Indirect taxes are the main taxation form in Iceland, accounting for 45.5% of the total tax burden in 2010.
The total tax burden as a percentage of GDP was 27.1% in 2010, and is estimated to be 26.4% in 2011.
Compared to tax systems of other countries the Icelandic tax system is relatively simple and effective. In the last few years the emphasis has been to simplify it further, reduce tax rates, broaden the tax base and conclude more double taxation conventions, which will increase competitiveness of Icelandic corporations and attract foreign investors.
Corporate income tax is 20% which is one of the lowest tax rates within the OECD member countries.
The principal direct taxes are individual income tax and corporate income tax (20%).
Individuals are subject to income tax at the following rates after deduction of personal allowance:
- Up to ISK 230,000 37.34%
- ISK 230,001- ISK 704,367 40.24%
- Over ISK 704,367 46.24%
Individual income tax is divided between a national tax of 22.9%, 25.8% and 31.8% for the income year 2012 and municipal income tax at an average rate of 14.44%.
Capital gains are taxed according to special rules for financial income for individuals, but treated as ordinary income for companies. Inheritance tax is also levied.
The principal indirect taxes are value-added tax – levied at a standard rate of 25.5% but with a 7% category for food, newspapers and certain other items – and various excise duties, including car tax.
The industrial fee was abolished on January 1st, 2011.
Land and property fee at nominal rates is paid to the municipal authorities; rates vary between municipalities and also with regard to use.
The principal fees and rates are those on property, use of cold water, waste disposal and other such basic services provided by the municipalities.
Contribution to the State Radio and Television (Útvarpsgjald)
A levy in the amount of ISK 18,800 is collected in the assessment of all businesses and individuals with income exceeding the tax-free limit and contributed to the state radio and television in Iceland.
A special tax on hotels and accomodation (Gistináttaskattur)
From January 1st, 2012, a special tax is levied on every night sold at hotels and other accomodation that is registered for value added tax in the amount of ISK 100.
Capital Taxes (Net Worth Taxes)
From December 31st 2005 no capital taxes are levied on net capital in Iceland, neither for individuals nor businesses.
Wealth Tax (Auðlegðarskattur)
A special 1.,5% wealth tax will be levied on individuals with net capital of ISK 75,000,000 and married couples with net capital of ISK 100,000,000. However, the tax is not levied on net capital above ISK 150,000,000 regarding individuals and not above net capital of ISK 200,000,000 when married couples are concerned. The tax is supposed to be temporary.
Tax on Financial Companies
Financial companies are liable for a specific tax on their total liabilities. The rate is 0.041% and is levied on total liabilities of a financial company as the liabilities are in the end of the accounting year.
In the assessment of years 2012 and 2013 an additional specific tax in the rate of 0.0814% will be levied on the total liabilities of financial companies. This tax is not deductible from taxable income.
Financial Activity Tax
The financial activity tax is levied on all kinds of salaries and fees paid by financial companies, securities firms, insurance companies and the State Housing Fund. The tax was adopted in 2012 and is paid monthly. The tax rate is 5.45%.
A special 6% financial activity tax will be levied in the assessment 2013 on the tax base above ISK 1 billion on those that are subject to the financial activity tax.