IcelandTax Obligations Detailed

In Iceland, employers shoulder significant tax responsibilities, including withholding and reporting various taxes on behalf of their employees.

Employer Obligations in Iceland for 2025

As of February 5, 2025, the following employer obligations are in effect for Iceland:

Income Tax

• Withholding: Employers are responsible for withholding income tax from employee salaries. Income tax is calculated based on progressive rates. The tax brackets are as follows:
  • 31.49% for monthly income up to 472,005 ISK.
  • 37.99% for monthly income between 472,006 and 1,325,127 ISK.
  • 46.29% for monthly income exceeding 1,325,127 ISK.
• Personal Tax Credit: A personal tax credit of 68,691 ISK per month is deducted from the calculated tax.
• Children's Allowance Tax: For children born in 2010 or later, a 6% tax applies to income exceeding 180,000 ISK per year. This is also withheld by the employer.

Municipal Tax

• Withholding: Employers also withhold municipal tax along with the national income tax. Rates for municipal tax vary by municipality but average around 14.67% as of 2024. Check with the specific municipality for current 2025 rates.

Social Security Contributions

• Employer Contributions: Employers pay social security contributions for their employees. As of 2023 the rate was 6.35% of the employee's gross salary.
• Employee Contributions: As of 2023 employees also contribute to social security at a rate of 4.00% of their gross salary, which is withheld by the employer.

Pension Fund Contributions

• Withholding: Employers withhold mandatory pension fund contributions from employee salaries, typically 4% of gross salary. Additional voluntary contributions up to 4% can also be made.

Reporting and Payment

• PAYE System: Iceland operates a Pay-As-You-Earn (PAYE) system, requiring employers to deduct taxes at source.
• Monthly Reporting: Employers must submit monthly reports and payments of withheld taxes to the Internal Revenue Directorate (Skatturinn).
• Deadlines: Tax returns for individuals are due by March 14, 2025. Corporate tax returns are generally due by May 31st, with advance payments due the first of each month (excluding January and October). Self-employed individuals pay estimated taxes in quarterly installments. It's essential to consult official sources for the most up-to-date information and specific deadlines for each tax year.

Additional Information

This information is for general guidance only and should not substitute professional tax advice. Employers are advised to consult with tax professionals for specific situations. Tax laws and regulations are subject to change, and it is crucial to stay informed about any updates or amendments.

In Iceland, employee tax deductions encompass various areas, including income tax, municipal tax, pension contributions, and certain allowable expenses.

Income Tax

• Personal Tax Credit: A monthly deduction of 68,691 ISK (2025 figure) applicable to individuals 16 years or older residing in Iceland. This credit reduces the taxable income amount. Those turning 16 during the year receive the full credit. Employees must inform their employer about how they wish to apply this credit.
• Tax Brackets (2024 rates, pending 2025 update):
  • 31.49% for income up to 472,005 ISK monthly.
  • 37.99% for income between 472,005 and 1,325,127 ISK monthly.
  • 46.29% for income exceeding 1,325,127 ISK monthly. These rates include municipal tax.
• Municipal Tax: Averaged at 14.94% in 2024, this varies based on the municipality. It's included within the tax bracket percentages.

Pension Contributions

• Mandatory Contributions: Employers contribute a minimum of 11.5%, and employees contribute at least 4% of their monthly earnings, totaling 15.5% minimum.
• Private Pension Funds: Voluntary additional contributions of 2% by employers and 4% by employees are possible. Employers are obligated to contribute the additional 2% if an employee opts for a private pension scheme. Up to 8% of employee contributions to pension schemes are tax-exempt.

Other Deductions and Allowances

• Work-Related Expenses: Certain documented expenses can be deductible. For example, verified car operating costs, with a maximum deduction between 83 and 141 ISK per km, can be deducted from car allowances. The specific amount can fluctuate throughout the year.
• Per Diem Payments: These payments, designed to cover travel expenses outside the regular workplace, are generally not subject to withholding tax unless they surpass stipulated limits defined by the Internal Revenue Directorate. Employees can report deductions against these payments as per the Principal Tax Rates.
• Support for Dependents: Parents or guardians supporting dependent children between 16 and 21 who are students or have insufficient income may be eligible for tax reductions, unless the dependent's education qualifies for student loans.
• Special Circumstances: Tax reductions may be granted by the Internal Revenue Directorate in situations such as illness, accidents, old age, death, or a child's chronic illness. Documentation of expenses is necessary.
• Foreign Expert Tax Incentive: Foreign experts meeting specific conditions can have 75% of their income taxed for their first three years in Iceland. Applications, submitted to the Icelandic Centre for Research, are due within three months of starting work.

Tax Return and Assessment

• Annual Tax Return: Obligatory filing with the Icelandic Tax Authority (Skatturinn) happens every March, covering the previous year's income, assets, and liabilities.
• Tax Assessment: Takes place each June, resulting in refunds for overpayments or payment requests for underpayments. Outstanding amounts are divided into seven payments, deducted by employers from monthly wages.

Important Considerations

• Multiple Employers: Employees with more than one employer must inform each about all income sources to ensure correct withholding and personal tax credit usage. Salary exceeding specific thresholds with one employer affects withholding by the second employer, potentially triggering higher tax brackets.
• Joint Tax Filing: Married or registered partners can opt for joint filing, allowing the use of a non-working partner's tax credit if they have a child or can prove cohabitation for over a year. Both partners bear responsibility for the joint return.

This information is current as of February 5, 2025, and may be subject to change due to legal updates or revisions in tax regulations. Consulting official Icelandic tax resources or a tax advisor is recommended for precise information.

In Iceland, Value Added Tax (VAT, locally known as "Virðisaukaskattur") is levied on most goods and services.

VAT Rates

• Standard Rate: 24% (This applies to most goods and services not specifically listed under the reduced rate or exemptions).
• Reduced Rate: 11% (Applies to specific goods and services, see below).

Reduced Rate Goods and Services (11%)

• Hotel and guest room rentals, including other accommodations like private homes, fishing lodges, cottages, and hostels rented for less than a month.
• Campground facilities, including parking spaces for mobile homes and caravans.
• Food and other consumables (specified in an addendum to the VAT Act).
• Newspapers, periodicals, and magazines.
• Books (Icelandic and translated), musical notation, and their audio recordings, including CDs and electronic media.
• Geothermal hot water, electricity, and fuel oils used for heating houses and swimming pools.
• Passenger transport (e.g., whale watching tours, horseback riding, snowmobile tours).
• Services of travel agencies and tour operators for services used in Iceland.
• Subscription to radio and television.
• Condoms, reusable cloth diapers, and diaper inserts.
• Admission fees to baths, saunas, and spas (not exempt due to sporting activities).
• Guiding services.

Zero-Rated Goods and Services (0%)

• Exports
• Services provided abroad

Exempt Goods and Services (0%)

• Healthcare and social services
• Operation of schools and various educational services
• Cultural and athletic activities
• Public transportation
• Postal services
• Sale of real estate (excluding the rental of hotel and guest accommodations)
• Rental of car parking lots
• Insurance and financial services (including securities trading)
• Lotteries and betting pools
• Artistic and funeral services
• Religious services.

VAT Registration

• Threshold: Businesses selling taxable goods and services exceeding ISK 2,000,000 in any 12-month period must register for VAT. Voluntary registration is also possible.
• Non-Resident Businesses: Foreign businesses exceeding the threshold must register within eight days and appoint a local VAT representative.
• Simplified Registration for E-Services: VOES (VAT on Electronic Services) is available for certain foreign companies providing digital services.

VAT Filing and Payment

• Frequency: Generally bi-monthly. Businesses regularly in a VAT credit position may file monthly. Businesses with annual taxable turnover below ISK 4,000,000 may file annually. Special rules apply to fishery (weekly) and agricultural (bi-annually) supplies.
• Deadlines: One month and five days after the end of the bi-monthly period. For example, January/February returns are due on April 5th.
• Method: Filed and paid online via www.skattur.is.

Penalties for Late Filing and Payment

• 1% penalty per day (up to 10% total).
• Late payment interest applies one month after the due date.
• ISK 5,000 fee for late filing if authorities estimate the VAT.

This information is current as of February 5, 2025, and may be subject to change. Consulting with a tax professional is recommended for specific situations.

Iceland offers various tax incentives for individuals and businesses. As of February 5, 2025, these incentives include those for personal income tax, research and development, green investments, filmmaking, and music recording. Keep in mind that incentive information may change.

Personal Income Tax Incentives

• Personal Tax Credit: A deduction from calculated taxes for individuals 16 years and older residing in Iceland. For 2024, this credit was ISK 779,112 annually (ISK 64,926 monthly). Unused credits are transferable between married couples and registered cohabitants. Senior citizens will receive a 46% increase in their tax-free allowance starting January 2025.

Research & Development (R&D) Incentives

• R&D Tax Credit: A tax credit for innovation companies. SMEs can claim a 35% credit on actual R&D costs, while large companies can claim a 25% credit. There's an annual ceiling on claimable costs, with a separate limit for outsourced R&D. Applications are submitted through the Icelandic Centre for Research (RANNÍS).

Green Investment Incentives

• Green Investment Discount: A 5% discount on the purchase price of qualifying sustainable and environmentally friendly movable assets purchased between 2021 and 2025. Qualifying categories include eco-friendly transport, renewable energy, sewage treatment, waste recycling, and sustainable land management. Other assets may qualify with appropriate certifications or by meeting specific criteria.

Filmmaking and Music Recording Incentives

• Filmmaking Reimbursement: A 25% reimbursement of production expenses incurred in Iceland for film or television production. If over 80% of total production costs are incurred in Iceland, the reimbursement is calculated based on total EEA production costs. The program expires at the end of 2025, but approved projects will still be reimbursed.
• Music Recording Reimbursement: A 25% reimbursement of eligible costs for recording music in Iceland that is released publicly. If over 80% of recording costs are incurred in Iceland, the reimbursement is calculated based on total EEA recording costs.

Other Incentives

• Investment Incentives: Incentives are available for companies investing in commercial operations that benefit the Icelandic economy and society. These incentives can include tax breaks and other benefits. Eligibility criteria exist related to job creation, rural development, exports, tax revenue, and knowledge contribution.
• Foreign Expert Tax Discount: Foreign experts may be eligible for a tax discount where only 75% of their income is taxed for their first three years in Iceland, subject to certain conditions. Applications for this discount are made through the Icelandic Centre for Research within three months of starting work in Iceland.