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.

Permanent residence is the place where a party, an individual or a legal person, is deemed to be 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 taxable residence in Iceland.

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 - Salary

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 aboard 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 37,13% - 46,25% income tax in the income year 2016. These individuals have also right to personal tax credit which gives them ISK 634.880 in tax deduction, if they stay in Iceland the whole year 2017. 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 - Pension, directors fee, etc.

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 34,45% income tax (including municipal tax). However an individual that receives a pension from Iceland shall pay full income tax 37,13% - 46,25%. 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 - Contractors

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

Earnings of individuals, artists or others, that perform on the basis of business to entertain, or in any kind of competition are liable to 34,45% income tax (including municipal tax).

Earnings of freelance individuals for other services and activities are 34,45% income tax (including municipal tax).

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

Article 3.4 - Permanent establishment

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 - Income from properties

This applies to all entities that own a real-estate in Iceland. All income of such real-estate shall be taxable in Iceland, e.g. income from leasing and profit from selling a house. Individuals and companies pay 20% tax. An individual with leasing income from a residential housing pays 20% tax on half of the income and can also deduct rent they pay for his or her residential home for the same time period.

Article 3.6 - Royalties

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 paid from those earnings. This article 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 34,45% income tax in the income year 2016 (including municipal tax).

Individuals that have earnings deriving from use or rights to utilization of movables, patents an every kind of rights and specialised knowledge pay 34,45% income tax in the income year 2016 (including municipal tax).

Article 3.7 - Capital gains  and dividends

This applies to all entities that have earnings, e.g. capital gains 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 - Interests

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%. The amount exceeding the amount of 125.000 ISK is subject to taxation in the final assessment.

Income on securities issued by the Central Bank of Iceland, financial institutions acc. to article 4.1.1 of Act no. 161/2002 and power companies acc. Act 50/2005 is not subject to taxation.

Article 3.9 - Foreign embassadors, diplomats etc.

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.)

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