Indirect tax - Iceland

Value Added Tax (VAT) is the main type of indirect taxation in Iceland.

It is a tax on consumption which is applied during the production and distribution process to most goods and services. It is also applied to goods, and certain services, entering the country. Although VAT is ultimately borne by the consumer by being included in the price paid, the responsibility for charging, collecting and paying it to the tax authority at each stage of the process rests with the business making the supply i.e. the sale.

A business registered for the tax will charge VAT (output tax) on its sales and incur VAT (input tax) on its purchases (including any VAT paid at importation). The difference between the output tax and the deductible input tax in each accounting period will be the amount of VAT payable by the business to the tax authority. Where the input tax exceeds the output tax, a refund can be claimed.

A transaction is within the scope of Icelandic VAT if the following conditions are met:

• it is a supply of goods or services subject to VAT and a taxable turnover in each twelve-month period from the beginning of the business activity of 2.000.000 ISK is reached;
• it takes place in Iceland.

There are three rates of VAT that are applied to goods and services in Iceland; the standard rate, the reduced rate, and the zero rate. In addition, some goods and services are exempted from the tax.

Businesses that make exempt supplies are unable to claim all of the input tax that they incur, so the VAT paid to suppliers will be a ‘real’ cost.

Goods imported into Iceland are subject to VAT. The tax will have to be paid by the importer at the time of importation. Where the importation is for business purposes and the importer is registered for VAT, it may be possible to reclaim the tax.

In general, all foreign as well as domestic companies and self- employed business owners selling taxable goods and services in Iceland needs to register their business for VAT if the taxable supplies in Iceland exceeds the annual registration limit or is expected to exceed the limit in the near future.

For these purposes, a ‘person’ includes any legal entity. Therefore, once a person is registered for VAT, all of his business activities will be covered by the registration – even if the nature of some of those activities are very different.

Two or more corporate bodies can be registered together as a VAT group if:

• at least 90% of issued shares in the subsidiaries are owned by the parent company that requests the co-registration or other subsidiaries that also participate in the co-registration;
• they companies have the same fiscal year.

A penalty may be imposed by the tax authority if a business fails to register at the correct time.

Foreign taxable persons selling taxable goods and services in Iceland are liable for VAT according to the same rules and regulations as Icelandic companies and shall be registered for VAT if the conditions for registration are met. Registration of a foreign taxable persons in the VAT register carries the same rights and obligations as registration of an Icelandic company. For example, foreign companies involved in commercial transportation in Iceland, e.g. busses or car rentals, must register for VAT, charge and deliver VAT to the extent that their activities are VAT-related.

A provider of electronically supplied services to consumers in Iceland shall register for VAT purposes whenever his taxable turnover exceeds ISK 2.000.000 in any twelve month period. Icelandic legislation defines the supply of electronic services in the same manner as the EU VAT Directive.

Electronic services include download or streaming of software, apps for smartphones, e-books, electronic games, music, movies or television programs. The services are always regarded as used where the buyer of the services resides or has a place of business.

If a foreign company selling taxable services in Iceland does not have a permanent establishment in Iceland, it must entrust an agent domiciled in Iceland to serve as its representative, including sending notification of its activities to the tax authorities, collecting VAT on taxable services and remitting it to the Treasury. The foreign taxable company and its representative are both responsible for the collection and payment of VAT. It is not necessary for the payment from an Icelandic customer to be made through the foreign company’s representative in Iceland. Payment may be made directly to the foreign business.

The representative shall keep complete VAT accounts for the foreign company’s supply in Iceland (both purchases and sales), and is obliged to keep these accounts, sales documents, vouchers etc. in Iceland for at least seven years after the end of the accounting year in question.

Foreign companies that only supply goods and services from abroad to recipients in Iceland, excluding electronically supplied services, are not liable for VAT in Iceland. However, the importation of goods is taxable and VAT is payable at the time of importation by the owner of the goods.

In general, each VAT reporting period is two months, January/ February, March/April, May/June, July/August, September/ October and November/December. VAT payment together with a VAT statement must be submitted no later than the due date for payment which is one month and five days after the period has ended. For example, the due date for the January/February payments is 5th of April. If the due date falls on a weekend or public holiday the next business day is the due date.

Late payments of VAT are subject to 1% penalty charge for each day past due date up to a total of 10% (no minimum penalty is stipulated).

An additional penalty is applied if the VAT is not remitted within a month from the due date. This additional penalty is in the form of late payment interest as determined by the Central Bank of Iceland.

No.

Yes. A range of penalties can be imposed where businesses do not comply with the VAT rules.

Civil penalties and interest can be applied for errors and omissions made on tax returns, or where the tax is paid late. Penalties can also be applied where the business has failed to maintain adequate records, provide information (including additional declarations), or makes repeated mistakes.

Criminal proceedings may be brought in the case of more serious matters.

Yes, it may be possible to reclaim the VAT incurred in certain circumstances.

As Iceland is not part of the European Union, the EU Directive 2008/09/EC and the 13th Directive are not applicable to companies asking for VAT refund in Iceland.

However, there is possibility to reclaim VAT in Iceland for foreign companies via a ‘13th Directive equivalent legislation’. Namely, Regulation no. 288/1995.

A non-resident business without a fixed establishment or liability to register in Iceland can recover VAT. No reciprocal agreement with the home country of the non-resident business is required to obtain a VAT refund.

Refunds can only be made to a non-resident business that otherwise would have been liable to register for VAT in Iceland had it carried on a business in Iceland.

If the application relates to a period of less than one calendar year but not less than two months, the amount for which application is made may not be less than ISK 68,700; if the application relates to a period of a calendar year or the remainder of a calendar year, the amount may not be less than ISK 13,300.

The application must refer to purchases of goods and taxable services over a period of at least two months, i.e. January- February, March-April, May-June, July-August, September- October, November-December, and not exceeding one calendar year. The period may be less than two months if the application relates to the remainder of a calendar year. The application must be submitted at least 15 days after the relevant period and no later than six years after the end of the calendar year to which the application refers.

All taxable persons, including foreign companies selling taxable goods and services in Iceland, shall keep accounts for their business activities in Iceland and shall arrange their accounts and their settlement in such a manner that tax authorities can verify VAT statements at any given time. The VAT accounts shall be accessible to the tax authorities at all times.

Invoices must be issued with every sale or delivery of goods or taxable service, except cf. Art. 21 of the VAT Act. The invoice must include a date of issue, name and Icelandic Id. no. (kennitala) of the purchaser and seller, VAT number of the seller, type of sale, quantity, unit price and total price. Type of sale to a registered person must be sufficiently clear, so that it can be deduced whether the transaction concerned is VAT-taxable activity. Invoice forms shall be numbered in advance in consecutive numerical order. The invoice shall state clearly whether the VAT tax is included in its sum total or not. Furthermore, the amount of the VAT tax shall be stated separately, or that the VAT tax amounts. The amount of the VAT tax must always appear in the case of a sale by a taxable party.

Parties exempt from VAT may neither specify on their invoices nor indicate in any other manner thereon that VAT is included in the invoice amount.

No.