Iceland - Income Tax

Iceland - Income Tax

Taxation of international executives

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Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

Each year, the Internal Revenue Directorate annually decides the last day of filing individual income tax returns. For the 2016 tax return (income year 2015), the tax return is due 10 March 2016.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Iceland?

Residents and non-residents

At the beginning of each year, the Director of Internal Revenue determines when tax returns are to be filed (traditionally it is at the end of March). Payment for taxes on employment income, benefits, or presumptive wages takes place through monthly payroll withholding at source (that is Pay-As-You-Earn (PAYE) system). The taxpayer, on his/her own initiative, must pay tax due on investment or business income by 31 January immediately following the tax year-end. An actual tax assessment should be issued by 30 June of the year following the tax year-end.

Tax rates

What are the current income tax rates for residents and non-residents in Iceland?

Residents and non-residents

Salary income is taxed as follows.

Income tax table for 2016

Taxable income bracket Tax rate on income in bracket
From ISK To ISK Percent*
0 4,032,420 37.13**
4,032,420 10,043,880 38.35
10,043,880 Over 46.25

Withholding tax for income earned in 2016 is as follows.

  Percent
National tax 22.68, 23.90 and 31.80
Municipal tax (13.70% - 14.52%) 14.45
Total 37.13 - 46.25

There is a progressive tax rate schedule.

* Based on average municipal income tax.

** It is allowed to deduct ISK 623,042 per year (personal tax credit) from the income tax, which equals to non-taxation on the first ISK 1,747,918. The personal tax credit is in proportion to the residence time in Iceland.

Non-residents

Remuneration of non-residents for managerial, accounting, or committee work, is subject to a national tax rate of 20 percent. In addition, a municipal tax of average 14.45 percent is levied (20 percent + 14.45 percent = 34.45 percent).

Pensions received from Iceland by non-residents are taxed in brackets, such as 22.68 – 31.8 percent national income tax plus 14.45 percent average municipal tax.

Entertainers and those without a fixed salary pay income tax at 20 percent plus the 14.45 percent municipal tax on earnings, but are not able to claim any deductions and can in lieu thereof enjoy the revenues from such activity.

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Iceland?

A resident is defined as an individual who is domiciled in Iceland or is staying in Iceland for a period exceeding 183 days during any 12-month period.

Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.

As a general principle, any individual who stays in Iceland for 183 days or longer during any 12-month period is considered a resident from the date of arrival. Resident individuals are subject to unlimited tax liability in Iceland on all their income, wherever earned. The tax liability ends as soon as the individual leaves Iceland. However, former residents, on the grounds of domicile, remain subject to unlimited tax liability for three years after leaving the country unless they prove that they have become subject to taxation in another country.

Non-resident individuals staying temporarily in Iceland (for 183 days or less), who derive income from employment during their stay, are subject to national income tax on such income. They are allowed the same deductions for expenses as are residents. The annual personal tax credit may be applied in proportion. Non-resident individuals staying temporarily in Iceland are also subject to municipal income tax in the same manner as residents. Other non-resident individuals are subject to national income tax and the municipal income tax on their income from Iceland.

Icelandic-source income in the form of remuneration to directors and committee members, grants, or remuneration for independent personal services and art performances is taxed by assessment at a rate of 20 percent plus the municipal income tax rate. Artists performing independently are taxed by assessment at a rate of 20 percent of their receipts.

Termination of residence

Are there any tax compliance requirements when leaving Iceland?

No special rules apply.

What if the assignee enters the country before their assignment begins?

The 183 days start counting on the first day of arrival.

What if the assignee comes back for a trip after residency has terminated?

If the assignee comes back for a trip after his/her residency has been terminated his/her days spent in Iceland during his/her trip will not count. If the assignee leaves the country for holidays and enters the country again because of his/her assignment the days abroad are counted as days spent in Iceland.

Communication between immigration and taxation authorities

Do the immigration authorities in Iceland provide information to the local taxation authorities regarding when a person enters or leaves Iceland?  

Icelandic local tax authorities have the right to obtain information from the immigration authorities.

Filing requirements

Will an assignee have a filing requirement in the host country after they leave the country and repatriate? 

The assignee has to file a tax return if he/she has received any income in the tax year in Iceland or if he/she owns any real estate in Iceland.

Economic employer approach

Do the taxation authorities in Iceland adopt the economic employer approach1 to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Iceland considering the adoption of this interpretation of economic employer in the future?

The Icelandic taxation authorities use the economic employer approach.

De minimus number of days

Are there a de minimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days? 

The economic employer approach is neither clear nor developed in Iceland.

Types of taxable compensation

What categories are subject to income tax in general situations?

As a rule, it can be stated that all types of compensation and benefits received by an employee for services rendered constitute taxable income regardless of where paid. Typical items of an expatriate compensation package, which are fully taxable, include the following:

  • salary payments 
  • bonus payments 
  • school tuition reimbursements for children 
  • provision of a car from the employer 
  • cost-of-living allowances 
  • housing allowances and housing provided 
  • employer’s contributions to a pension plan 
  • provision of domestic assistance 
  • reimbursement of moving expenses 
  • the benefit of loans at reduced or zero interest rates provided by the employer 
  • round sum expenses allowances 
  • home leave.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Iceland? If so, please provide a general definition of these areas.

These are the most significant items of compensation that are tax- exempt in Iceland (Article 28 in the Icelandic tax law).

  • Assets increase because of heritage, prepayment of heritage and legacy, that is, if inheritance tax has been paid. This does not apply to the part of social security savings that the inheritor gets according to the laws about mandatory insurance of pension rights and operation of pension funds. 
  • Assets increase because of life insurance payment, death compensation, harm compensation, and compensation for permanent invalidity that is if this compensation are decided and paid only once. Also damages and insurance benefits paid because of damages to assets that are not used for professional reasons. There are some exemptions from that rule.

Expatriate concessions

Are there any concessions made for expatriates in Iceland?

None.

Salary earned from working abroad

Is salary earned from working abroad taxed in Iceland? If so, how?

If an individual is a non-resident of Iceland, the salary payments for working abroad are not taxable in Iceland. Icelandic residents are taxable on worldwide income and hence their salaries from working abroad are fully taxable.

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Iceland? If so, how?

Investment income and capital gains of Icelandic residents (individuals) are subject to Category C taxation in Iceland taxed at the rate of 20 percent.

Interest income lower than ISK 125,000 per year is not taxed. For married couples, a double threshold applies.

Only 50 percent of residential properties long term rental income is taxed by 20 percent. The remaining 50 percent of the rental income will not be taxed.

Dividends, interest, and rental income

Dividends, Interest and Rental Income are subject to Category C taxation in Iceland. Special rules apply for non-tax residents in Iceland.

Gains from stock option exercises

Residency status Taxable at:
  Grant Vest Exercise
Resident N N Y
Non-resident N N Y
Other (if applicable) N N Y

Foreign exchange gains and losses

Icelandic tax-residents are taxed in Iceland on foreign exchange gains. Losses can be deducted from gain within the same account in the same year before the tax is calculated. The Income is subject to Category C.

Principal residence gains and losses

Gains from the sale of privately owned immovable property are included in taxable investment income (Category C) and taxed at the rate of 20 percent (by assessment). Losses on the sale of such property are generally not deductible; however, they may be deducted from gains made on the sale of similar property in the same year.

Gains from the sale of a private residence are tax-free if the taxpayer has owned the residence for at least two years and its size is within certain limits. If the taxpayer has owned such a residence for less than two years, the gains may be rolled over through a reduction in the acquisition cost of another residence. Taxation of such gains may be deferred for two years.

Gains from the sale of immovable or movable property in the course of a business or an independent economic activity are included in taxable business income (Category B) and are calculated in the same manner as capital gains made by companies. The rules regarding deferral of taxation also apply.

Capital losses

Different type of rules applies to capital losses depending on the type of capital losses.

Personal use items

The main principal is that the right of use is taxed on marked price. There are exemptions from this main principal.

Gifts

There is no special gift tax in Iceland. However, gifts are taxable as income in accordance with general principles. Gifts given on particular occasions may be exempt if their value does not exceed what is normal in the circumstances.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Iceland? If so, please discuss?

Information is not available.

General deductions from income

What are the general deductions from income allowed in Iceland?

Among items of expenditure which may be deducted from taxable income are pension contributions.

There is no system of personal allowances but tax credits are available. Each resident taxpayer is entitled to a personal tax credit, which is deducted from his/her computed income tax. For the income year 2016, the amount of the credit is ISK 623,042.

No allowances or credits are given based on dependent children. However, child benefit, which is payable by the state treasury to parents, is not taxable.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Iceland?

A gross-up is required in the year of departure.

Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in Iceland? For example, pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

Tax is handled in Iceland as Pay-As-You-Earn (PAYE).

Employer is responsible to withhold taxes but the employee is responsible for the payment.

Pay-as-you-go (PAYG) withholding

All foreign citizens and stateless individuals, who have residences permit in Iceland for specific time, are obligated to file tax returns, before leaving the country.

When are estimates/prepayments/withholding of tax due in Iceland? For example: monthly, annually, both, and so on.

The employer withholds taxes at the end of each month from the employee's salary and reports the income to the Icelandic tax authorities every month.

Individuals do not have to prepay any taxes in Iceland.

Relief for foreign taxes

Is there any Relief for Foreign Taxes in Iceland? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

Relief from double taxation is granted in the form of a foreign tax credit. Foreign tax paid on foreign-source income may be credited against national and municipal income taxes. The credit is limited to the amount of Icelandic tax attributable to the foreign income. Double taxation treaties may provide for exemption in lieu of credit relief. If there are double taxation treaties then it is possible to apply for a relief for foreign taxes.

General tax credits

What are the general tax credits that may be claimed in Iceland? Please list below.

Payments to an obligatory pension fund up to 4 percent and payment to an alternative pension fund up to 4 percent are deductible from the total employment income tax base (Category A).

All individual taxpayers are entitled to a personal tax credit against the national income tax from all income categories. This credit amounts to ISK 623,042 for the income year 2016. If the credit is higher than the tax, the excess will be applied by the State Treasury to settle the municipal tax payable. Any part of a single person’s credit remaining thereafter will be cancelled.

In the case of a married person (or a cohabiting person taxed as if married) the unused credit is added to the credit of the other spouse.

According to Article 65 of the Icelandic tax law, credits can by claimed against the taxpayer’s tax base (the municipal tax base is lower by the same amount).

Credits can be made because of the following:

  • death of a spouse
  • illness, accident, and more
  • child’s illness
  • child’s disability
  • support of family
  • property losses
  • lost claims.

Tax payers can also apply for tax concession, according to the same Article, if the taxpayer is supporting its child over the age of 16 that is studying or does not have enough income to support itself. The highest reduction on the taxpayers’ tax base for 2016 is ISK 355,000, that is, if the child had no income. From this amount, one-third is deducted from the child’s income, so when the income is ISK 1,065,000 the right to apply for tax concession is not applicable.

It is also allowed to deduct expenses from an adoption grant. The total amount that is deductible is the amount of the adoption grant.

Sample tax calculation

This calculation3 assumes a married taxpayer resident in Iceland with two children whose three-year assignment begins 1 January 2014 and ends 31 December 2016. The taxpayer’s base salary is USD100,000 and the calculation covers three years.

  2014USD 2015USD 2016USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = ISK 130.88.

Other assumptions

  • All earned income is attributable to local sources. 
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year. 
  • Interest income is not remitted to Iceland. 
  • The company car is used for business and private purposes and originally cost USD50,000. 
  • The employee is deemed resident throughout the assignment. 
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income

Year ended 2014ISK 2015ISK 2016ISK
Days in Iceland during year 365 365 366
Earned income subject to income tax:      
Salary 13,088,000 13,088,000 13,088,000
Bonus 2,617,600 2,617,600
2,617,600
Cost-of-living allowance 1,308,800
1,308,800
1,308,800
Housing allowance 1,385,640 1,385,640 1,385,640
Company car* 1,570,560 1,570,560
1,570,560
Moving expense reimbursement 2,617,600
0 2,617,600
Home leave 0 654,400
0
Education allowance 392,640 392,640 392,640
Pension fund contribution 4 percent 22,495,654
20,610,982
22,495,654
Personal income 19,846,984 18,184,216 19,846,984
Interest income 785,280
692,820 785,280
Total taxable income 23,280,934
21,396,262
23,280,934

Calculation of tax liability

  2014 ISK 2015 ISK
2016 ISK
Taxable income as above 23,280,934
21,396,262
23,280,934
Iceland tax thereon 9,206,155 8,283,838
9,045,592
Less:       
Spouses personal tax credit** 605,977
610,825 623,042
Foreign tax credits 0 0 0
Total Iceland tax 8,600,178
7,673,013
8,422,550

* Benefits from having a company car are calculated as 26 percent of the cars value.

** If the spouse does not have any income the taxpayer can use the spouse’s personal tax credit.

Foot Notes

1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.

2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.

3Sample calculation generated by KPMG hf, the Iceland member firm of KPMG International, based on Act no. 90/2003, on Income Tax and Capital Tax, as amended.

© 2016 KPMG ehf, an Iceland Limited Liability Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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