Foreign service providers and posted employees are required to comply with Icelandic tax legislation while carrying out work in Iceland.

Here you can find key information on the applicable tax rules, as well as links to the website of Iceland Revenue and Customs. As a general rule, income earned by foreign service providers from services provided in Iceland is subject to tax. In certain cases, an exemption from taxation may be applied for under a double taxation agreement.

Tax liability of foreign service providers

Foreign service providers providing services in Iceland are subject to tax in Iceland but may apply for an exemption under a double taxation agreement. However, an exemption cannot be applied for if the undertaking has a permanent establishment in Iceland. The exemption does not apply to value added tax (VAT).

Where a foreign service provider is exempt from tax liability in Iceland as described above, employees working in Iceland on its behalf are also exempt. However, the exemption does not apply to employees who stay in Iceland for more than 183 days in any twelve-month period.

If a foreign service provider that has been exempt from taxation under a double taxation agreement is deemed to have a permanent establishment in Iceland, it must pay income tax on the profits attributable to that permanent establishment.

Employees of foreign service providers that have a permanent establishment in Iceland are subject to tax in Iceland irrespective of the length of their stay. The general rules apply.

Value added tax (VAT)

As a general rule, both domestic and foreign undertakings and self-employed individuals selling taxable goods or services are required to register for VAT.

Further information on VAT is available on the Iceland Revenue and Customs website.

Tax liability of posted employees

Posted employees of foreign service providers are subject to tax in Iceland on income earned from work carried out in Iceland.

If the foreign service provider is exempt from taxation under a double taxation agreement, its employees are likewise exempt, provided that their stay in Iceland does not exceed 183 days in any twelve-month period. This includes normal periods of absence from Iceland due to annual leave and similar reasons.

Employees who stay in Iceland for more than 183 days in any twelve-month period are subject to unlimited tax liability in Iceland from the first day and must pay income tax on their total income from the date of their arrival in Iceland.

If a foreign service provider has a permanent establishment in Iceland, its employees are subject to tax irrespective of the length of their stay. Depending on the circumstances, their tax liability may be limited or unlimited.

Personal tax credit reduces the amount of tax payable. Employees working temporarily in Iceland are entitled to personal tax credit in proportion to the length of their stay.

Further information on taxation is available on the Iceland Revenue and Customs website.