Interest and Interest Income

Interest income is income earned from deposits or receivables, such as interest on bank deposits or bonds.

In brief:

• Interest income is classified as capital income.

• Capital income tax is usually withheld when the income is paid.

• Interest income is included in the shared capital income tax-free threshold.

• Special rules apply to children, bad debts and foreign income.

What Is Considered Interest Income?

Interest income includes, among other things:

• Interest on bank deposits and savings accounts.

• Interest on bonds and other securities.

• Discounts and indexation adjustments relating to receivables.

• Foreign exchange gains on receivables denominated in foreign currencies.

Withholding of Capital Income Tax on Interest Income

Capital income tax on interest income is usually withheld when the interest is paid. Financial institutions and other payers are responsible for withholding the tax and remitting it to the Treasury.

If capital income tax is not withheld automatically, for example in the case of foreign interest income or interest paid by individuals, the tax is assessed when the annual tax return is processed.

Tax-Free Threshold for Interest Income

Interest income is included in the shared capital income tax-free threshold. Capital income tax is payable only on the portion of your interest income that exceeds the threshold.

Under the tax-free threshold, capital income tax is payable only on the amount exceeding 300.000 ISK per year for individuals and 600.000 ISK per year for married couples and jointly assessed cohabiting partners.

In practice, if you have money on deposit in a bank, the following applies:

The capital income tax-free threshold is shared across interest income, dividends and capital gains from shares in companies listed on a regulated market or a multilateral trading facility (MTF).

Bad Debts and Capital Income

Bad debt interest may be deducted from capital income if capital income tax has already been paid on the interest. The same applies to other capital income that has become irrecoverable after tax has been paid.

To claim a deduction for irrecoverable capital income, include a note in your tax return.

The following rules apply to bad debt interest:

• The deduction may be claimed in the tax return for the year in which it is established that the receivable on which the interest was calculated cannot be collected. The receivable must not be more than five years old.

• The deduction may only be offset against capital income.

• Any unused deduction may be carried forward to the next tax return for up to five years, for example if it cannot be fully offset against the capital income of the relevant year.

Foreign Exchange Gains and Discounts

Foreign exchange gains are recognised as taxable income when realised, whether they arise from a bank deposit or another type of receivable.

• A foreign exchange gain is calculated as the difference between the exchange rate of the relevant foreign currency on 1 January 2010 or later and the exchange rate on the date of withdrawal or payment.

• Foreign exchange gains and losses may be offset only within the same bank deposit account during the same tax year. This is done in the tax return when the foreign exchange gain is reported.

• If there is a net foreign exchange loss, it is not reported in the tax return and cannot be taken into account in a later year.

• A foreign exchange loss on one account may not be offset against a foreign exchange gain on another account.

Endowment Insurance Policies

Interest, dividends and other investment returns from endowment insurance policies are generally taxable when they are paid out.

However, if the endowment insurance contract does not allow the policyholder to redeem the accumulated savings during the contract term without terminating the contract, the following applies:

• Accrued interest income does not become taxable until the contract term has ended, or at the point when the policyholder first becomes entitled to claim payment of the savings and the accrued interest.

Further Information

• Tax-free threshold for interest income: Article 66(3) of Act No. 90/2003 on Income Tax

• Offsetting interest income: Article 30, Section B, Item 2 of Act No. 90/2003

• Separate taxation of a child: Article 64(3) of Act No. 90/2003

• Taxable capital income: Article 7, Section C of Act No. 90/2003

• Taxation of interest, discounts and foreign exchange gains: Article 8 of Act No. 90/2003

• Withholding tax on capital income: Act No. 94/1996

• Rules on benefits in kind, income and deductions: Tax Assessment Guidelines (Skattmat)