Contractors
All business activities and individual personal services (contractors/freelance contractors) carried out by non-resident parties in Iceland are liable to income tax. Payments are subject to taxation, regardless of if they are made by a resident or by a non-resident party. Tax liability is limited to services and activities rendered in Iceland thereby payments for services or activities rendered abroad and then used in Iceland are not taxable.
Limited tax liability applies to income of both individuals and legal persons without permanent residence in Iceland.
- Non-resident individuals having neither permanent residence in Iceland nor having stayed in the country for 183 days or longer in any given 12-month period (this also applies to Icelandic citizens)
- Non-resident legal persons, such as foreign corporations, enterprises and institutions without a permanent establishment or legal registration in Iceland.
It is impossible to describe in details what is covered by "services and activities", but here are some examples:
- Contractor and manufacturing activities, such as designing and constructing civil engineering structures, e.g., residential housing, commercial and industrial buildings.
- Labour or services for maintenance of real estate and movables or for production of goods, unless a direct purchase of goods is involved.
- Professional services, such as all types of consulting, engineering or technical services, architectural services, business or economic services, accounting services, legal consultation or insurance business activities.
- Computer services, other data processing services or information exchange services.
- Research and science activities.
- Lecturing and conducting of courses.
- Concerts, performances, art events, film screenings and film production, all types of entertainment activities, etc.
- Sport competitions, such as races and cross-country vehicle races.
- Operation of amusement and entertainment parks, circuses etc.
- Transport of goods and persons.
Tax base
The income tax base for non-resident individuals that provide personal services and companies having limited tax liability in Iceland is determined by the general rules of the Income Tax Act.
Tax rates: Payments for services and activity rendered in Iceland
| Income tax | Municipal tax | Total tax | |
|---|---|---|---|
| Payments to individuals, artists or others, that perform on the basis of business to entertain or in every kind of competition | 20% | 14,44% | 34,44% |
| Payments to companies, artists or others, that perform on the basis of business to entertain or in competition | 20% | No | 20% |
| Payment to freelance individuals for other services and activities | 20% | 14,44% | 34,44% |
| Payment to companies for other services and activities | 20% | No | 20% |
International aspects that might affect tax rate
Iceland has concluded several agreements on tax matters with other countries. Parties with a permanent residence, with full and unlimited tax liability in either one of the contracting countries may be entitled to exemption from taxation or reduced tax rate according to provisions of the respective agreement, in absence of which the income would otherwise be subject to double taxation. Each agreement is different, and it is therefore necessary to check the respective agreement to ascertain where the tax liability lies, and which taxes the agreement stipulates. Provisions of tax agreements with other countries may restrict Iceland's right to tax.
Effective Double Taxation agreements (DTA) can be viewed here.
Tax benefits under DTA for payments can take place in two ways. On the one hand, there can be an exemption from tax payments or a reduced tax rate on respective payments. On the other hand, there can be a refund of deducted withholding payments.
NOTE: Exemption from taxation or reduced tax rate in Iceland according to agreements in force can only been achieved by filing an application for exemption/reduction on form RSK 5.42 to the Director of Internal Revenue. Until the application has been approved and confirmed one has to pay taxes in Iceland, based on national legislation.
