Principal tax rates 2007
This paper describes the principal tax rates applicable to individuals and companies as they stand at the beginning of 2007 as well as tax rate changes as they have already been passed into law for subsequent years.
1. Personal income taxation
Iceland’s personal income tax structure is such that all personal income in 2006 (other than capital income, see below) is taxed at a PAYE rate of 35.72 per cent, 22.75 % of which goes to the Treasury and 12.97 % to the municipalities. There is a basic annual tax credit which amounted to 329,948 krónur a year in 2004, increasing to 339,846 krónur a year in 2005, to 348,343 krónur in 2006 and 356.180 krónur in 2007. An unused tax credit is fully transferable between spouses.
Tax rates[1] since 1991 (income year) have been as follows:
|
Year |
Central gov't general tax rate |
Municipal tax rate |
Total tax rate |
Central gov't surtax |
|---|---|---|---|---|
|
1991 |
32.80 |
6.99 |
39.79 |
|
|
1992 |
32.80 |
7.05 |
39.85 |
|
|
1993 |
34.30 |
7.04 |
41.34 |
|
|
1994 |
33.15 |
8.69 |
41.84 |
5.00 |
|
1995 |
33.15 |
8.78 |
41.93 |
5.00 |
|
1996 1) |
33.15 |
8.79 |
41.94 |
5.00 |
|
1997 Jan-Apr |
30.41 |
11.57 |
41.98 |
5.00 |
|
1997 May-Dec |
29.31 |
11.57 |
40.88 |
5.00 |
|
1998 |
27.41 |
11.61 |
39.02 |
7.00 |
|
1999 |
26.41 |
11.93 |
38.34 |
7.00 |
|
2000 |
26.41 |
11.96 |
38.37 |
7.00 |
|
2001 |
26.08 |
12.68 |
38.76 |
7.00 |
|
2002 |
25.75 |
12.79 |
38.54 |
7.00 |
|
2003 |
25.75 |
12.80 |
38.55 |
5.00 |
|
2004 |
25.75 |
12.83 |
38.58 |
4.00 |
|
2005 |
24.75 |
12.98 |
37.73 |
2.00 |
|
2006 |
23.75 |
12.97 |
36.72 |
0 |
|
2007 |
22.75 |
12.97 |
35.72 |
0 |
| 1) As of the beginning of 1997, the financing and operation of elementary schools were transferred from the central government to the municipalities. In order to finance the operation of the schools at the municipal level, the central government reduced its tax rate by 2.84 percentage points and the municipalities increased their rate by the same percentage points. | ||||
In addition, tax legislation was amended at the end of 2004 to the effect that the central government income tax was reduced to 24.75% in 2005 (as shown in table above), to 23.75% in 2006 and to 21.75% in 2007. By the middle of 2006, it was decided to rescind 1 percentage point of the cut in the central government income tax in 2007 and bring the tax to 22.75%. The municipal income tax remains unchanged from the previous year. Seamen get a special tax reduction of 787 krónur per day in 2006 and 834 per day in 2007
The PAYE personal income tax comprises both the central government and municipal income tax[2] . It excludes the social security tax, which is levied on employers (see below).
In addition to the above, each individual pays a flat tax of 6,314 krónur per year to the Elderly’s Construction Fund, a central government fund used to finance the construction and operation of nursing homes and care centres for the elderly. Persons under the age of 16 and more than 70 years old are exempt from this levy, as well as those with an income below 948,647 krónur in 2006.
As noted above, the central government income tax rate is reduced by 1%, both in 2005 and 2006 and further by 1 per cent in 2007. Child allowances (see below) will be raised at the same time.
The personal income tax is levied on gross income excluding income from capital (for the capital income tax, see below), with a number of minor exceptions. Employee contributions to pension funds are deductible. Such contractual contributions normally comprise 4 per cent of gross pay, to which the employer adds a contribution, normally 6-7 per cent [3] which also is deductible as an operating expense on the business side. In addition, the employee can save up to 4 per cent as a supplementary pension saving on a voluntary basis and deduct the contribution from taxable income.
Interest rebates are granted by the central government for interest expenses incurred from home purchase loans. Such rebates are subject to debt, income and net wealth ceilings. Maximum rebates in 2007 are: 179,713 krónur for a single individual, 231,125 krónur for a single parent and 297,194 krónur for a couple [4].
Child benefits are granted for each child, subject to income thresholds. The amendments to tax legislation that came into effect at the end of 2004 included a schedule for raising child benefits. In 2004-2007 they are as follows (in krónur per year):
|
2004 |
2005 |
2006 |
2007 |
|
|---|---|---|---|---|
| For all children under the age of seven1) |
36,308 |
37,397 |
46,747 |
56,096 |
| Children under the age of sixteen: | ||||
| First child |
123,254 |
126,952 |
139,647 |
139,647 |
| Each additional child |
146,713 |
151,114 |
166,226 |
166,226 |
| Benefits for single parents: | ||||
| First child |
205,288 |
211,447 |
232,591 |
232,591 |
| Each additional child |
210,854 |
216,902 |
238,592 |
238,592 |
| Income threshold for benefit curtailment: | ||||
| For couples |
1,444,139 |
1,487,463 |
1,859,329 |
2,231,195 |
| For a single parent |
722,070 |
743,732 |
929,665 |
1,115,598 |
| Curtailment of benefits: | ||||
| For one child |
3% |
3% |
3% |
2% |
| For two children |
7% |
7% |
7% |
6% |
| For three children or more |
9% |
9% |
9% |
8% |
| 1) These benefits are not linked to income. | ||||
The income taxation of rent subsidies supplied by municipalities to low-income tenants was abolished as of the beginning of 2002. The tax treatment of stock options was introduced into tax legislation in 2001 as a result of the fact that a number of companies had begun to reward their employees with options to buy stock at a defined price as a part of the employees’ total emolument package. Profits from stock options are now defined as capital gains, subject to a 10 per cent tax, whereas previously they were defined as ordinary income, subject to the common personal income tax rate. The exercise of stock options is subject to certain conditions, the chief being: (1) Stock options must be available to all employees; (2) A minimum of twelve months must pass between the establishment of a stock option contract until it is exercised. (3) The exercise price must not be lower than the average trading price for the last ten trading days before the option is exercised. (4) The employee must own the stock for no less than two years after purchase. (5) The annual stock option must not exceed 600,000 krónur at the exercise price.
2. Taxes on capital income and net wealth
A uniform tax on capital income was introduced at the beginning of 1997. This change represented a complete overhaul of the former system. Before, there were large discrepancies between taxation of different forms of saving with distorting effects on the saver's choice. Interest income was tax-exempt, while most other capital income was subject to personal income tax. Starting in 1997, a general 10% withholding tax is levied on interest income and capital gains, which eliminates the discrepancy between various forms of capital income. Thus, all capital income, such as interest income, dividends, capital gains and rental income is subject to a uniform tax of 10 per cent . The capital income tax is withheld at source for both businesses and individuals, as applicable. Individuals pay no further tax on capital income, whereas capital income incurred by businesses is taxed as ordinary corporate profits with the withholding capital income tax being offset against the corporate income tax.
The net wealth tax was abolished at the end of 2005. The last net wealth tax assessment took place in 2005 on the basis of net wealth at the end of 2004.
3. The social security tax
A general social security tax rate of 5.34% is paid by the employer to the Treasury on top of personal wage income paid to the employee. The tax is allocated as follows:
| General charge |
4.54% |
| of which: | |
| to Standards Council |
0,007% |
| to Icepro Committee |
0,001% |
| to Childbirth Leave Fund |
1.080% |
| to support for disability payments of pension funds |
0.015% |
| to Financing social security expenditures |
3,437% |
| Unemployment insurance |
0.650% |
| Fund for covering wage claims of bankrupt employers |
0.100% |
| Marketing levy for financing the Export Council |
0,050% |
| Total |
5.340% |
| Suppl. charge for fishermen's accident insurance |
0,650% |
| Total including supplementary charge |
5.99% |
4. Corporate taxation
As of the beginning of 2002, Iceland’s corporate income tax was lowered from 30 per cent to 18 per cent. Partnerships with unlimited liability that file for taxes as distinct legal entities had their tax rate lowered from 38 per cent to 26 per cent[5]. The reduction in the tax rates applied to the 2002 income year, the tax for which is assessed in October 2003 and comes up for payment thereafter. The same schedule applies for subsequent years. As with the net wealth tax on individuals, the corporate net wealth tax has been abolished.
As of 2002, the so-called inflation accounting system was abolished and replaced by conventional historical accounting. Inflation accounting has been in effect for a number of years due to the fact that inflation was at one time quite substantial and accounting methods had to reflect that fact. For the past decade, however, inflation has been in the single figures and the need for inflation adjustments in company accounts was diminished. Furthermore, international accounting standards are generally based on historical cost, and Icelandic standards are therefore being brought into conformity with international norms. As of 2002, Icelandic firms are allowed to keep their books and draw up their accounts in foreign currency. Their tax liability continues to be in krónur.
The table below shows the corporate and partnership taxation rate since 1989 (in per cent):
|
Year |
Corporations |
Partnerships |
|---|---|---|
|
1989 |
50 |
50 |
|
1990 |
45 |
45 |
|
1991 |
45 |
45 |
|
1992 |
39 |
41 |
|
1993 |
33 |
41 |
|
1994 |
33 |
41 |
|
1995 |
33 |
41 |
|
1996 |
33 |
41 |
|
1997 |
33 |
41 |
|
1998 |
30 |
38 |
|
1999 |
30 |
38 |
|
2000 |
30 |
38 |
|
2001 |
30 |
38 |
|
2002 |
18 |
26 |
|
2003 |
18 |
26 |
|
2004 |
18 |
26 |
|
2005 |
18 |
26 |
|
2006 |
18 |
26 |
Since March 1999, so-called international trading companies, having established a venue in Iceland, are subject to a 5 per cent income tax. This refers to companies that exclusively trade in goods and services outside Iceland. In December 2003, legislation was passed to abolish the tax benefit for international trading companies as of the beginning of 2008.
In 2002, a number of changes in the corporate income tax system took place in order to make it more flexible and in line with that of other European countries. The carry-forward provision for net losses was extended from eight to ten years. Depreciation rules were amended so that straight-line depreciation on machinery, equipment, vehicles, ships, aircraft and other non-fixed assets is replaced with remaining-balance depreciation and the rates were sharply increased.
| Previous rates |
New rates |
|||
|---|---|---|---|---|
|
Min. |
Max. |
Min. |
Max. |
|
| Ships, ship equipment, passenger vehicles |
5 |
10 |
10 |
20 |
| Aircraft and related equipment |
5 |
10 |
10 |
20 |
| Industrial machinery and equipment |
5 |
15 |
10 |
30 |
| Office equipment |
10 |
20 |
20 |
35 |
| Earthmoving and construction equipment, other vehicles and transport equipment and other non-fixed assets |
10 |
20 |
20 |
35 |
Other assets are depreciated on a straight-line basis. Their main depreciation rates remain unchanged and are as follows:
| Min. | Max. | |
|---|---|---|
| Residential, office and commercial buildings |
1 |
3 |
| Industrial and farm buildings |
3 |
6 |
| Piers and glass hothouses |
6 |
8 |
| Drill holes, electric overhead wires, removable work camps |
7.5 |
10 |
| Acquired intellectual property rights |
15 |
20 |
| Goodwill purchased |
10 |
20 |
5. The value added tax
There is a general value added tax of 24.5 per cent on domestic goods and services. Exports of goods and services and several other transactions are zero-rated. A 14 per cen tax applies to most foodstuffs and a number of other items. As of March 1st 2007, the value added tax of 14 per cent will be reduced to 7 per cent and apply to the following items:
- All food (excl. liquor and wine), most of which has been taxed at 14 per cent but a few items at 24.5 per cent (e.g. soft drinks, sweets).
- Restaurant services, food canteens and similar services.
- The rental of hotel rooms and guest quarters and other related services.
- Radio and TV licence fees.
- Newspapers, magazines.
- Books and book audio recordings.
- Hot water, electricity, oil for space heating and water for swimming pools.
- Road tolls.
- CD disks (excl. DVDs), tapes and similar items (previously taxed at 24.5 per cent).
6. Motor vehicle taxation
The system of taxing motor vehicles and fuel is explained in a separate document that may be accessed here.
Endnotes
[1] The central government general tax and the municipal tax are collected together on a PAYE basis and the rates are shown as applicable in the year of collection. The central government surtax rate is shown in the year of assessment, i.e. assessment in any given year is based on the previous year’s income.
[2] The PAYE tax collection rate is the same for the whole country. Municipalities, however, have different municipal tax rates. An average of municipal income taxes is collected through the PAYE system. Actual tax settlements take place in the following year after a tax return has been filed and the actual tax has been assessed.
[3] In many cases the employer contribution is considerably higher. For central government employees it is 11.5 per cent and for airline pilots and similar professions with a shorter working life it is even higher.
[4] The following constraints apply to interest rebates: (1) They can not exceed 5 per cent of the remaining debt balance incurred in buying a home for one’s own use. (2) The maximum amount of interest payments that qualify for an interest rebate calculation is 524,469 krónur for an individual, 688,517 krónur for a single parent and 85,562 for a couple. (3) Six per cent of taxable income is subtracted from the interest expense. (4) The rebates begin to be curtailed at a net worth threshold of 4,931,043 krónur for a single individual and 8,174,053 krónur for a couple and are eliminated altogether at a 60 per cent higher amount.
[5]In fact, the income taxation of corporations and partnerships is about the same. If a corporation has an income of, say, 100, it pays 18 in income tax. If it chooses to use the entire remainder, 82, as dividends, it pays a further 8.2 (i.e. 10 per cent of 82) as capital income tax, for a total of 26.2 (18+8.2) per cent. A partnership pays a total of 26 per cent on an income of 100 up front and is not subject to a further capital income tax.