What Are the Key Tax Rates in Iceland?

Iceland maintains a comprehensive tax system that supports its robust welfare state. This system collects revenue through various levies on individuals, businesses, and consumption, funding public services and infrastructure. Understanding the structure and rates of these taxes is essential for anyone engaging with the Icelandic economy. This article outlines the key tax rates in Iceland, providing a clear overview of its financial landscape.

Personal Income Tax Rates

Personal income taxation in Iceland operates on a progressive scale. This system combines state and municipal taxes, generally withheld at the source through a Pay-As-You-Earn (PAYE) system. For 2025, the tax rates vary across three income brackets.

The lowest bracket applies to annual income up to ISK 5,664,060 (ISK 472,005 per month), taxed at 31.49%. Income between ISK 5,664,060 and ISK 15,901,524 (ISK 472,005 to ISK 1,325,127 per month) is subject to a 37.99% rate. For income exceeding ISK 15,901,524 (over ISK 1,325,127 per month), the highest rate of 46.29% applies. These combined rates incorporate an average municipal tax component, which typically stands at 14.94% but can range between 12.44% and 14.97% depending on the specific municipality.

Individuals benefit from a personal tax credit, which directly reduces their calculated tax liability. For 2025, this credit amounts to ISK 824,288 annually, or ISK 68,691 per month. This credit is applied against the total income tax due, effectively raising the income threshold before any tax is paid. Unused portions of this credit can sometimes be transferred to a spouse.

Employees in Iceland contribute to social security through mandatory pension insurance. A minimum of 4% of gross income is deducted for this purpose. Employees have the option to contribute an additional 4% to a private pension fund, and this extra contribution is deductible from their taxable income. Individuals are also required to make fixed annual contributions to the Construction Fund for the Elderly, set at ISK 14,093 for 2025, and to the Icelandic National Broadcasting Service, amounting to ISK 21,400 for 2025.

Corporate Income Tax Rates

Corporate income tax in Iceland is levied on the net profits of companies. The rates vary based on the legal structure of the entity. For 2025, limited liability companies (LLCs) and limited partnership companies are subject to a corporate income tax rate of 20%. This represents a slight reduction from the 21% rate applied in 2024.

Other legal entities, such as partnerships, estates, and bankruptcies, face a higher corporate income tax rate. For these entities, the rate for 2025 is 37.6%. Non-resident corporations that generate income in Iceland are taxed at the same rates as resident corporations.

Value Added Tax Rates

Value Added Tax (VAT) is a consumption tax applied to most goods and services in Iceland, as well as on imports. The standard VAT rate in Iceland is 24%.

A reduced VAT rate of 11% is applicable to certain essential goods and services. Examples include:
Food and other consumables
Hotel and guest room accommodations
Books, newspapers, and magazines
Electricity, geothermal hot water, and fuel oil used for heating
Passenger transportation
Services provided by travel agencies for use within Iceland

Some services are exempt from VAT entirely, such as financial services, residential property leases, and educational services. Businesses with sales totaling less than ISK 2 million over a 12-month period are also exempt from collecting and remitting VAT.

Other Key Taxes

Individuals in Iceland are subject to a capital gains tax, generally levied at 22%. This tax applies to various forms of capital income, including sales profits, dividends, and interest. A notable exemption allows for a tax-free limit of ISK 300,000 per person on interest income and on dividends or capital gains derived from shares listed on regulated securities markets. Gains from the sale of a privately owned residential property are entirely tax-exempt if the property has been owned for over two years. Rental income from residential properties is also treated as capital gains; if an individual rents out no more than two properties under Icelandic residential law, 50% of the rental income is tax-free, effectively reducing the tax rate to 11% on the gross rental income.

Property tax is imposed at the municipal level on real estate. The rates for this tax vary between municipalities, typically ranging from 0.18% to 0.625% of the property’s officially assessed value. In addition to the base property tax, other real estate-related fees may include charges for plat leases, garbage collection, and water usage.

Employers in Iceland contribute to social security, distinct from employee contributions. The general employer social security contribution rate for 2025 is 6.35% of the employee’s remuneration. Employers are also required to contribute to mandatory pension funds, with a minimum contribution of 11.5% of an employee’s gross salary. This employer contribution, combined with the employee’s mandatory 4% contribution, results in a total minimum pension contribution of 15.5% of the employee’s earnings.

Inheritance tax is applied to estates in Iceland, with a general rate of 10% on the net value of assets exceeding a specified tax-free threshold. For 2025, this threshold is ISK 6,498,129. No inheritance tax is levied if the inheritance is left to a surviving spouse or cohabitant. Gifts are generally considered taxable income, but those given for special occasions may be exempt, provided they are not of extraordinary value.