Tax Guide for US Expats Living and Working in Iceland
Who Is Liable For Income Taxes in Iceland
Residents of Iceland are subject to tax on their worldwide income. Nonresidents are subject to tax on their Iceland-source income only. Wages and remuneration may be considered Icelandic-source even if an employer does not have a permanent establishment in Iceland.
Individuals are considered residents if they permanently reside in Iceland. An individual is deemed to permanently reside where he or she is located, stays during his or her spare time, and maintains a home.
Income subject to tax. Icelandic income tax law distinguishes among several categories of income, including income from employment, self-employment, and a trade or business.
The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Resident and nonresident employees are subject to income tax on remuneration received from employment.
Employment income includes wages, salaries, bonuses, directors’ fees, pensions and all other compensation for services rendered.
Self-employment and business income. All individuals, whether resident or nonresident, who act independently in their own name and at their own risk are taxed on income derived from self-employment or business activities.
In general, taxable income includes all income and capital gains attributable to self-employment or business activities.
If a nonresident conducts business through a permanent establishment located in Iceland, taxable income is computed in the same manner as for resident individuals.
Investment income. Dividend income received by a resident from a resident or nonresident company is generally subject to personal financial income tax at a rate of 20%. Interest income and royalties are also subject to personal financial income tax at a rate of 20%. However, the first ISK 100,000 of interest income is not subject to tax. Income received by an individual from the rental of real properties is subject to personal financial income tax. Thirty percent of such rental income is tax-free, but the balance is subject to personal financial income tax at a rate of 20%.
Nonresidents are subject to a final withholding tax at a rate of 20% on dividends and interest income. If a nonresident has his or her domicile in a country that has entered into a double tax treaty with Iceland, the application of such treaty may result in the expatriate not being subject to tax on such income or being subject to tax at a lower rate. However, the expatriate might have to suffer withholding tax, which would subsequently be reimbursed.
Directors’ fees. Payments to managing directors for day-to-day management are considered employment income and are taxed at the rates.
If a nonresident is a member of the board of directors of an Icelandic company and bears the tax for his or her fees, the fees are subject to a progressive withholding tax and a municipal tax, which is also withheld at source. For details regarding the calculation of the withholding and municipal taxes.
Taxation of employer-provided stock options. Stock options are generally taxed on the date of exercise (not on the date of grant) on the difference between the strike price and the fair market value of the shares on the date of exercise. The taxable benefit is subject to income tax and to social security contributions from both the employer and the employee. A special regime is available under limited circumstances, which taxes the difference between the strike price and the fair market value at the personal net wealth income tax rate of 20%.
Capital gains. In general, a capital gains withholding tax at a rate of 20% is levied on all capital gains realized by nonresidents. The taxable gain on shares is the difference between the shares’ purchase price and selling price.
Capital gains from real estate. Capital gains on sales of privately owned buildings and land realized by nonresidents is subject to a 20% withholding tax. Gains derived from the sale of a principal residence are exempt from tax if the property has been owned for at least two years.
Capital gains from personal property. Capital gains derived from transfers of personal property not used in a business, including stamps, jewelry or automobiles, are exempt from tax, unless such sales are considered business activities.
Capital gains realized by a business enterprise. Capital gains derived from investments and from the disposal of real estate that forms part of the net asset value of an enterprise are taxable.
Deductions
Deductible expenses. Expenses incurred by an employee are generally not deductible. However, pension payments are deductible.
Personal allowances. In calculating state and municipal income taxes for 2011 each taxpayer is allowed a personal tax credit of ISK 530,466. This tax credit is reduced proportionately if the individual is taxable in Iceland for only part of the fiscal year. The tax credit not fully used by one spouse may be transferred to the other spouse.
Business deductions. Generally, all expenses for business or professional activities are deductible, including the following:
- Costs of material and stock
- Personnel expenses, certain taxes, rental and leasing expenses, finance charges, self-employment social security contributions, and all general and administrative expenses
- Depreciation of fixed assets
- Provisions for identified losses and expenses
Rates
Employment income tax. Employment income tax is computed by adding a municipal tax rate to the general rate. The income tax rates for 2011 consist of a municipal rate that varies from 12.44% to 14.48%, and a progressive income tax rate, depending on income.
Business profits tax. Net business profits are subject to both income tax and municipal business tax. The income tax rates on net business profits are the same as those that apply to employment income. Municipal business tax is levied on profits as computed for income tax purposes. For 2011, the rate of municipal business tax is 14.41%.
Nonresidents who carry on business through a permanent establishment in Iceland are taxed at the same rates as residents.
Relief for losses. Business losses may be carried forward for 10 years if accounts are kept in accordance with generally accepted accounting principles. Losses may not be carried back and may not be deducted by a successor. Investment losses may be offset against capital gains in the year incurred, but may not be carried forward.
B. Other taxes
Net worth tax. Net worth tax is levied at a rate of 1.5% on taxable net assets exceeding ISK 75 million for individuals and ISK 100 million for jointly taxed individuals.
Inheritance and gift taxes. The rate of inheritance tax is 10% of the market value of assets at the time of payment, exceeding ISK 1,500,000.
Gifts and donations are subject to income tax. Resident donees pay gift tax.
Media tax. If the taxable income of individuals aged 16 to 69 exceeds ISK 1,361,468, such individuals must pay a tax of ISK 17,900 to the state-owned media in Iceland.
C. Social security
Contributions. Social security contributions apply to wages and salaries and must be withheld by the employer. These contributions cover health insurance, unemployment insurance, birth leave insurance and bankruptcy insurance. Social security contributions are imposed at a flat rate of 8.65%.
Self-employed individuals must register for social security purposes, and are subject to the same social security contribution rate.
Totalization agreements. In accordance with the principle of free movement of workers, Iceland has adopted the European Union’s (EU) multilateral social security regulations for nonresident workers. These regulations also apply to European Free Trade Association (EFTA) countries, except Switzerland.
Double tax relief and tax treaties
Iceland has entered into double tax treaties with various countries, in addition to a multilateral treaty with the other five Nordic countries. Residents with income from non-treaty countries include the foreign-source income in their taxable income and may apply for a credit for foreign taxes paid, up to the amount of tax imposed by Iceland on the foreign-source income.
Iceland has entered into double tax treaties with the following countries.
Belgium
India
Portugal
Canada
Ireland
Romania
China
Italy
Russian
Czech Republic
Korea (South)
Federation
Denmark
Latvia
Slovak Republic
Estonia
Lithuania
Spain
Faroe Islands
Luxembourg
Sweden
Finland
Malta
Switzerland
France
Mexico
Ukraine
Germany
Netherlands
United Kingdom
Greece
Norway
United States
Greenland
Poland
Vietnam
Hungary
To learn more about the history, culture, economy and other information about the Iceland
We have been preparing US income tax returns for US Citizens and permanent residents living in Iceland for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Iceland and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Iceland.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email