Tax on Capital Income for Individuals Living Abroad

Individuals living abroad who receive capital income from assets or investments in Iceland must pay tax on that income in Iceland.

However, special rules apply to taxation of income between countries to prevent double taxation when income is taxable in more than one country. How tax on capital income is collected and paid may therefore depend on the double taxation agreement between Iceland and the country where you live.

Different rules apply to different types of capital income:

• Rental income is generally taxable in the country where the property is located.

• For other types of capital income, such as interest and dividends from shares, you may be entitled to a reduced tax rate or a full exemption from tax in Iceland.

Tax Liability Criteria

If a double taxation agreement is in effect, you may be able to apply for a tax exemption or reduction under the agreement.

Double taxation agreements vary, so it is important to review the relevant agreement in each case. Below are examples of different types of capital income and the main criteria that apply:

Interest Income

Individuals living abroad who receive interest payments from Icelandic entities are liable to tax on those payments in Iceland. If no double taxation agreement applies, interest income is taxed at 12%.

Under a double taxation agreement, you may be entitled to a full exemption from tax in Iceland or a reduced tax rate, as shown in the examples below.

Examples of countries with agreements providing a full exemption from tax on interest payments:

• Denmark, Norway, the Faroe Islands, Sweden, Finland, the United States and the United Kingdom

Examples of countries with agreements providing a reduced tax rate on interest payments:

• Spain: 5%

• Poland: 10%

• Portugal: 10%

See the full list of exemptions under double taxation agreements.

Dividends

Individuals living abroad who receive dividends from shares in Icelandic companies are liable to tax on those payments in Iceland. If no double taxation agreement applies, dividends are taxed at 22%.

If a double taxation agreement is in effect with the country where you live, you may apply for a reduced withholding tax rate on the dividends.

The agreed tax rate varies between agreements, but a rate of 15% is common, for example under agreements with:

• the Nordic countries, Spain, Portugal, the United Kingdom, the United States and Poland

Some agreements provide for a 10% tax rate, for example under agreements with:

• Hungary, Croatia and India

See a list of double taxation agreements and exemptions.

Capital Gains from the Sale of Shares

Individuals living abroad who make a capital gain from the sale of shares in Icelandic companies are liable to tax on that income in Iceland. Such gains are taxed at 22%, but are not subject to withholding tax.

If a Double Taxation Agreement Applies

Whether you need to file a tax return depends on the provisions of the relevant double taxation agreement. In most cases, capital gains from the sale of Icelandic shares are taxable in the country where you are resident for tax purposes.

To avoid taxation in Iceland, you must specifically apply for an exemption under the applicable double taxation agreement (Form 5.42).

In general, you must apply for the exemption before the end of the income year and submit a new application each year.

Special rules may apply to capital gains from the sale of shares in companies that own real estate. You can check whether these rules apply in the overview of capital gains from shares that must be reported on a tax return.

• If the tax rate shown in the overview is 0%, you must apply for an exemption using Form 5.42. If the exemption is approved, you do not need to report the income on your tax return.

• If the tax rate is not 0%, you must report the income on your tax return.

Special rules may also apply if you owned the shares when you moved abroad and sold them after leaving Iceland. In these circumstances, Iceland may retain the right to tax the increase in the value of the shares that occurred while you were resident in Iceland.

How long Iceland retains this taxing right depends on the provisions of the relevant double taxation agreement. The overview of capital gains from shares that must be reported on a tax return shows how long this right applies after you move abroad, under the column “Residence requirement – duration”.

If No Double Taxation Agreement Applies

If there is no double taxation agreement with the country where you live, you must always file a tax return in Iceland. The income is taxed at the applicable tax rate.

Rental Income from Property

Rental income received by an individual living abroad from property in Iceland is always taxable in Iceland.

Rental income from property must be reported on a tax return in Iceland.

The same tax rules apply as for individuals living in Iceland. Learn more about taxation of rental income from residential property.

Applying for an Exemption or Reduction under a Double Taxation Agreement

If you live in a country that has a double taxation agreement with Iceland, you may be entitled to a reduced tax rate or a full exemption from tax on capital income in Iceland.

Learn more about exemptions under double taxation agreements and how to apply (Form 5.42).

Refund of Overpaid Tax

If tax has already been withheld in Iceland but you are entitled to an exemption, you can apply for a refund of overpaid tax under a double taxation agreement (Form 5.43).

Please note that a refund application will only be processed if an application for exemption (Form 5.42) has already been approved or is submitted at the same time.