If you stay in Iceland for less than six months in a twelve month period, your tax liability is limited. This means that you have to pay tax on income arising from sources in Iceland although your unlimited tax liability still is in another country. Taxable income includes, for example cash payments, wages, fees, sickness allowance and benefits in kind. You are allowed the same deductions for expenses as residents, i.e. the mandatory payments to pensions insurances funds 4% of total employment income and in addition voluntary pension insurance premiums of up to 4% of total employment income.

Income is salary minus the pension fund premium. Personal tax deduction, which is ISK 46,532 pr. month is deducted from calculated taxes. The fisherman discount is ISK 493 per day, in 2012.

Salary from more than one employer

Those who receive salary from more than one employer need to ensure that the correct rate is used to calculate the income and municipal tax. If the monthly salary exceeds ISK 230.000 from one employer the next employer has to calculate 40.24% income tax or as appropriate, 46.24%.

You are entitled to a personal tax credit against the computed income tax, and a seaman who is employed on board a ship is entitled to seaman's credit. You are not entitled to children benefits or private housing benefits.

If you stay in Iceland for six months or longer in a twelve month period, you are considered to be a resident of Iceland, which means your tax liability is unlimited from the day you arrive to the country. In that case you will be taxed on your world wide income. Former residents remain subject to unlimited tax liability for 3 years after leaving the country, unless they prove that they have become subject to taxation in another country.

Individuals engaged in a business are subject to various taxes applicable to such operations.

Capital income of married couples and cohabiting persons who are treated as married couples for tax purposes, is taxed in the hands of the spouse whose total employment income is higher. Other types of income are taxed separately.

The income of a child under 16 years of age, other than employment income, is taxed together with the income of the parent who has higher employment income or who receives children’s benefits for the child. If a child’s employment income exceeds ISK 100.745 in the income year 2012, it is taxed in the hands of the child itself at a special rate (4% income tax and 2% municipal tax). Subject to certain conditions, all of a child’s income may be taxed in the hands of the child itself. A child under 16 years of age does not enjoy personal tax credits.

The income of an individual derived from a partnership that is not a separate entity for tax purposes is taxed together with that individual’s other income.