also obliged to deduct mantatory (and voluntary) fees to workers unions, pension funds as well as to pay wage-related expenses.

If you are a non-resident staying in Iceland for temporary work it is important to keep in mind:

Taxable income is salary minus the pension fund premium. The rate of income and municipal tax is calculated in three different levels. Read more about the information here.



Example of payment slip

Montly Salary

500.000 kr.

4% Deduction for mandatory pension

- 20.000 kr.

Taxable Income

480.000 kr.

Tax deduction (36,94%)

- 184.700 kr.

Personal tax credit (as per the amount in 2019)

56.447 kr. 

1% union fees.

- 10.000 kr.

Paid Salary

341.747 kr.

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 online on the Directorate of Internal Revenue website. 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 (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.

Tax deductions on tax returns for international experts who are employed in Iceland due to their expertise or experience are open for application all year round. These tax deductions on tax returns are for international experts who are employees with knowledge and/or expertise not available or available on a limited scale in Iceland.

All further information and applications are found on the website of Rannís - the Icelandic Center for Research. Applications are normally processed within 3 weeks after all relevant documents are received.