| Iceland Income Taxation Personal income tax rate in Iceland is 37.20%.
Iceland's personal income tax structure is such that all personal income in 2009 (other than capital income, see below) is taxed at a PAYE rate of 37.20 per cent, 24.1% of which goes to the Treasury and 13.10% to the municipalities. These tax rates increase by 1.48 percentage points from the previous year, 1.35 percentage points of which and 0.13 percentage points for the municipalities. There is a basic annual tax credit which amounted to 408,409 krónur in 2008 and 506,466 krónur in 2009. An unused tax credit is fully transferable between spouses.
The PAYE personal income tax comprises both the central government and municipal income tax. It excludes the social security tax, which is levied on employers (see below).
In addition to the above, each individual pays a flat tax of 7,534 krónur per year to the Elderly's Construction Fund, a central government fund used to finance the construction and operation of nursing homes and care centres for the elderly. Persons under the age of 16 and more than 69 years old are exempt from this levy, as well as those with an income below 1,143,362 krónur in 2008.
The personal income tax is levied on gross income excluding income from capital (for the capital income tax, see below), with a number of minor exceptions. Employee contributions to pension funds are deductible. Such contractual contributions normally comprise 4 per cent of gross pay, to which the employer adds a contribution, normally 8 per cent which also is deductible as an operating expense on the business side. In addition, the employee can save up to 4 per cent as a supplementary pension saving on a voluntary basis and deduct the contribution from taxable income. Employers generally make a counter-contribution to such voluntary contributions, in many cases fully matching them. Such retirement savings are placed in a separate account for each individual and are accessible after the age of 60 years. Funds drawn on such accounts are fully income-taxable.
Interest rebates are granted by the central government for interest expenses incurred from home purchase loans. Such rebates are subject to debt, income and net wealth ceilings. Maximum rebates in 2009 are: 189,957 krónur for a single individual, 244,299 krónur for a single parent and 314,134 krónur for a couple.
Child benefits are granted for each child, subject to income thresholds. They are as follows (in krónur per year):
For all children under the age of 7: 61,191
Children under the age of 18 - First child: 152,331
Children under the age of 18 - Each additional child: 181,323
Benefits for single parents - First child: 253,716
Benefits for single parents - Each additional child: 260,262
Income threshold for benefit curtailment - For couples: 3,600,000
Income threshold for benefit curtailment - For a single parent: 1,800,000
Curtailment of benefits - For one child: 2%
Curtailment of benefits - For two children: 5%
Curtailment of benefits - For three children or more: 7%
These benefits are not linked to income. Rent subsidies supplied by municipalities to low-income tenants are tax-free.
The tax treatment of stock options was introduced into tax legislation in 2001 as a result of the fact that a number of companies had begun to reward their employees with options to buy stock at a defined price as a part of the employees' total emolument package. The exercise of stock options is subject to certain conditions, the chief being: (1) Stock options must be available to all employees; (2) A minimum of twelve months must pass between the establishment of a stock option contract until it is exercised. (3) The exercise price must not be lower than the average trading price for the last ten trading days before the option is exercised. (4) The employee must own the stock for no less than two years after purchase. (5) The annual stock option must not exceed 600,000 krónur at the exercise price.
Corporate taxation in IcelandCorporations: 15%
Partnerships: 23.5%
As of the beginning of 2002, Iceland's corporate income tax was lowered from 30 per cent to 18 per cent. In 2009, the corporate income tax will be 15 per cent, levied on 2008 income. All the proceeds of the tax accrue to the Treasury. Municipalities levy no income tax. Partnerships with unlimited liability that file for taxes as distinct legal entities pay a tax of 23.5 per cent. As with the net wealth tax on individuals, the corporate net wealth tax has been abolished.
As of 2002, the so-called inflation accounting system was abolished and replaced by conventional historical accounting. Inflation accounting has been in effect for a number of years due to the fact that inflation was at one time quite substantial and accounting methods had to reflect that fact. For the past decade, however, inflation has been in the single figures and the need for inflation adjustments in company accounts was diminished. Furthermore, international accounting standards are generally based on historical cost, and Icelandic standards are therefore being brought into conformity with international norms. As of 2002, Icelandic firms are allowed to keep their books and draw up their accounts in foreign currency, subject to the restriction that the bulk of their business must be in the accounting currency. Their tax liability continues to be in krónur.
Since March 1999, so-called international trading companies, having established a venue in Iceland, are subject to a 5 per cent income tax. This refers to companies that exclusively trade in goods and services outside Iceland. In December 2003, legislation was passed to abolish the tax benefit for international trading companies as of the beginning of 2009.
The value added taxThere is a general value added tax of 24.5 per cent on domestic goods and services. Exports of goods and services and several other transactions are zero-rated. A 14 per cent tax applies to most foodstuffs and a number of other items. As of March 1st 2007, the value added tax of 14 per cent was reduced to 7 per cent on the following items:
- All food (excl. liquor and wine), most of which has been taxed at 14 per cent but a few items at 24.5 per cent (e.g. soft drinks, sweets).
- Restaurant services, food canteens and similar services.
- The rental of hotel rooms and guest quarters and other related services.
- Radio and TV licence fees.
- Newspapers, magazines.
- Books and book audio recordings.
- Hot water, electricity, oil for space heating and water for swimming pools.
- Road tolls.
- CD disks (excl. DVDs), tapes and similar items (previously taxed at 24.5 per cent).
As a general rule, all transactions are taxable except where exemptions are specified. The most common categories of exemption are health services, social services, education, libraries and art, sports, passenger transport, postal services, rental of property and parking spaces, insurance and banking services.
Taxes on capital income and net wealthStarting in 1997, a uniform 10% tax is levied on all capital income of individuals, such as interest income, dividends, capital gains and rental income. The capital income tax is withheld at source for both businesses and individuals, as applicable. Individuals pay no further tax on capital income, whereas capital income incurred by businesses is taxed as ordinary corporate profits with the withholding capital income tax being offset against the corporate income tax.
There is no tax on net wealth. The net wealth tax was abolished at the end of 2005. The last net wealth tax assessment took place in 2005 on the basis of net wealth at the end of 2004.
The social security taxA general social security tax rate of 5.34% is paid by the employer to the Treasury on top of personal wage income paid to the employee. For fishermen, the rate is 5.99 per cent.
Real property taxationMunicipalities tax real property on the basis of assessed value as is registered in the real property database kept by the Property Registry, a central government agency that keeps track of all real property transactions and valuations in the country. The assessed value is imputed from actual market values as they appear in sales data. On this basis, the municipalities impose a tax on the assessed value of 0.5 per cent a year on residential housing, farm buildings, recreational housing and adjacent land rights; 1.32 per cent on hospitals and health facilities, schools, dormitories, nursery schools, athletic buildings and libraries. A 1.32 per cent charge is also imposed on industrial, office and commercial buildings, fish processing buildings, hunting lodges and structures used for tourism services. These percentage charges may be increased by up to 25 per cent by a decision of any municipal council.
Capital Gains TaxesCapital gains are added to other taxable income and taxed at the regular corporate rate.
Interest IncomeInterest income is treated as ordinary income and included in taxable income of companies.
Residents and Non-ResidentsIndividuals are deemed to be residents of Iceland for tax purposes if they reside in the country and are registered in the national registry of persons or remain in the country for a period of six months or more out of a 12 -month period.
Taxation of Residents
Resident individuals are subject to Icelandic tax on their worldwide income. Capital taxes were abolished on December 31st, 2005, on individuals and business entities. Resident corporations are subject to Icelandic corporate income tax on their worldwide profits.
Taxation of Non-Residents
Non-resident persons are subject to tax on income from Icelandic sources, including but not limited to salaries, wages and pensions paid from Icelandic sources, income derived from business carried out in Iceland and from real property, shares and other financial income. However, interest income of non-residents in Iceland is not taxable.
According to domestic rules, non-resident individuals staying in Iceland for longer than 183 days out of a 12 -month period are subject to tax on their worldwide income. Individuals who are in Iceland for a temporary stay, i.e., less than 183 days, are taxed on Icelandic-source income.
Tax rates are the same as for resident individuals, with a standard deduction granted for the period stayed in the country. Exemptions from the above rules may be provided for in double taxation treaties.
Non-Resident Companies
Non-resident companies and other entities are subject to tax on their income from Icelandic sources at the normal rate, after consideration of relief if available under double taxation treaties. They are taxed in conformity with the rules applicable to companies domiciled in Iceland on income derived from business activities or participation in business activities with a permanent establishment in Iceland.
Withholding Taxes for Non-Residents
Withholding tax rates on payments to non-residents are 15% on dividends paid to companies and 10% on dividends paid to individuals, 18% on royalty payments to companies and 22 .75% national tax on royalty payments to individuals. In addition, municipal income tax is levied on royalties paid to non-resident individuals at the average rate for the income year 2008 of 12 .97%. No annual personal deduction is granted. There is no withholding tax in Iceland on interest payments to nonresidents. In cases where such a tax is withheld, for example by banks, a non-resident can apply to the Internal Revenue Directorate for a refund.
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