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Iceland - Taxation

The taxation system in Iceland is fairly straightforward. There is a ‘flat tax’ system, which means that the taxation rate is constant. The income tax rate is 22.75% although there is a tax free amount, which means that the equivalent of almost $11,000 (US dollars) can be earned before there is a need to pay taxes.

Residents of the country are taxed on all income regardless of the source, while non-residents are only taxed on income earned in Iceland. For taxation purposes an individual is considered to be a resident if they have spent a total of 183 days in any 12 month period in the country. There are a number of taxation treaties in place which allow the prevention of tax being paid in more than one country on the same income. If you choose to live and work in Iceland but still receive a different type of income from another country you will only be taxed on it in Iceland if you have not been taxed when the monies were first issued.

In addition to this basic income tax rate there is a municipal tax to be paid and a government surtax, which can take the total tax payable to around 37% of income, although the surtax is only applied to those on a high salary of over approximately $55,000 (US dollars).

There are many items which are considered to be tax deductible and those working at sea are entitled to special tax rates with the allocation of special tax credits. Payments to a pension plan are tax deductible as are some medical expenses, interest payments and other work related items. If you are unsure which of your expenses qualify then advice can be sought from the local tax office.

Income that is derived from interest payments, dividends on shares, capital gains from sales of property and other assets and income from renting property is subject to a 10% tax rate which is taken at the source. There is a wealth tax rate which is applied to all property and assets worth over the equivalent of $61,000 and the country does have an inheritance and gift tax system. This applies tax rates of between 11 and 15% on assets which are passed on, though the rate will depend upon the actual inheritance and value. Property is taxed at between 2 and 10% depending upon the size of the estate. Inheritance taxes are at a fixed 5%, and are applied regardless of whether or not the beneficiary is an Icelandic resident.

VAT in Iceland is quite high, at more than 24% for most goods and services. Some items have a VAT rate of 14% and these include food, some utilities, books and television subscription services. Services such as healthcare do not have VAT applied and others that fall into the exemption category include education costs, public transport, property rental and insurance.

Capital gains is payable only in certain circumstances, for example, if money is made from the sale of a property it is only considered to be capital gains if the property was owned for less than two years. Municipal taxes are charged by the local authorities. These vary depending upon the area you are in and the value of the property that you have but the local council will be able to give you details of what you may be expected to pay.

The tax year in Iceland is the calendar year and all tax returns must be filed a maximum of three months after the tax year has ended, although all tax payers will be notified of the latest date for filing a return. An assessment is made by the end of July and payment should be made immediately. If you fail to file a return or make payments when they are due then there are penalties and interest applied.

The Ministry of Finance and the Internal Revenue Service have websites which can offer advice and information on filing a return and making payments. Payments can be made in a number of ways including online, in person and by post. Those who are unsure about completing the paperwork should consider hiring the services of a qualified accountant.

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