Reykjavík GMT
EY Street address: Mail address Borgartún 30 Borgartún 30 105 Reykjavík 105 Reykjavík Iceland Iceland
Indirect tax contacts
Símon Jónsson +354 595-2500 simon.jonsson@is.ey.com
Ragnhildur Lárusdóttir +354 595-2500 ragnhildur.larusdottir@is.ey.com
Þorkell Bjarnason +354 595-2500 thorkell.bjarnason@is.ey.com
A. At a glance
Name of the tax
Value-added tax (VAT)
Local name Virðisaukaskattur (VSK)
Date introduced 1 January 1990
Trading bloc membership European Economic Area (EEA)
Administered by Ministry of Finance and Economic Affairs (www.stjornarradid.is/raduneyti/fjarmala-og-efnahagsraduneytid)
VAT rates
Standard 24%
Reduced 11%
Other
Zero-rated (0%) and exempt
VAT number format 12345
VAT return periods
Bimonthly
Annual (turnover less than ISK4 million/EUR29,300)
Biannual (agriculture)
Monthly (output tax habitually lower than input tax)
Weekly (fish processing)
Thresholds
Registration ISK2 million (EUR14,650)
Established ISK2 million (EUR14,650)
Non-established ISK2 million (EUR14,650)
Distance selling
ISK2 million (EUR14,650)
Intra-Community ISK10,000 (EUR66) acquisitions
Electronically supplied ISK2 million (EUR14,650) services
Recovery of VAT by non-established businesses Yes
B. Scope of the tax
VAT applies to the following transactions:
• The supply of goods or services made in Iceland by a taxable person
• Withdrawals of goods and services from a registered enterprise or an enterprise with a registra tion obligation for use other than relating to sales of taxable goods and services or for private use
• Reverse-charge services received by an Icelandic entity or person and used in whole or partially in Iceland
• The importation of goods, regardless of the status of the importer
Effective use and enjoyment. Non-established businesses that sell services, which are delivered over the internet or an electronic nature, to an individual in Iceland must charge VAT and return the VAT in Iceland. No other services are subject to the “use and enjoyment” provisions in Iceland.
Transfer of a going concern. The sale of inventories, machinery and other fixed assets is not a taxable supply if the sale is in connection with the sale of a company in whole or in part. In such cases, the taxable person must report the sale to the tax authority within eight days of the sale.
C. Who is liable
A taxable person is any business entity or individual that makes taxable supplies of goods or services in Iceland in the course of a business.
The VAT registration threshold is ISK2 million (EUR14,650) during a 12-month period. Persons can apply for an annual VAT return if the turnover is less than ISK4 million (EUR29,300) during a 12-month period.
Individuals who purchase the following services from a non-established business must pay VAT if the value price reaches ISK10,000 or more, excluding VAT, during a VAT reporting period. The rule applies to the following services:
• Sale or lease of copyright, patent rights, registered trademarks and copyrighted designs, and the sale or lease of other comparable rights
• Advertising services
• Services of consultants, engineers, lawyers, accountants and other similar specialized services, such as data processing and the provision of information
• Services of banks, financial corporations and insurance companies, other than those services that are exempt from VAT according to the VAT Act
• Employment agency services
• The rental of liquid assets, except for means of transport
• Obligations and duties related to business or production activity or the use of rights listed above
Exemption from registration. The VAT law in Iceland does not contain any provision for exemp tion from registration.
Voluntary registration and small businesses. Icelandic VAT legislation provides an option for vol untary registration for VAT purposes.
Entities that are not required to register for VAT because their turnover does not exceed the threshold may choose to voluntarily register.
Special registration is available for leasing real estate for use by a taxable business and construc tion activity at its own expense for the purpose of selling real property to registered persons.
Group registration. The Icelandic VAT Act provides that two or more limited companies may be jointly registered. VAT grouping in Iceland is therefore optional and not mandatory. The
condition for joint registration is that not less than 90% of the share capital in the subsidiary companies be owned by the principal company that requests joint registration or that of other subsidiaries that also participate in the joint registration. All the companies must have the same accounting year. The joint registration must be in the name of the principal company.
The minimum time period required for the duration of a VAT group is five years.
An application for joint registration must be filed with the Director of Internal Revenue no later than eight days before the beginning of the first accounting year subject to the joint registration.
Members of a VAT group are regarded as one taxable person liable for the payment of VAT. The principal company will be responsible for all duties regarding settlement, payment and assess ment of VAT on behalf of all the jointly registered companies. All of the participating companies are jointly and severally liable for VAT debts and penalties. Transactions between jointly registered companies are generally not subject to VAT. However, the withdrawal of taxable goods or services from a taxable part of the group’s business may be subject to VAT.
Holding companies. In Iceland, a pure holding company cannot be a member of a VAT group.
Cost-sharing exemption. The VAT cost-sharing exemption has not been implemented in Iceland.
Fixed establishment. The legal definition of a fixed establishment according to Icelandic tax law is a permanent place of business where the activities of a company take place in part or in full.
Non-established businesses. A “non-established business” is a business that has no fixed estab lishment in Iceland. A non-established business must register for VAT if it makes taxable supplies of goods or services in Iceland in excess of the registration threshold.
A non-established business that sells services that are delivered over the internet or an electronic nature in Iceland can choose voluntary registration if they are under the ISK2 million registration threshold.
Tax representatives. If a non-established business is required to register for VAT in Iceland, it must appoint a resident tax representative (for VAT purposes only), unless it maintains a place of business or a registered office in Iceland.
Reverse charge. A taxable person whose operations (labor or services) are exempt from VAT (according to the Icelandic VAT Act) must pay VAT on taxable services purchased from abroad.
A taxable person must pay VAT on services purchased from abroad unless they can claim input tax. However, a taxable person must always pay VAT if the services purchased from abroad are in relation to the import of goods. If an Icelandic entity imports goods than they are responsible for VAT at the time of import. If a nonresident entity imports the goods it must pay the VAT due at the time of import but can claim input tax upon registration for VAT.
Other persons, e.g., individuals and other persons operating in nonprofit activities, purchasing any of the following services must pay VAT if the value price reaches ISK10,000 or more, excluding VAT, during a VAT reporting period. The aforementioned rule applies to:
• Sale or lease of copyright, patent rights, registered trademarks and copyrighted designs, and the sale or lease of other comparable rights
• Advertising services
• Services of consultants, engineers, lawyers, accountants and other similar specialized services, such as data processing and the provision of information
• Services of banks, financial corporations and insurance companies, other than those services that are exempt from VAT according to the VAT Act
• Employment agency services
• Rental of liquid assets, except for means of transport
• Obligations and duties related to business or production activity or the use of rights listed above
• The aforementioned rules on reverse charge do not apply if the non-established business, sell ing the services in question, is VAT-registered in Iceland or has an agent or other party repre senting the company that is VAT registered in Iceland
A company (business) domiciled or with permanent establishment abroad, selling electronic services, telecommunication services, television services and broadcasting services to final consum ers, a business-to-consumer (B2C), must pay VAT on its price. The same applies to non-established business agents and other parties representing the company in Iceland.
Domestic reverse charge. There are no domestic reverse charges in Iceland.
Digital economy. For business-to-business (B2B) transactions, the customer is generally obligated to self-assess VAT.
For B2C transactions, the nonresident business can be expected to register and account for the VAT.
Non-established businesses that supply electronic services to final consumers in Iceland (B2C) are required to register for VAT and charge VAT on services supplied to Icelandic consumers not registered for VAT. For this purpose, electronic services include the supply of e-books, films, music and software. This rule only applies if the turnover is ISK2 million or more during a 12-month period. However, a non-established business that sells services that are delivered over the internet or an electronic nature in Iceland can choose voluntary registration if they are under the ISK2 million registration threshold.
There are no other special rules in Iceland for e-commerce supplies.
Online marketplaces and platforms. Online marketplaces and platforms fall under the scope of electronically supply services (see the Digital economy subsection above).
Non-established businesses domiciled outside of Iceland or with a permanent establishment outside of Iceland selling electronic services, telecommunication services, television services, broadcasting services or subscriptions to papers and magazines in hard copies (i.e., nonelec tronic copies) to final consumers (B2C) can choose between a general registration (by submitting form RSK 5.02, see details below under the subsection Registration procedures) or a simplified registration. The same registration procedures apply to foreign tour operators selling taxable services in Iceland to final consumers (B2C) and agents of the aforementioned non-established businesses.
Vouchers. No special rules exist for vouchers in Iceland.
Registration procedures. A taxable person applies for registration to the Director of Internal Revenue on form RSK 5.02. The form is available on the website http://www.rsk.is in Icelandic.
The RSK 5.02 can be submitted electronically by emailing the scanned form, signed by the tax able person, to rsk@rsk.is.
If the form is correctly filled out, the application is processed by the Director of Internal Revenue within one week. A taxable person should register no later than eight days before starting taxable activities.
Non-established businesses domiciled outside of Iceland or with a permanent establishment outside of Iceland selling electronic services, telecommunication services, television services, broadcasting services or subscriptions to papers and magazines in hard copies (i.e., nonelec tronic copies) to final consumers (B2C) can choose between a general registration (by submitting form RSK 5.02, see details above under Registration procedures) or a simplified registration. The
same registration procedures apply to foreign tour operators selling taxable services in Iceland to final consumers (B2C) and agents of the aforementioned non-established businesses.
Simplified registration is made via an electronic registration system, operated by the Directorate of Internal Revenue (www.voes.rsk.is) Registration (general or simplified) is only mandatory if the turnover is ISK2 million (EUR14,650) or more during a 12-month period.
A non-established business that chooses simplified registration cannot claim input tax.
Deregistration. Taxable persons apply for deregistration to the Director of Internal Revenue on written form RSK 5.04. The form is sent to RSK by email to rsk@rsk.is Deregistration is allowed when taxable activities are sold or ceased. The Director of Internal Revenue may deregister a taxable person if, for two or more consecutive return periods, the taxable person fails to file a VAT return or fails to provide proper supporting documents. There is no requirement to notify the tax authorities for change of address. The only time notification is required is for change of activities that influence the right of input tax deduction, e.g., where a taxable person takes over a VAT obligation when purchasing a property, which has been used for taxable activities but is no longer used for such activities.
Changes to VAT registration details. Changes that occur to a taxable person’s operations after VAT registration must be notified to the Director of Internal Revenue no later than eight days after the change. An example of a change that needs to be notified is if a business has activities of a type other than those listed in the corporate registration or it ceases activities subject to VAT. It is also a change if a company is sold to another registered party. When a company is sold, the operations of the previous operator cease and new ones take over. The Director of Internal Revenue may deregister a party from the VAT register if the notification obligation has not been fulfilled.
D. Rates
The term “taxable supplies” refers to supplies of goods and services that are liable to a rate of VAT, including the zero rate.
The VAT rates are:
• Standard rate: 24%
• Reduced rate: 11%
• Zero-rate: 0%
The standard rate of VAT applies to all supplies of goods or services, unless a specific measure allows a reduced rate, the zero rate or an exemption.
Examples of goods and services taxable at 0%
• Export of goods and services
• Supplies delivered for use on board vessels on international journeys
• Sale and leasing of aircraft and ships, shipbuilding along with repair and maintenance work on ships and aircraft and their fixed equipment
• The design, planning and other comparable services related to construction and other real property abroad
• Contractual payments from the Treasury related to the production of milk and sheep farming
• Sales of services to foreign fishing vessels landing fish in Iceland
• Sales of services to persons neither domiciled nor having a venue of operation in Iceland, provided that the services are wholly used abroad
• Transportation of goods between countries or within the country when the transport takes place to or from Iceland
Examples of services taxable at 11%
• Radio and television licenses
• Rental of hotel rooms, guest rooms and other accommodation
• Sale, including subscription, of newspapers, periodicals, countryside and district newspapers and books, both hard copies and electronic copies
• Geothermal hot water, electricity and fuel oil used for heating
• Most food-related items (including alcoholic beverages)
• CDs, records, magnetic tapes and other similar means of music recordings, other than visual records. Also, electronic versions of music, without visual records
• Access to road facilities
• Condoms
• Reusable diapers and diaper lining
• The services of travel agents
• Transportation of passengers, whether by land, air or sea, including coaches and bus trips(but transportation of passengers to and from the country is considered granted abroad and such services are exempt).
• Admission to spas, saunas, etc.
The terms “exempt” and “outside the scope” are used for supplies of goods and services that are not liable to VAT and that do not give rise to a right of input tax deduction.
Examples of exempt supplies of goods and services
• Financial services
• Insurance
• Lease of residential property
• Medical services
• Social services
• Educational services
• Real estate transactions
• Specified cultural and sporting events
• Public transport
• Postal services
• Lotteries and betting pools
• Funeral services
Option to tax for exempt supplies. When leasing real estate for use in taxable activities and for construction activity financed by the taxable person for the purpose of selling real property to registered persons, the taxable person has the option to register and pay VAT on those otherwise exempt supplies.
E. Time of supply
The basic time of supply for goods or services is when an invoice is issued (usually at the time of delivery). In case goods or services are delivered and no invoice has been issued, it is the time of delivery that decides.
If an invoice is issued due to delivery, the delivery is deemed to have taken place on the date of issue of the invoice, provided the invoice is issued before or at the same time as the delivery takes place.
When payment is rendered in full or in part before delivery takes place, 80.65% of the payment received must be counted as part of taxable turnover during the period when payment is rendered, or 90.09% in the case of a sale of goods/services subject to 11% VAT.
Goods delivered on a handling or agent basis may either be accounted for as part of taxable turnover during the accounting period when delivery takes place or the accounting period when the accounts are settled with the handling or commission agent. In the case of the latter method, an invoice may not be issued until the settlement of accounts takes place.
When goods sold are returned to the seller, a credit invoice for the value received must always be issued with reference to the former invoice. The same applies to a discount given after an invoice has been issued, as well as corrections of earlier invoices.
Accordingly, VAT must be reported on the VAT return in the VAT period when the invoice has been issued. Service suppliers, apart from suppliers who provide services almost exclusively to final consumers, are authorized to issue invoices at the end of each month.
Deposits and prepayments. The time of supply rule for deposits and prepayments is when the payment is received by the supplier, even if no supply has been made. Consequently, the sup plier must account for VAT when the deposit/prepayment is received.
Continuous supplies of services. There are no special time of supply rules in Iceland for continuous supplies of services. As such, the general time of supply rules apply (as outlined above).
Goods sent on approval for sale or return. There are no special time of supply rules in Iceland for supplies of goods sent on approval for sale or return. As such, the general time of supply rules apply (as outlined above), which may require corrective invoices to be issued once the final posi tion is determined.
Reverse-charge services. VAT payable through the reverse-charge mechanism is due on the date of the invoice if the invoice is issued in accordance with the generally accepted accounting prin ciples in the country of the service provider.
Leased assets. There are no special time of supply rules in Iceland for supplies of leased assets. As such, the general time of supply rules apply (as outlined above).
Imported goods. The time of supply for imported goods is upon customs clearance.
F. Recovery of VAT by taxable persons
A taxable person may recover VAT that is charged on goods and services supplied to it for busi ness purposes. A taxable person generally recovers input tax by deducting it from output tax, which is VAT charged on supplies made.
Input tax includes VAT charged on goods and services supplied in Iceland, VAT paid on imports of goods and VAT self-assessed for reverse-charge services received from outside Iceland. Input tax may also be deductible even though the products have not been sold and are still a part of the company’s inventory.
The amount of the VAT reclaimed must be detailed on a valid VAT invoice. Consequently, VAT may not be deducted as input tax before a VAT invoice is received. Input tax that is not properly documented may not be deducted. The input tax deduction must be reported in the VAT period in which the invoice is dated. As such, corrective VAT returns would need to be submitted and hence it is not allowed to report the deductible VAT in the upcoming period.
The time limit for a taxable person to reclaim input tax in Iceland is stated on the VAT invoice (as to which VAT period the right to deduct may be used).
Nondeductible input tax. Input tax may not be recovered on purchases of goods and services that are not for use in a business that is subject to VAT (for example, goods acquired for private use).
In addition, input tax may not be recovered for some items of business expenditure.
Examples of items for which input tax is nondeductible
• The cafeteria or dining room of the taxable persons and all food purchases
• The acquisition or operation of living quarters for the owner and staff
• Perquisites for the owner and staff
• The acquisition and operation of vacation homes, children’s nurseries and similar objects for the owner and staff
• Purchase and maintenance of passenger vehicles, with certain exemptions for taxi, car-lease companies and tour operators, which have been granted a license from the Icelandic Transporting Authority to provide passenger transportation in tourist services
• Entertainment costs and gifts
Examples of items for which input tax is deductible (if related to a taxable business use)
• Hotel accommodation
• Computers
• Mobile phones
• Passenger cars
• Vans, lorries and buses that are solely used for the sale of taxable goods or services prior to a special registration of the vehicle
Partial exemption. Iceland operates a procedure for the recovery of input tax when a business makes both taxable and exempt supplies.
If Icelandic persons make both taxable and exempt supplies, they can deduct input tax from all supplies solely related to the taxable activity. No deduction is available for supplies used solely for exempt activity. For supplies received and used for both taxable and exempt supplies, input tax may be apportioned according to the turnover split between taxable and exempt transactions. No other objective pro rates are allowed to be used in Iceland.
Approval from the tax authorities is not required to use the partial exemption standard method in Iceland. There are no special methods allowed in Iceland.
Capital goods. There are no special input tax recovery rules for capital goods. Input tax incurred on capital goods can be recovered in line with the normal input tax recovery rules. It is worth noting that in Iceland, most capital goods, such as buildings and land are not subject to VAT. However, computer software and hardware are subject to VAT in Iceland.
In Iceland, the capital goods adjustment does not apply to any services.
Refunds. If the amount of recoverable VAT exceeds the amount of output tax payable in that period, the relevant tax authority must investigate the tax return. If the return is calculated cor rectly, the Treasury must refund the difference.
If a return has been submitted on time, the refund must take place within 21 days of the due date. A refund claim is triggered automatically if the VAT return shows a VAT credit.
Pre-registration costs. Input tax incurred on pre-registration costs in Iceland is not recoverable.
Bad debts. When calculating taxable turnover, the seller may deduct 80.65% of lost outstanding trade debt, provided that the lost amount has previously been counted as taxable turnover, or 90.09% in the case of sales according subject to 11% VAT. If the amount is later paid, 80.65% of it must be included with taxable turnover during the period in which it is paid, or 90.09% in the case of sales subject to 11% VAT. There are no special formalities to be fulfilled to claim baddebt relief, just the general one, i.e., supporting documents must be retained, made available to the tax authorities upon request and kept for seven years.
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Iceland.