When individuals receive income or own assets in one country while living in another, specific rules apply to tax liability and taxation between countries.
All income arising in Iceland is taxable in Iceland, regardless of where the individual lives. This income must therefore be reported on an Icelandic tax return.
Income paid between countries may be taxable in both countries. Many countries have entered into double taxation agreements that determine how taxing rights are divided between them.
Iceland has entered into a number of double taxation agreements to prevent the same income from being taxed in two countries. These agreements vary between countries and determine how the final tax liability is divided.
In some cases, an individual may be entitled to apply for an exemption from or reduction in tax under a double taxation agreement.
Three key questions determine how income received between countries is taxed:
Is the individual permanently resident in Iceland?
What type of income is involved?
Which country is involved, and does Iceland have a double taxation agreement with that country?
Tax authorities generally exchange information between countries, but there may be delays in this process. By making sure that the tax authorities in both countries have the relevant information, for example through tax returns, individuals can reduce the risk of paying too much tax.
Residence Determines Tax Liability
Individuals who are not permanently resident in Iceland have limited tax liability in Iceland. This means that they are only required to pay tax in Iceland on income arising in Iceland. Other taxes are generally paid in the country where they live.
This applies, for example, to individuals who live abroad but receive income from Iceland or own assets in Iceland, as well as individuals who work temporarily in Iceland for less than 183 days within a 12-month period.
Different rules apply to individuals who are permanently resident in Iceland or stay in Iceland for more than six months. They are generally subject to full and unlimited tax liability in Iceland.
Examples of Taxation for Individuals Living Abroad
All income arising in Iceland is taxable in Iceland, including income received by individuals who live in another country. Below are common examples of income received between countries that is subject to limited tax liability, along with information on how double taxation agreements may affect the taxation.
An individual who lives abroad but receives payments from Icelandic pension funds or the social security system, for example from the Social Insurance Administration or the Maternity/Paternity Leave Fund, is liable to pay tax on these payments in Iceland.
A: Double Taxation Agreement in Force
If Iceland has a double taxation agreement with the country where the pension recipient lives, and the agreement states that the payments should not be taxed in Iceland, the recipient can apply for an exemption from Icelandic tax. If tax has already been paid, they can apply for a refund:
If an exemption is granted after tax has already been paid in Iceland, a correction must be requested through the Icelandic tax return.
An Icelandic tax return must be filed every year, even if an exemption has been granted.
B: No Double Taxation Agreement
If there is no double taxation agreement in force, or if the applicable agreement allows Iceland to tax pension payments and social security benefits, the following applies:
Payments are taxed according to the applicable income tax brackets, and the personal tax credit is deducted.
The individual pays municipal income tax to the municipality where they were last registered as legally domiciled in Iceland.
If proof of Icelandic tax payments is needed abroad, an income certificate can be requested from Iceland Revenue and Customs using form RSK 14.10.
Pension payments and social security benefits are taxed in Iceland if the applicable double taxation agreement allows Iceland to tax them. The payments are taxed according to the applicable income tax brackets, with the personal tax credit applied against the tax.
When an individual works remotely from abroad for an Icelandic company, for example from home, the income is taxable in Iceland.
A: Double Taxation Agreement in Force
If Iceland has a double taxation agreement with the country where the employee lives and the agreement applies to the income in question, the employee can apply for an exemption from Icelandic tax:
If an exemption is granted after tax has already been paid in Iceland, the overpaid tax will be refunded as part of the following year’s tax assessment.
An Icelandic tax return must be filed every year, even if an exemption has been granted.
B: No Double Taxation Agreement
If Iceland does not have a double taxation agreement with the country where the individual lives, the following applies:
Income is subject to 20% income tax, in addition to municipal income tax payable to the municipality where the individual was last registered as legally domiciled in Iceland. If the individual has never lived in Iceland, the municipal income tax depends on where the employer is registered.
The individual is not entitled to a personal tax credit.
An Icelandic tax return must be filed every year.
If proof of Icelandic tax payments is needed abroad, an income certificate can be requested from Iceland Revenue and Customs using form RSK 14.10.
An individual who lives abroad and receives income from Iceland for self-employed activities is liable to pay tax on that income in Iceland.
A: Double Taxation Agreement in Force
If Iceland has a double taxation agreement with the country where the contractor lives, they can apply for an exemption from Icelandic tax, provided that their stay in Iceland does not exceed 183 days in any 12-month period:
If Iceland does not have a double taxation agreement with the country where the individual lives, the following applies:
Income is subject to 20% income tax, in addition to municipal income tax payable to the municipality where the individual was last registered as legally domiciled in Iceland. If the individual has never lived in Iceland, the municipal income tax depends on where the payer is registered.
The individual is not entitled to a personal tax credit.
If proof of Icelandic tax payments is needed abroad, an income certificate can be requested from Iceland Revenue and Customs using form RSK 14.10.
When an individual comes to Iceland for a short stay (less than six months) to work for an Icelandic employer, they pay tax in Iceland on the income earned here (limited tax liability).
The stay must not exceed 183 days within a 12-month period. After that, the individual becomes subject to full and unlimited tax liability in Iceland.
Applications for Tax Exemptions and Refunds in Iceland
When a double taxation agreement is in force between Iceland and the country where an individual lives, it may be possible to apply for a reduction or exemption from tax in Iceland. Different applications are used depending on the type of income or payment.
It is important to check the relevant double taxation agreement, as different rules may apply to different types of income.
Tax Return
If you receive employment income or pension payments, you must continue to file an Icelandic tax return every year. If tax has already been paid in Iceland but you were entitled to an exemption, the overpaid tax will be refunded as part of the following year’s tax assessment.
Proof of Tax Paid in Iceland
If you need to provide the tax authorities in your country of residence with proof of tax paid in Iceland, you can request an income certificate from Iceland Revenue and Customs using form RSK 14.10.
