Tax liability of foreign individuals in Iceland

These instructions provide general directions on the tax liability and responsibilities of foreign individuals for income e.g. wages, commissions derived from services, activities and property rights that are utilised or provided in Iceland, dividends, interests and sales profit. The instructions do not provide complete information.

All business activities and individual personal services carried out by foreign parties in Iceland are liable to taxation. A payment is liable to taxation, whether made by a domestic or by a foreign party.

Limited tax liability

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.

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Allowances, deductions and credits

Deductions for expenses, personal tax credits, seaman's credits, private housing benefits, losses and rates

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Taxable income

Taxable income includes all kind of income from past and present employment, business and profession, and capital. All income received by the taxpayer in money or moneys worth is subject to tax, unless it is exempt. The collection of individual income taxes (state and municipal) on employment income takes place at source each month during the income year.

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Tax liability

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.

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