Foreign service providers

Temporary-work agencies (Hiring-out of labour)

Temporary-work agency is a service company which hires out its workers to perform work assignments at the workplace of a user company under the supervision of the latter.

Temporary-work agency tax liability and obligations

Foreign temporary-work agencies are liable to pay tax in Iceland on payments for services. They can file for exemption from taxation in Iceland regarding payments for their services on the basis of a Double taxation convention.

How to apply for an exemption

If an exemption has been accepted, but tax has been withheld, an application for a refund can be submitted.

How to apply for a refund

The exemption does not apply to taxes on employee salary. Employees are liable to pay tax in Iceland. A temporary work agency established in another state of the European Economic Area, another EFTA member state or Faroe Islands is responsible for withholding taxes due on behalf of their employees unless an agreement has been reached otherwise with the user company.

If a temporary-work agency does not fulfill its obligations to remit withholding taxes on wages on behalf of its employees, the user company is responsible.

If a temporary-work agency is not in another state of EEA, EFTA or Faroe Islands and not domiciled for taxation purposes in Iceland, the user company shall withhold and remit taxes on wages on behalf of employees.

Employee tax liability

Employees of a foreign temporary-work agency working in Iceland are liable to pay income tax on their salary. The tax liability of persons dwelling for 183 days or less in Iceland in every 12 month period is limited, i.e. they are liable to pay income tax on income arising in Iceland. Included are brief sojourn abroad on account of holidays etc. Persons dwelling more than a total of 183 days in every 12 month period have a full and unlimited tax liability in Iceland which means they are liable to pay tax on all income, regardless of where it was earned, in Iceland or abroad.

Additional information on limited tax liability

How taxes are calculated

Personal tax credit is deducted from calculated taxes. Persons dwelling temporarily in Iceland for work are entitled to personal tax credit for each day they dwell in Iceland.

Additional information on personal tax credit

Employee checklist

Before work begins you need to...

...register at the Þjóðskrá (National Registry). Those who register will receive an Icelandic National identification number. The ID No. is used to identify individuals, e.g. when filing a tax-return or opening a bank account.
...open a bank account.
...apply for an electronic ID. Persons can apply for an electronic ID online. There are various service providers (banks etc.) that activate the electronic ID. The ID is used extensively in Iceland, e.g. when accessing tax-information on skattur.is, filing a tax return online. It's used on various other government websites and to log into personal bank accounts electronically.
...sign into their account at the Directorate of Internal Revenue and print out information on their personal tax credit (yfirlit til launagreiðanda) to bring to their employer.

When leaving Iceland after working temporarily in Iceland you need to...

...file a tax-return. It‘s optimal to file RSK 1.13 before departure. Alternatively it is possible to turn in the tax return electronically on the Internal Revenue‘s service page. The tax return for individuals is due in March the following year.

Obligations of a user company

A temporary-work agency in another state of the European Economic Area, another EFTA member state or the Faroe Islands, shall withhold taxes on wages on behalf of their employees unless an agreement has been reached otherwise with the user company.

If a temporary-work agency does not fulfill its obligations to remit withholding taxes on wages on behalf of its employees, the user company is responsible.

If the temporary-work agency is not exempt from taxes based on a Double Taxation Convention, the user company is obliged to withhold taxes on service fee paid to the agency.

If the temporary-work agency is exempt from taxes, the user company must nonetheless provide information about the service fee using the form RSK 5.41.

Registration of a foreign temporary-work agency

Temporary-work agencies planning to operate in Iceland must apply for an Identification number, register their business at The Directorate of Labour and register the company as an employer and for VAT. The process is as follows:

Register at the Directorate of Labour.
Once the business has been registered at the Directorate of Labour, the company must apply for an Identification Number at the Internal Revenue Iceland – Register of Enterprises, using the form RSK 17.06. The application can be sent to fyrirtaekjaskra@skatturinn.is. A certificate of registration from the state of residency must be submitted.
Once an Id. No.has been issued the temporary-work agency must register the company at the Internal Revenue as an employer and for VAT using the form RSK 5.02.

Foreign service providers that post workers temporarily in Iceland

A foreign service provider (foreign undertaking) is a foreign business operation that provides services in Iceland carried out by its employees.

Foreign service provider tax liability and obligations

Foreign service providers are liable to pay income tax in Iceland but can apply for an exemption on the basis of a Double Taxation Convention. Foreign service providers that have a permanent establishment in Iceland can not apply for an exemption. The exemption does not apply to VAT.

How to apply for an exemption

If an exemption has been accepted, but tax has been withheld, an application for a refund can be submitted.

How to apply for a refund

The exemption applies to salary for posted workers unless they stay in Iceland for more than 183 days in each 12 month period. Included are brief sojourn abroad on account of holidays etc. If the stay exceeds 183 days they have an unlimited tax liability and are liable to pay tax on total income earned in Iceland from arrival.

If a foreign service provider that has been exempt from taxation based on a Double Taxation Convention is deemed to have a permanent establishment in Iceland, it is liable to pay income tax on profits attributable to that permanent establishment.

Employees of a service provider that carries on business in Iceland through a permanent establishment are liable to pay tax in Iceland regardless of duration of their stay.

Employee tax liability

Posted workers of a foreign service provider may be liable to pay tax on income in Iceland.

If the foreign service provider has an exemption from tax on the basis of a Double Taxation Convention, employees of the service provider are exempt as well if their stay does not exceed 183 in each 12 month period. Included are brief sojourn abroad on account of holidays etc. If the stay exceeds 183 days they have an unlimited tax liability and are liable to pay tax on total income earned in Iceland from arrival.

If a foreign service provider carries on business in Iceland through a permanent establishment, their employees are liable to pay tax in Iceland regardless of duration of their stay. Their tax liability may be limited or full and unlimited.

Additional information on limited tax liability

How taxes are calculated

Personal tax credit is deducted from calculated taxes. Persons dwelling temporarily in Iceland for work are entitled to personal tax credit for each day they reside in Iceland.

Additional information on personal tax credit

Employee checklist

If you are a foreign worker liable to pay tax in Iceland, the following information applies to you.

Before work begins you need to...

...register at the Þjóðskrá (National Registry). Those who register will receive an Icelandic National identification number. The ID No. is used to identify individuals, e.g. when filing a tax-return or opening a bank account.
...open a bank account.
...apply for an electronic ID. Persons can apply for an electronic ID online. There are various service providers (banks etc.) that activate the electronic ID. The ID is used extensively in Iceland, e.g. when accessing tax-information on skattur.is, filing a tax return online. It's used on various other government websites and to log into personal bank accounts electronically.
...sign into their account at the Directorate of Internal Revenue and print out information on their personal tax credit (yfirlit til launagreiðanda) to bring to their employer.

When leaving Iceland after working temporarily in Iceland you need to...

...file a tax-return. It‘s optimal to file RSK 1.13 before departure. Alternatively it is possible to turn in the tax return electronically on the Internal Revenue‘s service page. The tax return for individuals is due in March each year.

User undertaking obligations

The user undertaking is an individual, company or other party that runs a business operation and purchases services from a foreign service provider (foreign undertaking).

A foreign service provider shall withhold taxes on wages on behalf of their employees that are liable to pay tax in Iceland unless an agreement has been reached otherwise with the user company.

If a foreign service provider does not fulfill its obligations to remit withholding taxes due on wages on behalf of its employees, the user company is responsible for the taxes.

If a foreign service provider is not exempt from taxes based on a Double Taxation Convention, the user company is obliged to withhold taxes on the service fee.

If a foreign service provider is exempt from taxes, the user company must nonetheless provide information about the service fee using the form RSK 5.41.