Income tax and VAT

Income tax is a tax imposed by government on income generated by a businesses (corporate income tax) or individual (personal income tax). The taxable base for corporate income tax is net income, i.e. income after deduction of operating expenses. Corporate income tax varies by business type:

Legal form            Income tax %

Private limited companies and limited companies       20.00%

Partnerships and joint ventures    36.00%

Self-employed lower level     36.94%

Self-employed individuals higher level     46.24%



Business income tax base

In business operations, the income tax base is found by adding up all the income in the year in question and deducting from that income all deductible expenses in the same year. If the difference is positive, it is the income tax base of the business. If charges are equal or higher, no income tax is calculated.

For example: 


Amount ISK

Income from main business 


Other income


Total revenue



Amount ISK



Salaries and related expenses


Real estate operations


Other charges


Interest rates


Total charges


Profit (income tax base)



Difference in income tax according to business structure


Business structure

Income tax amount ISK

Income tax %

Income tax ISK

Profit after tax


Limited companies





If shareholders receive a dividend, they pay a 20% capital income tax on the dividend.

Co-operative Society Samlagsfélag





No tax is paid on the company’s owners’ withdrawals

Individual company
Self-employed persons lower level <834,707 ISK in a month**





Bracket. No tax is paid on the owner’s withdrawal from the business

Individual company
Self-employed persons, higher levels> 834,707 ISK per month **





No tax is paid on the owner’s withdrawal from the business 

 ** The level of taxation of self-employed persons is determined by the person’s calculated remuneration (monthly salary) in the operation and the profit for the year divided by month.

It is worth noting that if you set up a private limited company as an individual, you will pay a personal income tax on the salary that you pay yourself from the business, as well as the corporate income tax of 20% that you will pay on the net profits generated from the business. Personal income tax bands:

For the income year 2020 the rate of income and municipal tax is calculated in three brackets:


ISK 0 – 336.916 per month 


ISK 336.917 – 945.873 per month  


Income exceeding ISK 945.873 month 


VAT (Value Added Tax)

VAT is a tax paid by the end users of a product or service and is not part of the income and expenses of the companies that have a VAT number.

Value added tax companies collect this tax for the Treasury from the consumer and pay it back to the Treasury. They thus carry out a certain tax collection for the Treasury and may incur the cost of work on the collection.

The value added tax is in most cases 24% but in the following cases it is 11%

  • Rental of hotel and guest rooms and other accommodation services.
  • Utilization of radio and television stations.
  • Sales of magazines, newspapers and national and regional newspapers.
  • Sales of books, both original and translated, as well as audio recordings of reading such books.
  • Sales of hot water, electricity and oil for heating houses and pool water.
  • Sales of food and other food products defined in the Appendix to the Value Added Tax Act.
  • Access to road structures, such as tariffs for access to Hvalfjörður tunnels.
  • Sales of CDs, recordings, magnetic tapes and other similar media with music but not image.
  • Sale of condoms, multi-use diaper and diaper liner
  • Travel agencies and migration activities that business is not exempt from value added tax.

Value added tax is calculated on top of the price of a product or service that the operation in question has decided to use. The example below shows the breakdown of product prices.


Amount ISK

Sale price of goods / services of a company


Value Added Tax is collected for the Treasury


Total price paid by the consumer



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