Tax Liabilities in Iceland
Employers are requirred to deduct personal income tax and municipal income tax from an employee's wages every month and return the withholding tax to the local Inland Revenue Office. The tax percentage for withholding tax in 2016 is 37.13% and increases with higher wages.
Please see an example of deduction at the Euraxess Iceland webpage.
Personal Tax Credit
Wage earners are entitled to a personal tax credit, which is deducted from earnings before tax is calculated. The personal tax credit for 2017 is 52.907 ISK per month.
As the personal tax credit is issued electronically and in order to have the right amount of tax deducted an employee must inform their employers whether or not to use their personal tax credit, depending on previous work history etc. Without the permission from the employee the employer has to deduct full tax, from the salary, without any tax credit. This is to prevent a multi use of the tax credit, for instance for those who are employed at numerious employers.
When Nordic and EU/EEA citizens have registered into Iceland at Registers Iceland and Non-EU/EEA have registered into Iceland through Directorate of Immigration they will automatically be issued a personal tax credit. The Relocation Service notifies the UI Pay Roll Office on the new employee's date of arrival in Iceland which is a confirmation on no previous work history in Iceland. From that date the personal tax credit is issued for the individual.
Spouse Tax Credit
For married couples, if spouses are not working the spouse's personal tax credit can be used as well for the benefit of the employee.
For EU/EEA citizens the tax credit calculates from the day the couple registered into Iceland through Registers Iceland. When the ID number is in place you can go into www.skattur.is, sign in and retrieve a document called "yfirlit til launagreiðanda" (confirmation for employer). If taxes together, the name of the spouse should be listed with the name of the employee. Print out the form and submit to the UI Pay Roll Office located at the Main Building.
The same applies to citizens outside EU/EEA. The tax credit calculates from the day of the employee's issued work permit. When kennitala is in place, please retrieve the same docment as mentioned above.
Tax Discount for International Experts
Special rules apply to the taxation on remuneration to foreign experts that come to Iceland for work. The legislation, which came into effect January 1st 2017, stipulates that only 75% of the income is taxed for the first three years from the start of employment provided certain conditions are met.
International experts need to apply for the tax discount themselves within three months from the beginning of employment.
Documents to be submitted:
- Speciality statement on specific expertise written by the applicant.
- Curriculum vitae
- Employers statement on qualifications, expertise, value added for the research/team, chosen from a poll of applicatns etc. Written by the supervisior/dean/director.
- Confirmation of Domicile Story' from Registers Iceland. You have to apply for it to get it processed and costs approx. 2.000 ISK and takes about 6-8 working days to process. The form itself can be mailed out to you or you can pick it up from the office once finished. Note that you have to specifically tell them that you need the date listed on the form.
APPLICATION FORM - Please sign by using your "ÍSlykill" and look for the relevant fund.
The application is processed by the Icelandic Centre for Research (Rannis) and should be sent to Rannís, Borgartún 30, 105 Reykjavík and marked “Frádráttur frá tekjum erlendra starfsmanna”
Applications will normally be processed within 3 weeks after all relevant documents are received.
Child benefits are paid with every child under the age of 18 years, domiciled in Iceland and dependent on a person or persons who have an unlimited tax liability in Iceland.