Sponsored Q&A: BBA//Fjeldco

1. What are the key tax laws and regulations in Iceland that individuals and businesses should be aware of?

Under the Icelandic Income Tax Act no. 90/2003, resident corporations pay tax on their worldwide income (ie, unlimited tax liability) minus operating expenses. The general corporate tax rate is 20%. As a general practice, all businesses incorporated and registered in Iceland, or which have their effective management in Iceland are considered tax resident in Iceland. 

Resident individuals are liable for tax payments on their worldwide income. Non-resident employees are generally taxed on Iceland-sourced income.

VAT is charged on goods and services supplied in and imported to Iceland based on the Act on Value Added Tax no. 50/1988. The VAT rates are a standard 24% rate and a reduced 11% rate applicable to certain goods. Certain services are exempt from VAT and export of services and goods are generally zero VAT rated.

2. Can you explain the personal income tax rates and thresholds for residents and non-residents in Iceland?

Individuals that maintain a permanent residence in Iceland are generally considered residents for tax purposes in Iceland. Individuals residing in Iceland for six months in any 12-month period, are generally considered to have permanent residence in Iceland. Individuals, that do not exceed the six months stay, are generally taxed on Iceland-source income only.

Income tax is divided into state and municipal income tax. Employers withhold the tax monthly at the following progressive rates:

1. up to ISK 409,986: 31.45%
2. from ISK 409,986 to 1,151,012: 37.95%
3. more than ISK 1,151,012: 46.25%

Mandatory pension contribution amounts to 15.5% and social security tax amounts to 6.35%.

3. What are the corporate tax rates and incentives for businesses operating in Iceland?

The general corporate tax rate is currently 20%. Taxable income is determined based on generally accepted principles compared with similar tax systems within the EEA. The rate for partnerships (in Iceland they are legal persons and can be taxable as such) registered for tax purposes is 37.6%.

4. Are there any specific tax considerations or benefits for startups or innovative companies in Iceland?

Innovative companies, that have received a confirmation from the Icelandic Centre for Research, are entitled to a deduction from income tax. An increased deduction is currently in effect and applies throughout 2025. For small and medium-sized companies (with less than 250 employees and annual turnover below €50m), the deduction amounts to 35% of expenses incurred in relation to innovation projects, and 25% for large companies.

5. How does Iceland handle taxation of investment income, such as dividends, interest, and capital gains?

Limited liability companies are generally subject to 20% corporate tax. However, dividends and capital gains are effectively not subject to tax as such entities can apply full deduction (does not apply to income from entities in low tax jurisdictions). Partnerships are subject to 37.6% tax rate on all income with the exception of dividends, which are subject to 20% tax.

Investment income of individuals is generally subject to capital gains tax at a rate of 22%. Capital income from interests, dividends and sale of shares is taxed at general capital gains tax rate, with the first total ISK 300,000 of such capital gains income exempt from taxation. Rental income of individuals is generally taxed as business income (up to 46.25% rate) but can be taxed as general capital gains at 24% or, with further conditions, as low as 11%.

6. Can you provide guidance on the tax implications and compliance requirements for cross-border transactions and international tax planning in Iceland?

Iceland is a member of the European Economic Area (EEA), European Free Trade Association (EFTA) and a member state of the OECD and World Trade Organization (WTO). Through the EEA partnership, Iceland generally takes full part in the internal market of the EU. Tax matters are generally treated as core sovereign matter and Iceland is not part of the EU common system of taxation and has not implemented directives in the field of tax.

As an example, Icelandic tax law includes provisions on:

1. The Transfer Pricing rules, which are based on the arm’s length principle and are generally applied in line with guidelines issued by the OECD. The provision applies to transactions between related parties. Companies conducting cross-border transactions, and with revenue exceeding ISK 1 billion, are subject to annual documentation of all transactions with related entities.
2. Controlled Foreign Company rules, which apply when an Icelandic resident taxpayer (individual or legal entity) owns or controls, directly or indirectly, more than 50% of an entity situated in defined low tax jurisdictions. Profits distributed from such entities are taxed with its resident shareholders in Iceland at the local corporate or income/capital gains tax rate.
3. Thin capitalisation rules provide a threshold on deduction of interests on related party debt. Interests, exceeding 30% of the adjusted EBITDA cannot be deducted unless further conditions apply.

Dividends, interests, and royalties, paid to a foreign non-resident recipient, are subject to withholding taxation, at rates between 12-22%. Such taxation is generally reduced under Iceland’s tax treaties.

7. What are the main tax deductions and credits available to individuals and businesses in Iceland?

Below examples of deductions and incentives, apply in addition to generally accepted tax deductions and credit such as foreign tax credit, tax losses, depreciation etc.

Examples of tax credit and incentives for companies:

1. Increased depreciation for green assets – limited liability companies can apply for an increased depreciation (additional 25%) for certain green assets (13.3% for partnerships).
2. Tax incentives for innovation enterprises – see further Q&A no. 4 above.
3. Dividends and gains from shareholdings – see further Q&A no. 5 above.

Examples of tax credit and incentives for individuals:

1. Personal tax credit is provided annually, which is deducted from personal income tax. For 2023 the credit amounts to ISK 716,000.
2. Tax-free limit on capital gains – see Q&A 5.
3. Gains from sale of private residential property can be tax-exempt if the property is owned for two years.
4. Deduction up to 50% of taxable income, for investment in companies which fulfil certain criteria (applies until the end of 2024).
5. Foreign experts, hired for work in Iceland due to expertise and experience can apply for tax deduction, resulting in only 75% of income being subject to income taxation.

8. Are there any specific tax treaties or agreements that Iceland has with other countries to avoid double taxation?

Currently, Iceland has double taxation treaties with 48 countries, including a multilateral treaty between the Nordic countries. In recent years, emphasis has been on concluding more double taxation treaties, most recent being treaties with Australia and Andorra.

9. How can I effectively structure my business or investments in Iceland to optimise tax efficiency and minimise liabilities?

Effective structuring depends on the business sector and many other variables when investing in Iceland. The factors to be analysed are the minimisation of withholding taxes, maximisation of the use of any available incentives, optimisation of finance structure taking into account limitations of interest deduction and other factors which often can be case sensitive.

10. Are there any recent tax developments or upcoming changes in Iceland that individuals and businesses should be aware of

A new exemption is to be implemented, providing for capital gains taxation on income from stock option in innovative companies, provided to employees, board members and experts, instead of taxation as general income (up to 46.25%). The exemption is pending EFTA Surveillance Authority’s approval.

Following the UK’s exit from the EU, dividend payments received by UK companies from Icelandic companies were subject to withholding tax in Iceland. A new temporary provision to the Icelandic Income Tax Act provides full deduction on such payments, resulting in no taxation.

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