An individual that stays in Iceland for less than six months in a twelve-month period, has limited tax liability in Iceland. This means he has to pay tax on income arising from sources in Iceland although he still has unlimited tax liability in another country. Taxable income includes, for example cash payments, wages, fees, sickness allowance and benefits in kind. He is allowed the same deductions for expenses as residents, i.e. the mandatory payments to pensions insurances funds 4% of total employment income and in addition voluntary pension insurance premiums of up to 4% of total employment income.
| For the income year 2024 the rate of income and municipal tax is calculated in three brackets; | |
|---|---|
| ISK 0 - 446,136 pr. month | 31.48% |
| ISK 446,137 - 1,252,501 pr. month | 37.98% |
| Income exceeding ISK 1,252,501 pr. month | 46.28% |
Taxable income is salary minus the pension fund premium. Personal tax credit, which is ISK 64.926 pr. month is deducted from calculated taxes.
Those who receive salary from more than one employer need to ensure that the correct rate is used to calculate the income and municipal tax. If the monthly salary exceeds ISK 446,136 from one employer, the next employer has to calculate income tax in a higher tax bracket depending on the amount from the other employer.
An individual is not entitled to children benefits or private housing benefits.
If the stay in Iceland is six months or longer in a twelve-month period, the individual is considered to be a resident of Iceland, which means he has unlimited tax liability from the day of arrival to the country. In which case taxes are levied on worldwide income. Former residents remain subject to unlimited tax liability for 3 years after leaving the country, unless they prove that they have become subject to taxation in another country.
Individuals engaged in a business are subject to various taxes applicable to such operations.
Capital income of married couples and cohabiting persons who are treated as married couples for tax purposes, is taxed in the hands of the spouse whose total employment income is higher. Other types of income are taxed separately.
The income of a child under 16 years of age, other than employment income, is taxed together with the income of the parent who has higher employment income or who receives children's benefits for the child. If a child's employment income exceeds ISK 180.000 in the income year 2024, it is taxed in the hands of the child itself at a special rate (4% income tax and 2% municipal tax). Subject to certain conditions, all of a child's income may be taxed in the hands of the child itself. A child under 16 years of age is not granted personal tax credit.
The income of an individual derived from a partnership that is not a separate entity for tax purposes is taxed together with that individual's other income.