Iceland's Tax System and Regulatory Framework in 2025

Iceland maintains a streamlined and efficient tax regime designed to support economic competitiveness and attract international investment. Over recent years, the government has focused on simplifying the tax code, broadening the tax base, and entering into comprehensive double taxation avoidance agreements (DTAAs) with partner nations. As of 2025, Iceland has expanded its network of tax treaties to over 45 countries, reinforcing its position as a transparent and business-friendly jurisdiction within the OECD. Notably, the corporate income tax rate remains at 20%, one of the lowest among OECD members, despite minor adjustments in sector-specific levies.

The country operates under a residence-based taxation system, meaning tax liability is determined by an individual’s or entity’s residency status. The guiding principle is universal contribution: all residents are required to pay taxes, with progressive rates ensuring higher earners contribute proportionally more. Low-income individuals benefit from tax exemptions, while targeted relief measures support seafarers, retirees, and families with children. Sectoral incentives remain strong—exports are fully exempt from value-added tax (VAT), and essential services such as education, healthcare, financial services, and postal operations enjoy zero-rating. Conversely, excise duties on alcohol, tobacco, and automobiles have seen incremental increases, reflecting public health and environmental priorities.

Tax administration in Iceland is centralized and rigorous, overseen by the Directorate of Internal Revenue under the Ministry of Finance. The system integrates customs authorities, the National Tax Committee, and financial oversight bodies to ensure compliance. Key legislation includes the Income Tax Act, Withholding Tax Act, VAT Act, and Customs Act. Annually, taxpayers receive official guidance and forms to facilitate accurate reporting. Assessments are conducted by the tax authority, with payments processed through designated banks or customs offices. Disputes may be appealed first to the National Tax Committee and ultimately adjudicated in district courts. Late filings incur penalty interest, while tax evasion triggers investigations and potential legal action.

Major Taxes and Rates in Iceland

Iceland’s tax structure is divided into direct and indirect categories. Direct taxes include personal and corporate income taxes, capital gains taxes, inheritance tax, and net wealth tax. Indirect taxes are dominated by VAT and excise duties on select goods. Additional levies include social security contributions, pension premiums, real estate tax, pollution fees, stamp duty, and industry-specific charges.

Personal Income Tax

Residents of Iceland are taxed on their worldwide non-capital income. The tax year runs from January to December, with rates set annually based on fiscal policy goals. As of 2025, the progressive scale applies across three brackets: 31.5% for monthly income up to ISK 349,018; 38.0% for income between ISK 349,019 and ISK 979,847; and 46.2% for amounts exceeding that threshold. A monthly tax-free allowance of ISK 50,792 (annual ISK 609,509) helps reduce the burden on lower earners.

Non-residents staying fewer than 183 days in a 12-month period are taxed only on Icelandic-sourced non-capital income. Those exceeding the stay threshold are treated as residents unless protected under a DTAA. Special provisions apply to maritime workers, who benefit from reduced taxable income, and families, which qualify for child-related tax credits.

Corporate Income Tax

Legal entities such as limited liability companies and partnerships are subject to corporate taxation on global profits. The standard rate for limited companies remains at 20%. Partnerships and certain other structures face a higher effective rate of 37.6%, making entity selection a critical decision for foreign investors. Tax is assessed on net profit after allowable deductions, with losses carryable forward for up to ten years to offset future taxable income.

Capital Gains Tax

Capital income—including interest, dividends, and fund returns—is subject to withholding tax. Individuals pay 22% on interest and bond earnings and 20% on dividend income. Corporate recipients of dividends are taxed at 22%. Importantly, this withholding serves as final tax for individuals, eliminating double taxation. For corporations, withheld amounts can be credited against corporate income tax liabilities when distributed profits are included in overall taxable income.

Value-Added Tax (VAT)

VAT is a cornerstone of Iceland’s indirect tax revenue. The standard rate is 24%, applied to most goods and services. A reduced 11% rate covers essential items and specific sectors:

• Accommodation services (hotels, guesthouses)
• Subscription fees for radio and TV broadcasting
• Sale of newspapers, magazines, and periodicals
• Purchase of original or translated books
• Fuel used for home heating
• Infrastructure application fees (e.g., road and tunnel projects)
• Sales of music CDs and audio tapes

Most food products—excluding sugar and confectionery—are exempt from excise duty but may still be subject to VAT at the reduced rate. Excise taxes target luxury and harmful consumption: alcohol, tobacco, gasoline, diesel, and vehicle ownership. Since 2013, sugary foods have been taxed to combat obesity, and further hikes are planned for tourism, aviation, and environmental levies. In 2018, the tourism VAT was increased from 11% to 24%, aligning it with the standard rate. Book sales became fully VAT-exempt starting 2019.

Business Activity Fee

All commercial activities—whether conducted by individuals or legal entities—are subject to a flat 0.1% levy on gross revenue. This fee, known locally as the 'industry tax,' supports municipal infrastructure and applies uniformly across sectors.

Other Significant Levies

Social security contributions are mandatory, with employers paying 6.9% of gross wages and employees contributing 4.0%. Additionally, both parties contribute to the pension system: workers pay 4%, employers 8%, totaling 12% of payroll. Financial institutions face a 5.5% Financial Activities Tax (FAT) based on wage expenses. Entities with taxable bases exceeding ISK 1 billion incur an additional 6% surcharge.

Wealth taxation applies to net assets above ISK 4 million, with full exemption below that threshold. Assets surpassing ISK 5,277,058 are subject to an extra 0.3% levy. Stamp duties range from 0.4% to 1.5% on legal documents, stock issuances, loans, and bills of exchange. Inheritance tax ranges from 10% to 45%, depending on the relationship between donor and beneficiary. Gifts between individuals are taxed at personal income rates for the recipient. Municipalities may impose local pollution charges, and customs duties apply to specified imports.

Notably, Iceland has not introduced a digital services tax as of 2025, maintaining neutrality in taxing digital versus traditional businesses.

Environmental taxation has intensified since 2009, beginning with a temporary carbon tax on fossil fuels set at 50% of the EU ETS price. Extended indefinitely and raised to 100% of ETS levels, the tax saw further increases—50% in 2018 and 10% each in 2019 and 2020—reflecting Iceland’s commitment to climate action.

Key Considerations for Chinese Investors

Foreign enterprises, including those from China, are treated equally under Icelandic tax law. However, strategic awareness can significantly enhance compliance and efficiency:

1. The Sino-Icelandic Double Taxation Avoidance Agreement allows relief on dividends, interest, and royalties. Investors should structure cross-border payments accordingly to prevent dual taxation.
2. Export-oriented ventures benefit from full VAT exemption on shipped goods. Chinese firms establishing manufacturing or trading entities in Iceland can leverage this to improve margins.
3. Entity choice directly impacts tax outcomes. Establishing a有限责任公司 (limited company) ensures a 20% rate, whereas partnerships face nearly double that. Legal advice is essential during incorporation.
4. Operating losses can be carried forward for ten years, offering valuable flexibility for startups or expanding businesses navigating early deficits.

For multinational teams managing cross-border employment, SailGlobal offers tailored HR and payroll solutions compliant with Icelandic regulations, ensuring smooth integration and audit-ready reporting.