Part II Developments in the Member States

Current topics and prospects; policy orientation

I The budget law for 2012 contains the following main changes: The special tax on financial institutions is increased
from 0.041 % to 0.1285 %; the tax deductible part of voluntary pension insurance premiums is decreased from 4 %
c to 2 % for the fiscal years 2012, 2013 and 2014.
e
l In 2011, the parliament adopted legislation introducing a Financial Activities Tax (the Tax): for financial
institutions a tax of 5.45 % is imposed on all remunerations (i.e. salaries, benefits in kind, presumptive
a employment income of self-employed) paid to their employees; pension funds are not included within the
n definition of "financial institutions" for the purposes of the Tax. The financial institutions covered are all types of
d licensed insurance companies, banks and other lending institutions, securities and brokerage companies, and
pension funds; institutions fully owned by the government are generally exempt except for the Icelandic Housing
Financing Fund. The VAT Act is amended so that the financial institutions belonging to the scope of the Tax will
no longer be obliged to calculate VAT on goods and services that they produce exclusively for their own use in
competition with taxable parties. The Tax is a deductible expense for its payer.

Environmental and natural resource taxes are increased in 2012.

Main features of the tax system

Personal income tax
In the last decade personal income taxes were reduced by gradually lowering the standard income tax rate and
introducing a flat tax on capital income previously subject to the common personal income tax rate. A special tax
on higher income was abolished in 2006, but reintroduced in 2009. In 2010 the PAYE (pay as you earn) system
which had been basically a flat rate system with or without a temporary surcharge, was replaced by a three-rate
system. It includes the central government and the municipal income taxes. The rates for 2010 were set at 37.22 %
for monthly incomes of up to ISK 200 000, 40.12 % for incomes from ISK 200 000 to ISK 650 000 and 46.12 %
for incomes above ISK 650 000 monthly. Thereof the municipal tax is a flat rate of 24.1 %. Compared to 2009, the
lowest rate increased by 0.02 percentage points and the two higher brackets were added. There are two annual flat
taxes; ISK 8 400 (€ 52) for the elderly fund and ISK 17 700 (€ 109) for radio broadcast services, collected from
each individual between 16 and 69 years with an income over the non-taxable ISK 1 425 218 (€ 8 804) per year.
Investment income is taxed separately at a rate of 18 %. In 2011 the income tax rates for resident and non-resident
individuals were progressive with a top rate of 31.8 % above ISK 7 800 000 (€ 47 000).

In 2010, no personal income tax was levied on annual income below ISK 1 425 218 (€ 8 804). The basic annual
tax credit amounting to ISK 530 466 (€ 3 277) is non-refundable and non-transferable between years but
transferable between spouses. Seamen get a tax reduction of ISK 987 (€ 6.1) per day. Compulsory payments to
pension funds are deductible from taxable income. Annual interest rebates are granted to purchasers of personal
dwellings. The maximum level of this rebate in 2010 is ISK 246 944 (€ 1 525) for a single person; ISK 317 589
(€ 1 962) for a single parent and ISK 408 374 (€ 2 523) for a couple. Child benefits are granted subject to income
thresholds and category.

Corporate taxation
Since 1999 Iceland has a classical corporate taxation system. The corporate net wealth tax has been abolished.
Inflation accounting had been in effect for years but was replaced in 2002 by conventional historical accounting in
conformity with international norms. As of 2002 accounting in foreign currency is allowed. There is a deduction
system for inter-company dividends and for capital gains both for residents and non-resident companies.
International companies trading exclusively with goods and services outside of Iceland have benefited from a
favourable 5 % offshore corporate tax, which was however abolished in 2009. Profits and capital gains are taxed at
the same corporate tax rate of 120 % in 2012; it was cut steadily from 50 % in 1989 to 15 % in 2008 and 2009 and
raised back to 18 % in 2010. The rate for partnerships is 32.7 %. No taxes are levied by municipalities on corporate
profits and all proceeds of the CIT accrue to the Treasury. All foreign entities, receiving interest income from
Iceland are subject to limited tax liability as of 1 September 2009. Since 2008 significant amendments have been
introduced, such as: no tax is levied on capital gains from the corporate sale of shares in companies; the rate on

174 Taxation trends in the European Union