News release. October 3, 2001. Substantial tax reforms for business and households.

October 3, 2001

Substantial tax reforms for
business and households
The Government has decided to implement wide-ranging tax reforms, both for business and households. First, there will be a range of changes in tax rates and reference amounts. Second, inflation accounting for tax purposes and in accounting will be abolished which constitutes a large step in aligning the Icelandic tax system to that of other countries. Third, it is proposed that the tax treatment of individuals engaged in business when they convert their business into private limited companies will be subject to the same rules as changes between other company types. Fourth, a variety of interpretations and implementations of existing tax laws will be reviewed.

Changes in personal income taxation:

• The personal net wealth tax will be reduced from 1.2 per cent to 0.6 per cent at the end of 2002.
• The personal net wealth surtax will be abolished at the end of 2002.
• The taxation of rent subsidies will be abolished as of 2002.
• The personal income tax rate will be reduced by 0.33 per cent as of 1 January 2002.
• The tax threshold for the personal income surtax will be raised by 15 per cent on income earned in 2001.
• The tax-free threshold for the personal net wealth tax as well as the net wealth surtax will be increased by 20 per cent of net wealth at the end of 2001 to counter the effects of the recent general review of real property values. The review raised such values by a substantial margin and the tax base thereby. The Government has decided that this should not lead to an increase in net wealth taxation.

Corporate taxation:

• The corporate income tax will be reduced from 30 per cent to 18 per cent as of 1 January 2002.
• The corporate net wealth tax will be reduced from 1.2 per cent to 0.6 per cent at the end of 2002.
• The corporate net wealth surtax will be abolished at the end of 2002.
• Inflation accounting will be abolished as of 1 January 2002.
• Corporations will be authorised to keep their books and draw up their accounts in foreign currency as of 1 January 2002.
• The social security tax will increase by 0.77 per cent as of 1 January 2003.

Furthermore, the stamp duty will be reduced as of 1 January 2003, both on corporations and individuals.

The impact on Treasury revenue:
The net revenue loss to the Treasury in 2003 is estimated at 3.5 billion krónur, taking the impact on turnover and other factors into account. This is a conservative estimate and the net revenue loss is likely to be even lower and turn into a revenue gain in the long run.

Other changes in taxation during the Government's term of office:

• The personal tax credit has been made fully transferable between spouses or co-habitants whereas previously the transferability was 80 per cent.

• Optional pension fund savings by individuals exempt from tax were increased from 2 per cent to 4 per cent of salaries and the Government's counter-contribution was raised accordingly. The tax deduction of individuals for share purchases was extend to 2002. Special legislation was enacted to introduce stock options for company staff.

• Taxes on motor vehicles and fuels have been reduced and the fiscal neutrality of such taxation has been improved.

• The Government's support for families with children has been increased. At the beginning of next year the second phase of three in increasing child benefits will come into effect. All told, child benefits will increase by more than a third in 2001-2003 or by close to 2 billion krónur.

• Social security benefits have been substantially increased. The latest increase was based on legislation from May 2001.

The Government's decision to reduce taxes is based on three premises.
First, the sound finances of the Treasury in recent years has enabled the Government to respond to declining economic growth with stimulating measures without endangering fiscal stability.
Second, increasingly keen international competition demands that Iceland's tax environment must be competitive with other countries.
Third, in times of slower economic growth the Government should meet the situation by reducing taxes, thus stimulating business and mitigating the impact of the slowdown.


Reykjavík, 3 October 2001