The tax system in the Faroe Islands is administered by TAKS, the Faroese tax authority. It is a progressive system that includes national income tax, municipal income tax, and various social contributions. Employers play a crucial role in this system by withholding income tax and remitting social contributions on behalf of their employees, ensuring compliance with local regulations.
Understanding these obligations is essential for companies employing staff in the Faroe Islands, whether they are local businesses or international entities expanding into the territory. Proper management of payroll taxes and social security contributions is key to smooth operations and avoiding penalties.
Employer Social Security and Payroll Tax Obligations
Employers in the Faroe Islands are responsible for contributing to several social security schemes based on employee salaries. These contributions are typically calculated as a percentage of the gross salary. The main contributions include payments to the Labour Market Fund (ALS), the Holiday Pay Fund (FeriuLøn), and potentially other specific industry or collective agreement funds.
The primary social contribution for employers is the Labour Market Fund (ALS) contribution. The rate for this contribution is set annually. For 2025, based on current regulations, the rate is expected to be applied to the gross salary.
- Labour Market Fund (ALS): A percentage of the employee's gross salary.
- Holiday Pay Fund (FeriuLøn): Employers are required to set aside holiday pay, typically 12.5% of the employee's salary, which is paid out when the employee takes holiday or leaves employment. While not a tax, managing this accrual and payment is a key employer payroll obligation.
- Other Contributions: Depending on the industry or collective agreements, additional mandatory contributions might apply, such as pension contributions or specific training funds.
These employer contributions are separate from the income tax withheld from the employee's salary.
Income Tax Withholding Requirements
Employers are required to withhold income tax from their employees' salaries under the Pay As You Earn (PAYE) system. This withheld amount includes both national income tax and municipal income tax. The total tax rate varies depending on the employee's income level and the municipality in which they reside.
The national income tax is progressive, meaning higher income is taxed at higher rates. Municipal tax rates are set by each municipality, leading to variations across the islands. TAKS provides employers with tax cards or electronic tax information for each employee, specifying the correct withholding rate and any applicable allowances or deductions to be considered when calculating the net salary.
While specific 2025 national tax brackets and rates are subject to final confirmation, the structure typically involves several income thresholds. Municipal tax rates generally range from around 16% to 20% and are added to the national rate.
Example National Income Tax Brackets (Illustrative, based on current structure, subject to 2025 confirmation):
| Taxable Income (DKK) | National Tax Rate (%) |
|---|---|
| Up to Threshold 1 | Rate 1 |
| Threshold 1 - 2 | Rate 2 |
| Above Threshold 2 | Rate 3 |
The total income tax withheld is the sum of the calculated national tax and the municipal tax based on the employee's municipality of residence.
Employee Tax Deductions and Allowances
Employees in the Faroe Islands are entitled to certain deductions and allowances that reduce their taxable income. These are typically factored into the tax card information provided by TAKS, which the employer uses for withholding.
Common deductions and allowances include:
- Personal Allowance: A standard annual amount that is tax-free.
- Travel Allowance: Deductions for commuting expenses between home and work, subject to specific rules and limits.
- Pension Contributions: Mandatory or voluntary contributions to approved pension schemes are often tax-deductible.
- Interest Expenses: Interest paid on certain loans, such as mortgages, can be deductible.
- Child Allowance: Specific allowances or benefits related to dependent children.
The exact amounts and rules for these deductions and allowances for 2025 will be determined by the annual tax law. Employers must apply the deductions and allowances specified on the employee's tax card when calculating the amount of tax to withhold.
Tax Compliance and Reporting Deadlines
Employers have strict deadlines for reporting payroll information and remitting withheld taxes and employer contributions to TAKS. Compliance is managed through the online system provided by TAKS.
Key obligations and deadlines include:
- Monthly Reporting: Employers must report salaries paid and taxes/contributions withheld/calculated for each employee on a monthly basis. This reporting is typically due shortly after the end of the month the salary pertains to.
- Monthly Payment: The total amount of withheld income tax and employer social contributions must be paid to TAKS monthly. The deadline for payment usually coincides with the reporting deadline.
- Annual Reporting: An annual summary of salaries paid and taxes/contributions reported for the year must be submitted.
- Tax Cards: Employers must obtain valid tax information (tax cards) for all employees to ensure correct withholding.
Failure to meet these deadlines or incorrect reporting can result in penalties and interest charges.
Special Tax Considerations for Foreign Workers and Companies
Foreign workers and companies operating in the Faroe Islands may have specific tax considerations.
- Foreign Workers: Non-resident individuals working in the Faroe Islands are generally subject to Faroese income tax on their income earned from Faroese sources. Depending on their residency status and the duration of their stay, they may be taxed as residents or under special non-resident rules. Double taxation treaties, if applicable between the Faroe Islands (via Denmark) and the worker's home country, can influence the tax treatment. Employers must ensure they correctly determine the tax status of foreign employees and apply the appropriate withholding rules.
- Foreign Companies: A foreign company employing staff in the Faroe Islands may establish a taxable presence (permanent establishment) depending on the nature and duration of its activities. If a permanent establishment exists, the company becomes subject to Faroese corporate tax. Even without a permanent establishment, a foreign company employing staff locally is typically required to register as an employer with TAKS and fulfill all employer obligations regarding payroll tax withholding and social contributions for its Faroese-based employees. Simplified registration processes may be available for foreign employers solely employing staff without having a physical presence.
Navigating these rules requires careful attention to detail and understanding of both Faroese tax law and international tax principles.
