Faroe IslandsTax Obligations Detailed

Employers in the Faroe Islands must fulfill tax obligations for themselves and their employees, which vary based on the employee's tax liability status.

Employer Obligations for Employees with Limited Tax Liability

Limited tax liability applies to employees who work in the Faroe Islands for less than 180 days in a 12-month period and do not establish residency.

• Withholding Tax: Employers must withhold a flat tax rate of 42% from the employee's A-income (income taxed at source). This rate is reduced to 35% for employees on FAS (Faroe Islands National and International Ship Register) or BareBoat ships.
• Labour Market Contribution: Employers must withhold 3% of the employee's taxable income for the labour market contribution (samhaldsfasti).

Employer Obligations for Employees with Full Tax Liability

Full tax liability applies to employees who reside in the Faroe Islands or work there for 180 days or more within a 12-month period.

• Withholding Tax (A-income): The tax rate for A-income is progressive and dependent on the employee's income and municipality of residence. The national tax averages around 40%. In addition to the national tax, municipal tax rates apply, varying between municipalities.
• Parental Contribution (Barnsilsgjald): Employers must withhold 0.71% of the employee's A-income for the parental leave fund for employees aged 16 to 67.
• Labour Market Contribution (Samhaldsfasti): Employers must withhold 3% of the employee's taxable income.
• Unemployment Insurance (ALS): Employers must withhold 1.25% of the employee's A-income.
• Public Health Insurance (Heilsutrygd): Employers must withhold a monthly fee (DKK 175 as of today) plus 0.6% of taxable income.
• Public Broadcasting Fee (Kringvarp Føroya): Employers must withhold DKK 150 per month.

Value Added Tax (VAT)

All businesses registered in the Faroe Islands and with annual revenue exceeding DKK 20,000 must register for VAT. VAT returns must be filed quarterly, even if there's been no business activity. Deadlines are May 10th (Q1), August 24th (Q2), November 10th (Q3), and the second Monday of February (Q4). The standard VAT rate is 25%.

Additional Considerations for Employers

• Registration: All employers must register with the Faroese tax authorities (TAKS).
• Reporting: Employers must submit regular payroll reports and tax payments to TAKS.
• Compliance: Employers are responsible for staying up-to-date with changes in tax laws and regulations.

As of February 5, 2025, this information reflects the current understanding of employer tax obligations in the Faroe Islands. Tax laws and regulations are subject to change, so keeping abreast of official updates from TAKS is essential.

In the Faroe Islands, employee tax deductions depend on whether an individual is considered to have full or limited tax liability. Those with full liability pay income tax based on a progressive system, while those with limited liability pay a flat rate with no deductions.

Full Tax Liability

This status applies to residents or those staying in the Faroe Islands for 180 days or more within a 12-month period. Individuals with full tax liability are subject to income tax on worldwide income. The tax rate on A-income (income taxed at source) is approximately 40%, varying based on income and municipality.

• Income Tax: Around 40% of A-income, depending on income level and municipality. This is a progressive tax, meaning the rate may change as income increases. The tax system operates on a pay-as-you-earn (PAYE) system, meaning taxes are withheld by employers.
• Municipal Tax: Varies by municipality.
• Parental Contribution: 0.71% for those aged 16-67.
• Labour Market Contribution (Samhaldsfasti): 3% of taxable income.
• Unemployment Benefit Fund (ALS): 1.25% of taxable income.
• Public Health Insurance (Heilsutrygd): DKK 175 per month + 0.60% of taxable income.
• Public Broadcaster Charge (Kvf): DKK 150 per month (DKK 50 for those over 67; exempt for those 23 and under). There are exceptions for students.

Deductions are available for those with full tax liability, such as child allowance (amount varies based on child's age). Tax returns are required to declare all income (domestic and foreign).

Limited Tax Liability

Applies to individuals working temporarily in the Faroe Islands for less than 180 days.

• Income Tax: A flat rate of 42% of A-income.
• Labour Market Contribution: 3% of taxable income.

Those with limited tax liability are not eligible for deductions like the child allowance or interest subsidy. They also do not declare foreign income on tax returns as they are only liable for Faroese sourced income. Employees of FAS (Faroe Islands National and International Ship Register) or BareBoat ships pay a 35% tax rate.

General Information

• Bank Account: Required to receive salary and pay taxes. The Faroe Islands have four main banks: Bank Nordik, Betri Banki, Norðoya Sparikassi, and Suðuroya Sparikassi.
• Tax Year: Follows the calendar year (January 1st to December 31st).
• Tax Administration (TAKS): The Faroese tax authority.

This information is current as of February 5, 2025, and might be subject to change. It's recommended to consult with TAKS or a tax advisor for personalized advice.

In the Faroe Islands, the standard VAT rate is 25% as of 2025. This applies to most goods and services.

VAT Rates

• Standard Rate: 25% (This is the most common rate)

Registration Thresholds

• Businesses with annual sales below DKK 50,000 are not required to register or collect VAT. Foreign businesses operating in the Faroe Islands follow the same rules.

Filing and Payment

• Returns: VAT-registered businesses must file quarterly returns.
• Deadlines: The deadlines are one month and ten days after the end of each quarter. Specific 2025 deadlines are May 10th (Q1), August 24th (Q2), November 10th (Q3), and February 10th, 2026 (Q4).
• Payments: VAT payments are due on the same deadlines as the returns. Late filing penalties are 1% of the VAT due, with a minimum of DKK 300 and a maximum of DKK 1,000. Interest on late payments is 0.7% per month.
• Refunds: Negative VAT balances are refunded within three weeks of filing.

Exemptions and Special Cases

• Certain goods and services are VAT exempt, including some cultural and sporting activities, personal transportation, financial and insurance transactions, and literary/artistic activities.
• Vessels (rigs) over 5 GT are exempt from import VAT.
• Foreign businesses can utilize designated customs- and VAT-exempt zones for goods used offshore, avoiding VAT and customs duties. Currently, such zones exist in Tórshavn and Runavík.
• Tax-free shopping is available for non-residents on purchases over DKK 300. After a service charge, refunds range from 12% to 18% of the paid VAT, claimable at the airport, ferry, or Visit Norðoy in Klaksvík.
• Electric or hydrogen car purchases qualify for VAT refunds. For cars registered in 2025, the maximum refund is DKK 52,200. Heat pump systems also qualify for refunds until December 31, 2026, subject to certain requirements.

Tourist Tax

Beginning October 2025, a tourist tax will be implemented for all visitors to the Faroe Islands.

Please note that this information is current as of February 5, 2025, and may be subject to change. Always consult with official sources for the latest regulations.

The Faroe Islands offer select tax provisions and schemes to support businesses and residents.

Corporate Tax Incentives

• Competitive Corporate Income Tax Rate: The corporate income tax rate is 18%.
• Tax Exemption on Foreign-Sourced Income: Companies are generally exempt from paying taxes on income earned outside the Faroe Islands.
• Tax Deductions for Research and Development (R&D) Expenses: Businesses engaged in R&D activities can deduct qualifying expenses.
• Regional Development Schemes: The Faroese government offers tax benefits and incentives for investments in specific regions or industries.

Individual Tax Provisions

• Standard Tax Rate: For those with limited tax liability, a standard tax rate of 42% applies to all income earned in the Faroe Islands. This rate is lowered to 35% for those working on FAS or bareboat ships.
• Pension Exemption: Employees with fixed-term contracts may be exempt from pension contributions for up to 60 months.
• Tax Deduction for Foreign Workers: A tax deduction up to 30% may be available for foreign workers.
• Fishermen's Deduction: Fishermen are eligible for a 14% deduction, up to a maximum of DKK 65,800 annually (based on 14% of DKK 470,000).
• Deductions for Students and Parents: Deductions are available for students and parents. For students from specific countries (including the Faroe Islands), studying or apprenticing in Denmark, a deduction up to DKK 48,000 (2023) or DKK 46,600 (2022) might apply.
• Child Allowance: A child allowance is granted through national and municipal taxes. The amount varies depending on the child's age: DKK 9,200 per year for children under 7.
• Interest Subsidy: Those fully liable for tax can receive an interest subsidy up to DKK 35,000 per year, covering 35% of the interest on debt for owner-occupied homes in the Faroe Islands.
• Family Allowance: Low-income families may qualify for a family allowance.
• Dividend Withholding Tax Refund: A 35% withholding tax is applied to dividends. Nordic shareholders can claim a 20% refund, resulting in a minimum 15% tax. Similar refunds are available for shareholders residing in countries with tax treaties (e.g., UK, Switzerland, India).

Other Taxes and Contributions

• Value Added Tax (VAT): VAT is levied on imports and sales, deductible for income purposes. Non-VAT-paying companies are subject to an employer's tax.
• Tourist Tax: From October 2025, a tourist tax will be implemented per person per day, regardless of accommodation type. It will fund local nature protection efforts. Cruise passengers will pay approximately EUR 9 for shore leave.
• Mandatory Contributions: Residents with full tax liability contribute to several funds:
  • Labor Market Supplemental Pension Fund (AMEG): 3% of taxable income.
  • National Health Insurance: DKK 175 per month and 0.7% of taxable income.
  • Parental Benefit Fund (Barsilskipanin): 0.86% of A-income. Those with B-income or self-employed must have a parental insurance policy (DKK 500 annual premium).
  • Broadcast Receiver License (Kringvarpsgjald): DKK 173 per month (ages 24-66), DKK 71 per month (age 67+).
  • Unemployment Insurance (ALS): 0.8%.

Tax Liability

Tax liability depends on residency and duration of stay (over 180 days in a 12-month period triggers full tax liability). Those with limited liability are not eligible for certain benefits (e.g., child tax credit, interest subsidy). They must also apply for a temporary P-tal (civil registration number).

This information is current as of February 5, 2025, and may be subject to change. Consulting with tax professionals or the Faroese tax authorities (TAKS) is recommended for the most up-to-date information.