Iceland

The corporate tax rate for Icelandic limited liability companies in Iceland is 20%. For partnerships and limited partnerships, the tax rate is 37.6%.

A global minimum tax has not yet been implemented in Iceland. However, the Ministry of Finance published a draft bill, in June 2025, for consultation. In addition, the annal budget for 2026 assumes that a global minimum tax will be implemented. A formal bill has not yet been put forward to Parliament.

Residents versus non-residents

Icelandic resident companies, which include companies incorporated in Iceland and companies managed and controlled from Iceland, are subject to corporate income tax on their worldwide income, including capital gains and foreign-source income.

Non-resident companies are subject to Icelandic tax only on Iceland-sourced income, such as income derived from a permanent establishment (PE) in Iceland, rental income from Icelandic real estate, or certain payments subject to withholding tax, such as dividends, royalties, interest and other payments. A PE would be subject to corporate tax (20% or 37.6% depending on the form of the foreign entity) in Iceland based on Icelandic sourced income after deducting expenses which relate to the Icelandic operations.

Iceland has concluded tax treaties with numerous countries, largely following the Organisation for Economic Co-operation and Development (OECD) Model Convention. Tax treaties can reduce the taxation of Iceland-sourced income.

Capital gains

Capital gains realised by resident companies are generally taxed as ordinary corporate income at the standard 20% rate (37.6% in case of partnerships). Deferral options may be available depending on the assets.

Gains on the disposal of shares may benefit from a full deduction based on Article 31 of the Income Tax Act (No. 90/2003) (ITA). Hence, the income is in effect not subject to tax. The full deduction is not available in the case of disposals of shares of companies in low tax jurisdictions, as defined in the ITA.

Foreign-source income

Iceland operates a worldwide taxation system for resident companies. Foreign-source income is included in taxable income.

Double taxation is relieved either through Iceland’s network of tax treaties (typically via the credit method) or through unilateral credit relief under domestic law.

Loss carry-forward

Tax losses may generally be carried forward for up to 10 years under Icelandic law. There is no provision for carrying losses back. Loss carry-forwards may be restricted following significant changes in ownership and/or activities of a company. A PE of a foreign entity is also able to carry forward losses from its activities sourced in Iceland.

Value Added Tax (VAT)

Iceland imposes VAT (virðisaukaskattur (VSK)) under Act No. 50/1988 on Value Added Tax. The standard rate is 24%, applying to most supplies of goods and services. A reduced rate of 11% applies to certain supplies, including food, books, newspapers, accommodation, and heating.

Businesses with an annual taxable turnover exceeding ISK 2,000,000 are required to register for VAT. VAT returns are generally filed bimonthly.

As Iceland is not a member of the EU, it has not implemented the VAT Directive directly although amendments to the Icelandic VAT Act in recent years have been aimed at aligning the VAT system with the VAT Directive.

Excise duties

Excise duties apply to specific goods such as alcohol, tobacco, fuel, and vehicles. Import duties apply to goods imported from outside Iceland’s free trade area partners.

Other indirect taxes

Stamp duty (stimpilgjald) applies to certain legal documents and transactions, including transfers of real estate and registration of mortgages, at a rate of 0.8% where the transferee is an individual and 1.6% where the transferee is a legal entity.

A Financial Activities Tax (FAT) applies to financial institutions as a substitute for VAT, which is generally exempt for financial services. The FAT is a 5.5% tax on salary payments in addition to an additional FAT on taxable income/profit exceeding ISK 1 billion.

VAT compliance and penalties

Late filing or payment of VAT results in surcharges (10%) and penalty interest. The Directorate of Revenue (DIR) may impose administrative penalties for noncompliance.

• Dividends. Withholding tax of 20% applies to dividends paid by Icelandic companies to non-resident corporate shareholders and 22% to non-resident individuals. These rates may be reduced under an applicable double tax treaty.
• Interest. Withholding tax of 12% generally applies to interest paid to non-residents. Treaty reductions may apply.
• Royalties. Withholding tax of 20% applies to royalty payments made to non-resident corporations but 22% to individuals, subject to treaty relief.
• Real estate. Income from Icelandic real estate, such as rental payments, is subject to 20% in the case of non-resident corporations but 22% in the case of non-resident individuals.
• Wages/salaries. Icelandic employers are required to withhold income tax on salaries paid to employees, including non-resident employees, subject to treaty relief.
• Treaty provisions. Iceland’s double tax treaties (e.g. with EU/EEA countries and the Nordic countries) frequently reduce or eliminate withholding taxes on dividends, interest and royalties.

Dividends paid to resident corporate shareholders (limited liability companies) are generally exempt from withholding. Dividends paid to resident individuals are subject to income tax at the 22% capital income rate, withheld by the company distributing dividends.

Interest income paid to resident individuals is subject to a 22% capital income tax subject to withholding if paid by certain banks or financial service companies.

The Icelandic General Anti-Avoidance Rule (GAAR) (found in Article 57 of the ITA) essentially allows tax authorities to disregard or recharacterise transactions and arrangements that lack genuine economic substance and whose primary or dominant purpose is to achieve a tax advantage. If a transaction is deemed artificial, the authorities can tax it according to what they consider reflects the true economic reality of the situation.

The rule typically looks at a few central factors:

• whether the arrangement has real commercial or economic substance beyond the tax benefit;
• whether the form of the transaction matches its actual economic content; and
• whether the structure departs from what parties dealing at arm’s length in an ordinary commercial context would do.

Article 57 also incorporates transfer pricing principles, requiring that transactions between related parties — such as within corporate groups or between connected individuals — be conducted on arm’s-length terms. If prices or conditions deviate from what independent parties would agree to, the tax authorities can adjust the taxable income accordingly.

In practice, the Icelandic tax authorities can invoke the GAAR to look through unusual financing arrangements where the dominant motive appears to be tax reduction rather than genuine business activity. The burden generally falls on the authorities to demonstrate that an arrangement is artificial, though taxpayers are expected to be able to demonstrate the commercial rationale for their structures.

As Iceland is not a Member State of the EU, although it is a member of the EEA Agreement, it has not implemented the EU Anti-Tax Avoidance Directives (ATAD).

Transfer pricing

Transfer pricing is one of the most significant and growing sources of tax controversy in Iceland. The Icelandic authorities have increased their focus on transactions between related parties, particularly in multinational groups. Iceland follows the OECD Transfer Pricing Guidelines, and documentation requirements have become increasingly stringent.

In a recent landmark transfer pricing case, the Icelandic courts ruled in favour of the Icelandic tax authorities, raising serious concerns about the burden of proof in tax disputes. The case involved an Icelandic subsidiary processing calcite algae for its Irish parent, and despite reporting losses between 2016 and 2020, the taxpayer’s transfer pricing documentation was rejected by the DIR, who imposed a reassessment increasing taxable income by ISK 488 million and added a 25% surcharge. The ruling suggests that when documentation is considered insufficient, the tax authorities may impose adjustments without proving that the reassessment reflects an arm’s-length outcome, effectively shifting the burden of proof to the taxpayer. This sets a significant precedent for multinationals with Icelandic operations.

Tax residency and domicile disputes

Controversies frequently arise regarding whether an individual is tax resident in Iceland under the Icelandic ITA. Cases have often involved individuals who have emigrated but retain ties to Iceland. The tax authorities have often challenged whether residency has genuinely ended.

VAT

VAT disputes are among the most common in Iceland, given the broad scope of the VAT Act (Act No. 50/1988). Frequent issues include:

• input VAT recovery—whether costs relate to taxable or exempt activities;
• classification of supplies as taxable, exempt, or zero rated;
• VAT on cross-border services, particularly digital/electronic services;
• real estate transactions and the distinction between taxable and exempt supplies; and
• VAT registration obligations for foreign entities.

Employee versus independent contractor classification

A persistent area of controversy concerns whether workers are employees or self-employed contractors. This has implications for withholding Pay As You Earn (PAYE), input tax deduction, social security tax and pension contributions.

The tax authorities have actively challenged those arrangements it views as disguised employment.

Remuneration to employees

Controversy also often concerns reclassification of capital income as employment income. The cases have involved issuance of classes of shares to employees, stock options, warrants and other arrangements. The tax authorities have applied strict interpretation of the general rule of classifying income as employment income rather than capital income. The GAAR comes into play in some of these cases.

Deductibility of business expenses

Disputes regularly arise over whether costs qualify as deductible under Article 31 of Chapter III of the ITA, including entertainment and representation expenses, mixed-use assets (e.g. vehicles, real estate), costs alleged to be personal rather than business-related, and so on.

The cornerstone of Iceland’s tax law is Act No. 90/2003 on Income Tax, which consolidates earlier legislation, including the original Act No. 75/1981. It defines taxable income, assessment procedures, penalties (under Article 108), and provides the legal basis for reassessments and appeals. Other key statutes include the Act on VAT, the Act on Withholding Tax, and the Act on Capital Income Tax.

DIR is the agency responsible for tax and customs, managing the institution known as Skatturinn, which handles taxation and customs duties. It is the first point of contact in any tax controversy. Taxpayers may initially pass complaints or objections directly to DIR before escalating further.

The Internal Revenue Board (Yfirskattanefnd) is the supreme administrative appeals authority for cases regarding taxation, VAT, and duties. It is independent of the Ministry of Finance and the relevant administrative office, providing independent merits reviews of administrative decisions. It reviews a wide range of decisions made by DIR, including administratively binding rulings.

Key procedural points of the appeals process:

• Appeals must generally be filed within three months from the date of the decision letter, though in some cases the deadline is 30 days.
• There are no fees for making an appeal to the Internal Revenue Board.
• The Internal Revenue Board has six months to rule on an appeal from the date it receives all necessary documents from the relevant administrative office.
• Importantly, making an appeal does not give the taxpayer a new payment deadline for tax claims, nor does it result in the absolution of any penalties charged for non-payment.

DIR also handles criminal tax investigations, and the Internal Revenue Board has jurisdiction to rule on fines in cases referred to it by that directorate.

Once administrative remedies are exhausted, taxpayers may bring cases before the ordinary courts.

Formal mediation or arbitration is not generally available in Icelandic domestic tax disputes; the administrative and judicial route is the standard path.

Binding advance rulings are available under Act No. 91/1998. The ruling is binding on the tax authorities provided the transaction is carried out substantially as described in the application. Rulings are typically issued within 90 days of a complete request. A filing fee is payable. Rulings do not bind the courts but carry significant practical weight in proceedings.