Tax liability can be either unlimited or limited. The general rule is that individuals and legal persons with permanent residence in Iceland have unlimited tax liability according to Article 1 and 2 of The Income Tax Act and limited tax liability is covered in Article 3 of the same law. Limited tax liability refers to the liability of parties without permanent residence in Iceland for income tax payments on income arising in Iceland.

Permanent residence is the place where a party, an individual or a legal person, is deemed subject to tax liability because of his domicile, residence, place of management or other similar conditions, and where he has closer personal and business relations. RSK has the authority to decide who is deemed to have a permanent residens in Iceland if two or more such places come into consideration.

The types of earnings specified in Article 3(1) to (9) are subject to limited tax liability, such as income from employment, all types of pension payments, income from personal services or businesses, income from intellectual property rights, income from the leasing of movables (usufruct), and income from real estate and capital assets, e.g. gains from sales, dividends and interests.

Limited tax liability in Iceland arises regardless of the income and assets that the parties could earn or possess in other countries at the same time or in the same calendar year.

Article 3.1 of the Income tax act no. 90/2003.

Under this article fall individuals that live and work in Iceland or work aboard an aircraft or a ship that is registered in Iceland for shorter time than 183 days in every 12 months period. It does not matter if the individual works for a foreign company or an Icelandic one, the tax liability stays in Iceland. If the stay lasts longer than 183 days, the person will be taxable under article 1 of the income tax act.

If an individual works on board in an aircraft or a ship that is registered in Iceland, then it does not matter where he lives. It is not important whether he is a foreign or an Icelandic citizen.

Individuals that fall under this article pay 22,9% -31,8% income tax plus 14,44% municipal income tax, in the income year 2012. These individuals have also right to personal tax card which gives them ISK 558.385 in tax deduction, if they stay in Iceland the whole year 2012. Individuals get the personal tax credit in the same proportion as they stay in Iceland. An individual has a right to personal tax credit from the day of arrival to Iceland, it does not matter when he starts to work.

Article 3.2 of the Income tax act no. 90/2003.

This article applies to individuals that have income from Icelandic party for sitting on a directors board, accountants or committee’s fees, retirement pension, temporary retaining salary, maintenance, grants or other comparable income.

These individuals pay 18% income tax and 14,44% municipal income tax in most cases. However an individual that receives a pension from Iceland shall pay full income tax 22,9% - 31,8% plus the municipal income tax 14,44%. This individual also receives a full personal tax credit, even though he does not stay in Iceland at the time he receives the pension.

Article 3.3 of the Income tax act no. 90/2003.

This article applies to all entities that receive payments for services or other activities that is carried out in Iceland.

Earnings or royalties to individuals, artists or others, that perform on the basis of business to entertain, or in any kind of competition are liable to 18% income tax plus 14,44% municipal income tax, total tax is therefore 32,44%

Earnings of freelance individuals for other services and activities are 18% income tax plus 14,44% municipal income tax, total tax is therefore 32,44%

The tax percentage is 20% for companies with limited liabilities and 36% for companies with unlimited liability.

Article 3.4 of the Income tax act no. 90/2003.

This article applies to all entities that have permanent establishment in Iceland. They shall pay taxes on all their income that is related to the Icelandic PE. The tax percentage is 20% for companies with limited liabilities and 36% for companies with unlimited liability.

Article 3.5 of the Income tax act no. 90/2003.

This applies to all entities that own a real-estate in Iceland. All income of such real-estate shall be taxable in Iceland for example income from leasing and profit from selling a house. Individuals shall pay 20% tax and companies pay 20%.

Article 3.6 of the Income tax act no. 90/2003.

This article applies to all entities that have income in Iceland from lease, property rights (usufruct) or utilisation rights from movables, patents, every kind of rights or specialised knowledge, as well as having sales profits derived from such property. Income tax is payed from those earnings. This clause does not apply to lease of aircrafts and ships that are used to transport on international routes.

The tax percentage is 20% for companies.

Individuals that have earnings deriving from lease or sale of movables, patents and every kind of rights and specialised knowledge pay 20% income tax plus 14,44% municipal income tax, total tax is therefore 32.44% in the income year 2012.

Individuals that have earnings deriving from use or rights to utilization of movables, patents an every kind of rights and specialised knowledge pay 20% income tax plus 14,42% municipal income tax, total tax is therefore 32,44% in the income year 2012.

Article 3.7 of the Income tax act no. 90/2003.

This applies to all entities that have earnings, e.g. sales profit and dividends, from Icelandic stock, founders stock profits from business or privilege of share from profits, pay income tax from those earnings.

The tax percentage is 20% for individuals and 18% for companies for earnings deriving from sales profit and dividends.

Article 3.8 of the Income tax act no. 90/2003.

Non-resident individuals are liable to income tax on interests received from Icelandic bank accounts, investment and security funds, Icelandic bonds and all other financial claims. The withholding tax is deducted from the interest payment itself when the interests are paid or transferred.

Interest income tax rate is 10% in the year 2012.

Article 3.9 of the Income tax act no. 90/2003.

This article applies to foreign ambassadors, career Consuls and missions of foreign employees of other states based in Iceland and others that are entitled to extraterritorial rights, shall pay income tax from their earnings from domestic parties as well as earnings addressed in Article 3. (4.-7.)

Effective double taxation conventions are here.