Taxes in Iceland, Taxation in Iceland, Taxes system in Iceland
The tax-system in Iceland is very simple. Income tax is withheld by the employer. The amount withheld is calculated on the basis of employment income, including pensions and benefits in kind, after deducing pension premiums. The tax-system in Iceland is very simple:
Income tax rate
There is a 35.72% tax on wages and salaries .
Dividends and interests
There is a 10% tax on dividends and interests.
Personal tax credits
All individual taxpayers are entitled to a personal tax credit against the computed income taxes on income. This credit amounts to ISK 385,800 for the year 2007 or ISK 32,150 for each month.
For the tax year 2007 the rate of withheld tax is 35,72%, i.e. 22,75% for income tax and 12,97% for municipal tax. The personal tax credit, ISK 32,150 pr. month, is deducted from the calculated tax.
This is how the tax-system in Iceland works in real life:
When your salary is paid, you receive a pay slip showing the amounts withheld as tax, pension premiums etc. Do remember to keep your pay slips, they are evidence that the tax has been deducted. The employer is responsible for the deducted tax of your salary.
Example showing how tax is calculated in ISK: Salary for one month: 200,000
4% deduction of pension premium: 8,000
Taxable income: 192,000
Tax rate 36,72 x 192.000: 68,582
Personal tax credit: 32,150
Withheld tax: 36,432
Net salary: 155,568
However, if the person is married and the spouse is not working and not using the personal tax credit, the person who is working gets a double tax credit. In that case, the net salary would be ISK 187,718
Income tax rate
The corporate income tax rate for income year 2007 is 18% for companies and 26% for partnerships registered as taxable entities.
Dividends and interests
Dividends and interests paid to resident companies are subject to withholding tax of 10%. Taxes withheld are credited against the assessed income tax.
Taxes on payroll
Social security contributions
Social security contribution (tryggingagjald) is imposed on all remuneration paid for dependent personal services and presumptive employment income of the self-employed. The contribution is inter alia used to finance the social security system.
For the income year 2007 the general rate is 5.340%, for employee from European Economic Area (EEA) withholding E-101, it is 0.158%, and for seamen it amounts to 5.990%.
Pension fund contributions
Contributions for occupational pension funds are imposed on all remuneration paid for dependent personal services and presumptive employment income of the self-employed. The general contribution is 8% of pre-tax remuneration, matched by a 4% contribution of the wage-earner. Most collective wage agreements on the labour market require employers to contribute an additional 2% to an occupational pension fund, if an employee chooses to pay an additional 2-4% contribution into a pension fund plan. However, if the employee has an E-101, the employer does not pay 12% (4+8) to the Icelandic pension fund.
According to the World Bank, the total tax rate for companies as % of profits in Iceland is 27.9, compared to 68.2 for France, 46.0 for USA, 35.4 for UK and 57.0 for Sweden.
Value Added Tax (VAT)
The general rate is 24.5% and the reduced rate is 7% (from 1 March 2007 on certain food, books, newspaper…)
Tax System in Iceland
The Icelandic tax system is relatively simple and effective. In the last few years the emphasis has been to simplify it further, reduce tax rates, broaden the tax bases and conclude more bilateral taxation agreements, which will increase the competitiveness of Icelandic corporations and attract foreign investors.
In December 2001 the Parliament passed a law to implement wide-ranging tax reforms, both for business and households. The tax reforms include a range of changes in tax rates and reference amounts, and abolition of inflation accounting for tax purposes and in accounting, which constitutes a large step in aligning the Icelandic tax system to that of other countries. Corporate income tax has been reduced from 30% to 18% as of January 1, 40 2002, thereby ranking among the lowest tax rates within the OECD member countries.
Tax law in Iceland
Corporate income tax rate of 18% on net income only levied by the state.
Dividends received by corporations are not taxable. No requirements relating to percentage of stock ownership in the corporate payer apply.
Consolidated returns available for corporations under 90% common control.
No branch profits tax levied on repatriated profits from branches.
Bilateral taxation agreements available.
Foreign tax credit available to avoid double taxation in the absence of tax agreements.
No legislation on controlled foreign corporations.
No legislation on “Thin Capitalization”.
No basket system regarding the foreign tax credit.
Taxes on Businesses in Iceland
Companies resident in Iceland, and Icelandic branches of foreign resident companies, are liable for corporate income tax (national income tax) on their net earnings. In 2002 the corporate tax rate was 18%.
Companies in Iceland pay net worth tax, as do individuals.
Real estate taxes are paid locally by businesses, along with local service charges.
Personal Income Taxes in Iceland
Individuals resident in Iceland are liable to income tax at the rate of 38.58%, on all earned yearly income above ISK 855,240. An additional tax of 4% is levied on all earned income in excess of ISK 4,191,686 in 2004 for an individual, and on double that amount for a couple. This tax rate will be reduced down to 2% in 2005 and abolished in 2006.
Personal income tax is withheld at source and paid as you earn. It is divided into national income tax (25.75%) and municipal income tax (averaging 12.83%), making a total of 38.58%.
Financial income of individuals is taxed at the rate of 10%.
Resident individuals are taxed on their worldwide income. Non-resident individuals become tax residents if they stay in the country for more than 183 days out of a 12-month period.
A non-resident individual is taxed on Icelandic-sourced income.