Reykjavík
EY
Borgatún 30
105 Reykjavík Iceland
Executive and immigration contacts
Símon Jónsson
Þorkell Bjarnason
Ragnhildur Lárusdóttir
+354 595-2585, +354 840-2008
Fax: +354 595-2501
Email: simon.jonsson@is.ey.com
+354 595-2574, +354 825-2574
Fax: +354 595-2501
Email: thorkell.bjarnason@is.ey.com
+354 595-2575, +354 825-2575
Fax: +354 595-2501
Email: ragnhildur.larusdottir@is.ey.com
A. Income tax
Who is liable. Residents of Iceland are subject to tax on their world wide income. Nonresidents are subject to tax on their Icelandicsource income only. Wages and remuneration may be considered Icelandic-source even if an employer does not have a permanent establishment in Iceland.
Individuals are considered residents if they permanently reside in Iceland. An individual is deemed to permanently reside where he or she is located, stays during his or her spare time, and maintains a home.
Income subject to tax. Icelandic income tax law distinguishes among several categories of income, including income from employment, self-employment, and a trade or business.
The taxation of various types of income is described below.
Employment income. Resident and nonresident employees are sub ject to income tax on remuneration received from employment. Employment income includes wages, salaries, bonuses, directors’ fees, pensions and all other compensation for services rendered.
Self-employment and business income. All resident and nonresi dent individuals who act independently in their own name and at their own risk are taxed on income derived from self-employment or business activities.
In general, taxable income includes all income and capital gains attributable to self-employment or business activities.
If a nonresident conducts business through a permanent establish ment located in Iceland, taxable income is computed in the same manner as for resident individuals.
Investment income. Dividend income received by a resident from a resident or nonresident company is generally subject to capital
income tax at a rate of 22%. Interest income and royalties are also subject to capital income tax at a rate of 22%. However, individuals are not subject to tax on the first ISK300,000 of interest income. Income received by an individual from the rental of real property is subject to capital income tax at a rate of 22%. Fifty percent of such rental income is tax-free.
Nonresidents are subject to a final withholding tax at a rate of 22% (20% for legal entities) on dividends and 12% on interest income. Interest on bonds issued in the names of financial institutions or energy companies is not subject to Icelandic tax. The bonds must be issued in the enterprises’ own names and registered at a central securities depository within the Organisation for Economic Co-operation and Development (OECD), European Free Trade Association (EFTA) or the Faroe Islands. Interest paid by the Icelandic Central Bank in its own name or on behalf of the Icelandic government is not subject to the 12% withholding tax. If a nonresident has his or her domicile in a country that has entered into a double tax treaty with Iceland, the application of such treaty may result in the expatriate not being subject to tax on such income or being subject to tax at a lower rate. However, the expatriate might have to suffer withholding tax, which would subse quently be reimbursed.
Directors’ fees. Payments to managing directors for day-to-day management are considered employment income and are taxed in the same manner as employment income.
If a nonresident is a member of the board of directors of an Icelandic company and bears the tax for his or her fees, the fees are subject to a 20% withholding tax and a municipal tax, which is also withheld at source.
Taxation of employer-provided stock options. Stock options are generally taxed on the date on which stocks are sold (not on the date of grant or exercise) as employment income. The taxable value is the difference between the exercise price and the fair market value of the shares on the date of exercise. The taxable benefit is treated as ordinary employment income. Social secu rity contribution should be paid by the employer when the option is exercised. Accordingly, under these circumstances, the tax obligation is deferred until the year the shares are sold.
A special tax regime applies to stock options granted under approved employee share schemes. Under the special tax regime, income is taxed when the employee sells his or her shares. The taxable income is the difference between the exercise price and the sale price of the shares and is subject to the capital income tax rate of 22%. The taxable benefit is not subject to municipal tax, social security tax or pension contributions. At the end of the year, the employer must provide the tax authorities with informa tion on employees who have exercised their share options.
Capital gains. Capital gains tax is levied on individuals at a rate of 22%. In general, a withholding tax at a rate of 22% is levied on all capital gains realized by nonresidents.
The taxable gain on shares is the difference between the shares’ purchase price and selling price.
Capital gains from real estate. Gains derived from the sale of a principal residence are exempt from tax if the property has been owned for at least two years.
Capital gains on sales of privately owned buildings and land real ized by nonresidents is subject to a 22% withholding tax.
Capital gains from personal property. Capital gains derived from transfers of personal property not used in a business, including stamps, jewelry or automobiles, are exempt from tax, unless such sales are considered business activities.
Capital gains realized by a business enterprise. Capital gains derived from investments and from the disposal of real estate that forms part of the net profit of an enterprise are taxable.
Deductions
Deductible expenses. Expenses incurred by an employee are generally not deductible. However, proven expenses from workrelated travel and upkeep (cost of accommodation, meals and fares, and other travel costs) are allowed to a certain extent. The deductible amount of the expenses is reduced by the amount of car allowances, per diem allowances or similar reimbursements of costs received by the employee. In addition, employee pension contributions up to a maximum of 8% of total employment income are deductible.
Personal allowances. In calculating state and municipal income taxes for 2021, each taxpayer is allowed a personal tax credit of ISK609,509. This tax credit is reduced proportionately if the individual is taxable in Iceland for only part of the fiscal year. The tax credit not fully used by one spouse may be transferred to the other spouse.
Business deductions. In principle, all expenses for earning, secur ing and maintaining income are deductible, including the follow ing:
Costs of material and stock
Personnel expenses, certain taxes, rental and leasing expenses, finance charges, self-employment social security contributions, and all general and administrative expenses
Depreciation of fixed assets
for identified losses
Rates. Employment income tax is computed by adding a municipal tax rate to the general rate. The income tax rates for 2021 consist of a municipal rate that varies from 12.44% to 14.52%, and a progressive income tax rate (17%, 23.5% or 31.8%), depending on income. The following table sets forth the general income tax rates (income tax rate plus an average municipal tax rate of 14.45%).
Monthly income
If the total annual income tax base of a jointly taxed individual is higher than ISK11,758,159 for 2021, the income tax base in excess of that amount can be taxed at the medium progressive income tax rate of 23.5% (plus the municipal tax) instead of the income tax rate of 31.8% (plus the municipal tax), subject to the following limits:
• This applies only if the tax base of the jointly taxed individual that receives the lower amount of income is less than ISK11,758,159 and only as much as the half of the difference between ISK11,758,159 and that tax base of the jointly taxed individual receiving the lower amount of income.
• This rule applies only to a tax base of up to ISK3,784,974.
Nonresidents who carry on business through a permanent establishment in Iceland are taxed at the same rates as residents.
Relief for losses. Business losses may be carried forward for 10 years. Losses may not be carried back and may not be deducted by a successor.
B. Other taxes
Inheritance and gift taxes. The rate of inheritance tax is 10% of the market value of assets at the time of payment, exceeding ISK5 million.
Gifts and donations are subject to income tax.
Media tax and contribution to the Construction Fund for the Elderly. Individuals aged 16 to 69 who have taxable income exceeding ISK2,018,760 must pay a tax of ISK18,300 to the state-owned media in Iceland and an ISK12,034 contribution to the Construction Fund for the Elderly.
C. Social security
Contributions. Social security contributions must be paid by the employer only. These contributions cover health insurance, unemployment insurance, birth leave insurance and bankruptcy insurance. Social security contributions paid by the employer are imposed on the employer at a flat rate of 6.1% of all wages and salaries paid by the employers. Employees do not have to pay any social contribution and no social security contribution are with held from wages or salaries.
Self-employed individuals must register for social security pur poses, and as employers they are subject to the same social secu rity contribution rate.
Totalization agreements. To provide relief from double social security taxes and to assure benefit coverage (A-1 Certification), Iceland has entered into social security agreements with the fol lowing countries, including European Union/European Economic Area (EEA) countries.
Austria Germany Netherlands Belgium Greece Norway Bulgaria Greenland Poland
Croatia Hungary Portugal Cyprus Ireland Romania
Czech Republic Italy Slovak Republic
Denmark Latvia Slovenia
Estonia Liechtenstein Spain
Faroe Islands Lithuania Sweden
Finland Luxembourg Switzerland
France Malta United Kingdom
D. Tax filing and payment procedures
Icelandic tax residents must file annual income tax returns for the 2021 calendar year by 31 March 2022. Employers withhold taxes for salaried individuals. Employers that do not pay the withhold ing tax have a surety liability for the payment.
Nonresident taxpayers earning Icelandic-source salaries and pen sions must file tax returns.
Self-employed individuals must make estimated monthly pay ments of tax on deemed salaries.
Married persons are taxed separately on all types of income. However, married persons are automatically jointly taxed and are jointly liable for their tax payments and jointly net their credits and debts. Tax liability arising during the marriage continues after the divorce. The above rules also apply to couples in cohab itation that choose to be jointly taxed.
E. Double tax relief and tax treaties
Iceland has entered into double tax treaties with various countries, in addition to a multilateral treaty with the other five Nordic countries. Residents with income from non-treaty countries include the foreign-source income in their taxable income and may apply for a credit for foreign taxes paid, up to the amount of tax imposed by Iceland on the foreign-source income.
Iceland has entered into double tax treaties with the following jurisdictions.
Albania Greece Norway
Austria Greenland Poland Barbados Hungary Portugal
Belgium India Romania
Canada Ireland Russian
China Mainland Italy Federation
Croatia Japan Slovak Republic
Cyprus Korea (South) Slovenia
Czech Republic Latvia Spain
Denmark Liechtenstein Sweden
Estonia Lithuania Switzerland
Faroe Islands Luxembourg Ukraine
Finland Malta United Kingdom
France Mexico United States
Georgia Netherlands Vietnam Germany
F. Temporary visas
Permission to enter Iceland is granted to foreign nationals who wish to visit or stay in the country for up to three months. Citizens of certain Eastern European countries and most African, Asian
and Latin American countries must have visas before they may enter Iceland.
Iceland is a member of the Schengen agreement. All persons not holding a valid Schengen visa in their travel document must apply for a visa. Applications for visas may be obtained at embassies and consulates issuing visas on behalf of Iceland (in most cases, the Danish embassy).
A short-stay visa is valid for employed or self-employed persons staying in Iceland for less than three months who do not derive income in Iceland, such as tourists, students enrolled in training courses in Iceland for less than three months and businesspersons on business trips.
In general, renewals are not granted for a longer stay. However, a license to stay for longer than three months without seeking work may be obtained.
A long-term visa may be granted if a foreigner wishes to stay in Iceland for longer than 90 days for a reason not conforming to the residence permit categories and if the foreigner does not intend to reside in Iceland.
G. Work and residence permits and self-employment
Icelandic law regulates the right of foreign nationals to enter, reside and work in Iceland. To take up paid employment in Iceland, a foreign national must satisfy conditions entitling him or her to enter and reside in Iceland and hold a work permit.
For purposes of entry, residence and work in Iceland, foreign nationals are divided into different categories of workers, depend ing on whether they are Nordic nationals, EEA nationals or nationals of other countries.
Nordic nationals. Nationals from other Nordic countries may stay and work in Iceland without restrictions. However, if they take up residence or work in Iceland, they must register with the National Registration Office.
EEA nationals. Nationals of EEA/EFTA countries may stay and work in Iceland without a permit up to three months after their arrival in the country, or stay up to six months if they are seeking employment. If the individual resides in Iceland for longer than three months (or six months if seeking employment), he or she must register his or her right to residency with the National Registration Office. Residency in another Nordic country is not deducted from the residency period.
Non-EEA nationals. Non-EEA nationals may stay in Iceland for either the time period stated in their tourist visas, or if visa is not requested, for up to 90 days.
Non-EEA nationals who want to extend their stay and work in Iceland must obtain work permits and residence permits. The application must generally be made before entering Iceland.
Temporary work and residence permits. The following are four categories of work and residence permits based on employment: • Permit for a job that requires expert knowledge
• Permit based on temporary shortage of laborers
• Permit for athletes
• Permit for a qualified professional based on collaboration or service contracts regarding educational, academic or scientific work
A temporary work permit is issued to the employer to allow the employment of a foreign national. A temporary work permit may be revoked if the activities of the permit holder become inconsis tent with the conditions for the permit.
The following are the general conditions for the granting of a temporary work and residence permits:
• Qualified persons cannot be found in Iceland or in EEA/EFTA countries or the Faroe Islands, occupational sectors in the coun try lack workers or athletes, or other special reasons exist for granting such permits.
• The local trade union in the relevant branch of industry, or the appropriate national union, has provided its comment on the application.
• A signed employment contract covers a specific period or task and guarantees the employee wages and other terms of service equal to those enjoyed by local residents.
• The employer takes out health insurance for the foreign employee, which provides the same coverage as the coverage provided under the Social Security Act.
• The employer guarantees the payment of the cost of sending the employee back to his or her home if the employee becomes incapable of working for a long period as a result of illness or accident or if the employment is terminated because of reasons for which the employee is not responsible.
• A satisfactory health certificate for the employee is submitted.
A temporary work permit for a job that requires expert knowl edge is granted for an initial period of up to two years. It may be renewed for up to two years at a time.
A temporary work permit based on a temporary shortage of laborers is granted for an initial period of up to one year. It may be renewed for up to one year at a time.
A temporary work permit for athletes is granted for an initial period of up to one year. It may be renewed for up to two years at a time.
A temporary work permit for qualified professionals based on collaboration or service contracts on educational, academic or scientific work is generally granted for a period of up to six months per contract.
Student Work and Residence Permit. A Student Work and Residence Permit is granted to an individual who studies in an Icelandic school. This work permit is limited to jobs connected to the student’s studies or jobs during school holidays. The follow ing are the requirements for qualification for the permit:
• A signed employment contract between the parties
• A satisfactory health certificate for the employee
• A residence permit for the student
The work ratio of the foreign national generally may not exceed 40%, with the exception of work that is performed during school
vacation or in the course of vocational training. The Student Work and Residence Permit may be granted for periods of up to 12 months at a time.
Au-pair Work and Residence Permit. An Au-pair Work and Residence Permit may be granted if the basic conditions for a residence permit are fulfilled and if the applicant is not younger than 18 years and not older than 25 years when the application is submitted.
Exceptions. The following nonresident individuals do not need work permits to work for up to 90 days per year in Iceland:
• Scientists and scholars, including PhD students and interns, in relation to teaching, academic or scientific work or other simi lar activities. The foreign individual must hold a university degree in the field of the profession concerned.
• Artists, except musicians performing in restaurants.
• Athletic coaches.
• Representatives of companies.
• Drivers of passenger coaches registered in a foreign country that are used to transport foreign tourists.
• Foreign media reporters working for companies that do not maintain a permanent establishment in Iceland.
• Specialized employees, consultants and advisors working on the assembly, setup, inspection or repair of equipment.
Permanent work permits. Permanent work permits are no longer granted in Iceland. Instead, foreign individuals who have acquired a permanent residence permit have the right to work in Iceland without limitations.
Therefore, if a foreign individual loses his or her permanent residence permit, he or she also loses his or her right to work in Iceland without limitations.
Steps for obtaining work permits. After an employer decides to hire a non-EEA national, the administrative procedures described below must be followed and necessary permits must be obtained, depending on the citizenship of the prospective employee.
To apply for temporary work and residence permits, an employer must complete an application form and request comments from the relevant union. The union must recommend or deny the appli cation within seven days. If recommended by the union, the employer and the employee file an application for temporary work and residence permits with the Directorate of Immigration (DI). If the DI agrees to a residence permit, it sends the application for temporary work to the Directorate of Labour (Vinnumálastofnun, or DL). If the DL agrees to a work permit, it notifies the employer and foreign individual, and sends a copy of its approval to the DI. The DI then issues a certificate for the foreigner as proof of the granted residence and work permits. The employer receives the certificate from the DI.
To apply for a permanent residence permit, the foreigner files an application with the DI. An application for a permanent residence permit must be submitted to the DI at least four weeks before the expiration of the current permit. If the DI agrees to a permanent residence permit, the DI issues a certificate as proof of the
unrestricted residence. The foreign individual then receives the certificate from the DI.
To operate a business, a foreign individual must obtain permanent residence and work permits.
H. Family and personal considerations
Family members. Immediate family members of Icelandic nationals, Nordic nationals residing in Iceland or other nationals residing in Iceland, who have one of the following residence permits, can apply for a residence permit for family unification:
• Qualified specialists
• Athletes
• Spouses or cohabiting partners
• On grounds of international protection
• On grounds of humanitarian reasons
• On grounds of special ties to Iceland
• Permanent residence permit
• Graduate or post-graduate students
In general, an application must be filed before arrival in Iceland. The application must meet certain criteria, depending on the kind of residence permit applied for (for example, financial support, health insurance and accommodation are secured). The foreign er’s spouse, cohabiting partner or minor children under 18 may be present in Iceland when an application for residence permit is filed, unless the applicant is a spouse, cohabiting partner or a minor child of a student and is required to have a visa.
Immediate family members of EEA/EFTA nationals who are citizens of countries outside of the EEA/EFTA may reside in Iceland if their residence is based on the rights of an EEA/EFTA national residing in Iceland. However, the immediate family member must apply for a residence permit card within three months after arrival in Iceland (or six months if the EEA/EFTA national is seeking employment).
Marital property regime. Under Icelandic law, the marital prop erty regime is community property. Community property includes all property brought into the marriage and all property acquired during the marriage.
Couples may elect out of the regime before or during the mar riage by signing a marriage settlement, which is registered at the marriage settlement registration.
Driver’s permits. A foreign driver’s license is valid in Iceland for those who stay in Iceland on a temporary basis. In principle, a person who has permanent residence in Iceland must hold an Icelandic driver’s license. Exceptions to this rule are discussed below.
A driver’s license issued in a Nordic or EEA/EFTA country gives the holder the same rights he or she has under the license of the issuing country. The rights are based on the validity of the license, but not beyond the age of 70.
Driver’s licenses issued in countries that are not parties to the EEA agreement give the holders rights to drive in Iceland for up to one month after they register a legal domicile in Iceland. After
the end of this one-month period, an individual must hold an Icelandic driver’s license to drive in Iceland.
In most cases, nationals of non-EEA/EFTA countries must pro vide a statement about good health or a health certificate issued by a doctor, whichever is appropriate, and undergo a test of qualification. The second requirement may be waived if it is determined that the conditions for a driver’s license in the country where the license was issued are not less than the requirements in Iceland.
For a driver’s license issued in a Nordic country or EEA/EFTA country, the Icelandic license is usually issued without the appli cant needing to undergo a test of qualification or to submit a health certificate or a statement of good health.