Income and Capital Taxation in Iceland
The taxation system in Iceland is the PAYE system (Pay-As-You-Earn). Taxes are deducted from all taxable incomes and consist of income taxes and municipal taxes (paid to municipal authorities).  Residents are legally subject to pay taxes on all their income, wherever earned.  As a general principle, any individual staying in Iceland for 6 months or longer is considered a resident.

Employers are required to calculate and deduct taxes from all salaries and wages paid out to employees. Out of the calculated tax, (which is 36.72% of the total salary, 2006), the employer must deduct the Personal Tax Credit (which is 29,029 per month, 2006). The personal tax allowance (persónuafsláttur) can only be deducted if the employee has submitted a tax card (skattkort). The tax card should be submitted as soon as the employee starts working. 

The Director of Internal Revenue (Ríkisskattstjóri), issues tax cards. Applicants must have an identification number (kennitala), and be prepared to show personal identification with a picture. The PTA or personal tax allowance or discount, is calculated according to the length of stay of the taxpayer, that is, from the date of arrival until the date of departure. If the applicant is working part-time, he/she may ask officials at the tax office to divide the tax card (for example, a 100% tax card to 40% and 60% cards, or two 50%) in correlation with the proportion of employment. This is done so the tax card can be utilized in the best possible way. Also, if a spouse’s tax card is not in use, the employed spouse may utilize up to 100% of the tax card.

Parents supporting children between the ages of 16-21 years of age while they are students have the right to apply for a tax discount.  This discount works differently than child benefits (barnabætur) as it isn’t automatic.  Parents must apply for this by filling in the appropriate information requested on their tax form. The amount of discount for which parents are eligible is dependent on the amount that the youth has earned.

All individuals who are permanent residents in Iceland and are 16 years of age or older are regarded as full-fledged taxpayers and are issued tax cards accordingly.  This is true for those individuals not working and those that do not have a work permit.

Income tax returns (skattframtal) must be filed with the local tax authority in the end of March. The date tends to change from year to year so be sure and find out from the Intercultural Centre or your local tax office when the deadline is. Tax returns must be postmarked by midnight on the filing day. The tax return is sent to your home and the information from your employer about your earnings in the previous year should also be sent to your home before you receive the tax return.   If you need help filling out your tax returns you may ask your union or The Intercultural Centre.

Taxpayers are required to hand in their income tax return as soon as possible prior to leaving the country. The final tax evaluation is completed a year after the accumulation of income and is usually completed by August 1st of that year.
 

THE MOST COMMON TAXES FOR INDIVIDUALS
Following are brief descriptions of the most common taxes that individuals need to pay. This is not a complete list. For example there is no discussion of the taxes that employers need to pay.
 

INCOME AND CAPITAL TAXATION IN ICELAND
The taxation system in Iceland is the PAYE system (Pay-As-You-Earn). Taxes are deducted from all taxable incomes and consist of income taxes and municipal taxes (paid to municipal authorities).  Residents are legally subject to pay taxes on all their income, wherever earned.  As a general principle, any individual staying in Iceland for 6 months or longer is considered a resident.

STATE AND MUNICIPAL INCOME TAXES

The state income tax rate is 23.89% and the average municipal income tax rate is 12.83%. As is pointed out this figure is an average. The municipal tax rate varies between municipalities. The collection of individual income taxes (state and municipal) on employment income is deducted each month during the income year. However all individual taxpayers are entitled to a personal tax credit against the computed state and municipal income taxes on income. The personal tax credit was kr. 348,348 in 2006, but normally it is calculated on a monthly basis (kr. 29,029) just as the collection of the income tax.
 

Therefore the income tax on monthly wages of kr. 100,000 would look like this:

VALUE ADDED TAX
The value added tax (VAT) is a sales tax and a general tax on consumption that is collected at all stages of economic exchange in Iceland. It is also collected during the importation of goods and services. Those who work as contractors need to pay VAT. Normally the VAT rate is 24.5%. Advertised prices of goods and services always include VAT. However, the VAT rate is 14% of some goods, like food, newspapers and magazines, hotels and accommodation, hot water and electricity.

VEHICLE TAX
A vehicle tax must be paid for all vehicles registered in Iceland. This applies to petrol, diesel and electrically run vehicles. The amount of the vehicle tax is determined by law and depends on the weight of the vehicle. Exceptions are granted for vehicles used by or for invalidity pensioners, vehicles that are 25 years old or older and for vehicles that have been exported from the country. In the case of exportation, export and import documents need to be provided by the owner. The vehicle tax is determined by weight according to certain standards.  The vehicle tax for a single vehicle can never be under kr. 3.416 and cannot exceed kr. 41.193. The Directorate of Customs is responsible for collecting vehicle taxes.  The registered owners of vehicles receive a bill sent home to them twice a year. 
 

THE TAX RETURN
All individuals over the age of 16 who are permanent residents in Iceland are regarded as fully-fledged taxpayers. They are given tax cards and they must fill in their tax returns each year in March.  The purpose of the tax return is to ensure that all individuals are taxed according to their wages, properties and debts.
The tax return is sent to everyone in late February or early March and the deadline for returns is usually the end of March.  It is also possible to complete the tax return on the Net (www.rsk.is). There is a different deadline for returns done electronically. In order to fill in the tax return, you need a summary of your wages over the past year (this is a document that all employers send their employees at the beginning of each year). You also need to have all your documents about your assets and outstanding debts. Often the authorities, for example concerning wages or mortgages, have already filled in the necessary information. Here it is very important for you to make sure that this information is correct. When the tax return has been completed, you need to send it to the local tax authority.
Those who need assistance with understanding or completing their tax return should contact their trade union or The Intercultural Centre. You can also seek the help of registered auditors (many Icelanders do so) but keep in mind that you need to pay for this service. 

Ríkisskattstjóri                    Skattstjórinn í Reykjavík
Laugavegur 166                Inland Revenue Reykjavik
105 Reykjavík                           Tryggvagata 19 
563 1100                                  101 Reykjavík
www.rsk.is                                 560 3600
                                                   www.skr.is