VAT, GST and Sales Tax in Iceland

Summary

Name of the tax Value-added tax (VAT)
Local name Virðisaukaskattur
Date introduced 1-Jan-90
Trading bloc membership European Economic Area (EEA)
Administered by Ministry of Finance (www.fjarmalaraduneyti.is)
VAT rates
Standard 24%
Reduced 11% and zero-rated (0%)
Other Exempt
VAT number format 12345
VAT return periods for parties subject to registration Bimonthly: Annual (turnover less than ISK4 million), Twice a year: (agriculture) Monthly (output VAT habitually lower than input VAT) Weekly (fish processing)
Thresholds
Registration ISK2 million (registration optional if turnover is lower)
Recovery of VAT by non-established businesses Yes

Scope of the tax

VAT applies to the following transactions:

  • The supply of goods or services made in Iceland by a taxable person
  • Withdrawals of goods and services from a registered enterprise, or an enterprise with a registration obligation, for use other than relating to sales of taxable goods and services, or for private use
  • Reverse-charge services received by an Icelandic entity or person and used in whole or partially in Iceland
  • The importation of goods, regardless of the status of the importer

Who is liable

A taxable person is any business entity or individual that makes taxable supplies of goods or services in Iceland in the course of a business.

The VAT registration threshold is ISK2 million during a 12-month period. Parties can apply for an annual VAT return if the turnover is less than ISK4 million during a 12-month period.

Voluntary registration. Icelandic VAT legislation provides an option for voluntary registration for VAT purposes for certain activities. Special registration is available for leasing real estate for use by a taxable business and construction activity at its own expense for the purpose of selling real property to registered par­ties.

Group registration. The Icelandic VAT Act provides that two or more limited companies may be jointly registered. The condition for joint registration is that not less than 90% of the share capital in the subsidiary companies be owned by the principal company that requests joint registration or that of other subsidiaries that also participate in the joint registration. All the companies must have the same accounting year. The joint registration must be in the name of the principal company and is in effect for a minimum of five years.

An application for joint registration must be filed with the Director of Internal Revenue no later than eight days before the beginning of the first accounting year subject to the joint registra­tion.

Members of a VAT group are regarded as one taxable person liable for the payment of VAT. The principal company will be responsible for all duties regarding settlement, payment, and assessment of VAT on behalf of all the jointly registered compa­nies. All of the participating companies are jointly and severally liable for the correct payment of VAT. Transactions between jointly registered companies are generally not subject to VAT. However, the withdrawal of taxable goods or services from a tax­able part of the group’s business may be subject to VAT.

Non-established businesses. A “non-established business” is a business that has no fixed establishment in Iceland. A non-established business must register for VAT if it makes taxable supplies of goods or services in Iceland in excess of the registra­tion threshold.

VAT representatives. If a non-established business is required to register for VAT in Iceland, it must appoint a resident tax repre­sentative, unless it maintains a place of business or a registered office in Iceland.

Electronic services. Effective from 1 November 2011, nonresi­dents who supply electronic services to final consumers in Iceland (B2C supplies) are required to register for VAT and charge VAT on services supplied to Icelandic consumers not registered for VAT. For this purpose, electronic services include the supply of e-books, films, music and software. This rule only applies if the turnover is ISK2 million or more during a 12-month period.

Registration procedures. A taxable person applies for registration to the Director of Internal Revenue on form RSK 5.02. The form is available on the website http://www.rsk.is in Icelandic.

The RSK 5.02 can be submitted electronically by emailing the scanned form, signed by the taxpayer, to rsk@rsk.is.

If the form is correctly filled out, the application is processed by the Director of Internal Revenue within one week. A taxable person should register no later than eight days before starting taxable activities.

Late-registration penalties. No specific penalty applies to late VAT registration in Iceland; however, penalties are assessed if, as a result of the late registration, a taxable person submits a late VAT return or pays VAT late.

Reverse charge. A party purchasing services, listed below, from abroad for use in part or in full in Iceland shall pay value-added tax on its price. The same applies to the service of a foreign party provided in this country, provided the foreign party does not operate a venue for business nor has an agent in this country.

The reverse-charge mechanism applies to the following services received by parties in Iceland:

  • Sale or lease of copyright, patent rights, registered trademarks and copyrighted designs and the sale or lease of other compa­rable rights
  • Advertising services
  • Services of consultants, engineers, lawyers, accountants and other similar specialized services, except for labor or services related to liquid assets or real property located in Iceland
  • Electronically provided services to registered buyers
  • Obligations and duties related to business or production activ­ity or the use of rights listed under this point
  • Employment agency services
  • Rental of liquid assets, except for means of transport
  • Services of agents acting on behalf of others and for their account as regards the sale and delivery of services listed under this point
  • Telecommunications services

Taxable parties record the self-assessed VAT as output VAT on the VAT return. If the VAT is classified as deductible cost, the self-assessed VAT may be deducted on the same VAT return.

Nontaxable parties that are subject to the reverse charge must file form RSK 10.24.

Digital economy. No specific rules apply.

Deregistration. Taxable persons apply for deregistration to the Director of Internal Revenue on written form RSK 5.04. Deregistration is allowed when taxable activities are sold or ceased. The Director of Internal Revenue may deregister a taxable person if, for two or more consecutive return periods, the taxpayer fails to file a VAT return or fails to provide proper sup­porting documents.

VAT rates

The term “taxable supplies” refers to all supplies of goods and services that fall within the scope of the Icelandic VAT Act. This includes zero-rated supplies, when no VAT is due, but the supplier may recover input VAT related to the supplies.

The following are the VAT rates in Iceland:

  • Standard rate: 24%
  • Reduced rate: 11%
  • Zero rate (0%)

The standard rate of VAT applies to all supplies of goods or ser­vices, unless a specific measure allows a reduced rate, the zero rate or an exemption.

Examples of goods and services taxable at 0%

  • Export of goods and services
  • Supplies delivered for use on board vessels on international journeys
  • Sale and leasing of aircraft and ships, shipbuilding along with repair-and-maintenance work on ships and aircraft and their fixed equipment
  • The design, planning and other comparable services related to construction and other real property abroad
  • Contractual payments from the Treasury related to the produc­tion of milk and sheep farming
  • Sales of services to foreign fishing vessels landing fish in Iceland
  • Sales of services to parties neither domiciled nor having a venue of operation in Iceland, provided that the services are wholly used abroad
  • Transportation of goods between countries or within the coun­try when the transport takes place to or from Iceland

Examples of services taxable at 11%

  • Radio licenses
  • Rental of hotel rooms, guest rooms and other accommodation
  • Newspapers, periodicals and books
  • Geothermal hot water, electricity and fuel oil used for heating
  • Most food-related items (including alcoholic beverages)
  • CDs, records, magnetic tapes and other similar means of music recordings, other than visual records
  • Access to road facilities
  • Condoms
  • Reusable diapers and diaper lining
  • The services of travel agents
  • Transportation of passengers, whether by land, air or sea, including coaches and bus trips. (But transportation of passen­gers to and from the country is considered granted abroad and such services are exempt.)
  • Admission to spas, saunas, etc.

The terms “exempt” and “outside the scope” are used for supplies of goods and services that are not liable to VAT and that do not give rise to a right of input tax deduction (see Section F).

Examples of exempt supplies of goods and services
(also called outside the scope of the VAT Act)

  • Financial services
  • Insurance
  • Lease of residential property
  • Medical services
  • Social services
  • Educational services
  • Real estate transactions
  • Specified cultural and sporting events
  • Public transport
  • Postal services
  • Lotteries and betting pools
  • Funeral services

Option to tax for exempt supplies. When leasing real estate for use in taxable activities and for construction activity financed by the taxpayer for the purpose of selling real property to registered parties, the taxpayer has the option to register and pay VAT on those otherwise exempt supplies.

Time of supply

The basic time of supply for goods is when an invoice is issued (usually at the time of delivery). In the case of partial or full advance payment, the tax point is when the payment is received by the supplier, even if no supply has been made. Consequently, the supplier shall account for VAT when advance payment is received. In practice, the tax authorities accept that invoices may be issued after the supply if this is common practice for the business.

VAT on services is, as a general rule, due in the VAT period when the service is supplied. Alternatively, VAT is due in the period when the invoice is issued, if the invoice is issued shortly after the supply. Accordingly, VAT shall be reported on the VAT return in the VAT period when the invoice has been issued. Service suppli­ers are authorized to issue invoices at the end of each month.

Reverse-charge services. VAT payable through the reverse-charge mechanism is due on the date of the invoice if the invoice is issued in accordance with the generally accepted accounting principles in the country of the service provider.

Imported goods. The time of supply is upon customs clearance.

Recovery of VAT by taxable persons

A taxable person may recover VAT that is charged on goods and services supplied to it for business purposes. A taxable person generally recovers input VAT by deducting it from output VAT, which is VAT charged on supplies made.

Input VAT includes VAT charged on goods and services supplied in Iceland, VAT paid on imports of goods and VAT self-assessed for reverse-charge services received from outside Iceland.

The amount of the VAT reclaimed must be detailed on a valid VAT invoice. Consequently, VAT may not be deducted as input VAT before a VAT invoice is received. Input VAT that is not prop­erly documented may not be deducted. The input VAT deduction must be reported in the VAT period in which the invoice is dated.

Nondeductible input VAT. Input VAT may not be recovered on purchases of goods and services that are not for use in a business that is subject to VAT (for example, goods acquired for private use).

In addition, input VAT may not be recovered for some items of business expenditure.

Examples of items for which input VAT is nondeductible

  • The cafeteria or dining room of the taxable party and all food purchases
  • The acquisition or operation of living quarters for the owner and staff
  • Perquisites for the owner and staff
  • The acquisition and operation of vacation homes, children’s nurseries and similar objects for the owner and staff
  • Purchase and maintenance of passenger vehicles, with certain exemptions for taxi and car-lease companies
  • Entertainment costs and gifts

Partial exemption. Iceland operates a procedure for the recovery of input tax when a business makes both taxable and exempt supplies.

If Icelandic parties make both taxable and exempt supplies, they can deduct input tax from all supplies solely related to the taxable activity. No deduction is available for supplies used solely for exempt activity. For supplies received and used for both taxable and exempt supplies, input tax may be apportioned according to the turnover split between taxable and exempt transactions.

Refunds. If the amount of recoverable VAT exceeds the amount of output tax payable in that period, the relevant tax authority shall investigate the tax return. If the return is calculated correctly, the Treasury shall refund the difference.

If a return has been submitted on time, the refund shall take place within 21 days of the due date. A refund claim is triggered auto­matically if the VAT return shows a VAT credit.

Preregistration costs. VAT on costs incurred prior to VAT regis­tration cannot be taken into account as input VAT.

Recovery of VAT by non-established businesses

The Icelandic tax authorities refund VAT incurred by businesses that are neither established in Iceland nor registered for VAT there. A non-established business may claim Icelandic VAT to the same extent that an Icelandic taxable person may deduct input VAT incurred in the course of a similar business in Iceland.

Iceland does not apply the reciprocity principle to refunds. Consequently, it does not exclude claimants based on the country where they are established.

Refund application. A claimant must submit the following docu­mentation to obtain a VAT refund:

  • Application form RSK 10.29
  • Under the general rule, the original VAT invoices
  • A declaration in regard to the purposes of the purchases
  • A declaration that the enterprise has, during the reimbursement period in question, neither delivered goods nor rendered taxable services in Iceland for which the enterprise would be liable to registration and taxation
  • The original invoices or receipts of payments from the customs authorities noting the amount of VAT paid
  • A certificate of taxable status obtained from the competent tax authorities in the country, such certificate being valid for two years from date of issue, a period that may be extended by two years at a time if the applicant is otherwise compliant with regulations
  • A power of attorney if the claimant uses the services of a third party to recover the VAT

The applications must be submitted at least 15 days after the period in question and not later than six years after the end of the calendar year to which the application refers. The forms must be completed in Icelandic or English. The application must refer to purchases of goods and taxable services over a period of at least two months (e.g., January-February, March-April) and not exceeding one calendar year. The period may be less than two months where it is a question of the remaining part of a calendar year. The minimum claim amounts are ISK60,800 for a VAT application. Where the application covers a calendar year or the remainder of a calendar year, the amount shall be at least ISK11,800.

Applications for refunds of Icelandic VAT may be sent to the fol­lowing address:

Ríkisskattstjóri Laugavegur 166 150 Reykjavík Iceland

Repayment interest. Claims for VAT refunds are generally paid within one month and five days after the end of the repayment period. Applications received after the deadline will be processed with the application pertaining to the next payment period. Interest is not paid on late refunds.

Invoicing

VAT invoices and credit notes. As a general principle, VAT invoic­es and credit notes must be issued by the supplier. An Icelandic taxable person must generally provide a VAT invoice for all tax­able supplies and exports made. Invoices must support claims for input tax made by Icelandic taxable persons and VAT refunds claimed by non-established businesses.

A VAT credit note may be used to reduce the VAT charged and reclaimed on a supply. The document should be marked “credit note” and it must refer to the original invoice.

Proof of exports. Goods and services exported to countries out­side Iceland are exempt from VAT with input tax credit. To qualify as VAT-free, the supplier must prove that the goods have been exported. Suitable proof includes a Customs Export Declaration.

Foreign-currency invoices. The value-added tax must be in Icelandic krona (ISK), but the underlying trade may be in any known currency for VAT purposes. The invoice must include the VAT amount in ISK. The currency conversion must use the exchange rate of the Icelandic Central Bank on the date of supply.

VAT returns and payment

VAT returns. In general, Icelandic taxable persons file bimonthly VAT returns. Parties engaged in fish processing are permitted to file a temporary settlement of one week from Monday to Sunday. Farmers file VAT returns twice a year. Businesses with taxable turnover of less than ISK4 million may opt to file annual returns. Parties whose output VAT is habitually lower than their input VAT may obtain permission to file monthly VAT returns.

VAT groups submit a single, joint VAT return.

To ease cash flow, businesses that receive regular VAT refunds may request shorter VAT return periods. Taxable persons must contact the appropriate VAT office to register for annual returns or for permission to use shorter VAT return periods.

For bimonthly VAT returns, the VAT due for each period must be reported and paid in full within one month and five days after the end of the VAT period. Return liabilities must be paid in Icelandic krona.

Special schemes. Not applicable.

Electronic filing and archiving. VAT returns should be filed elec­tronically. The Director of Internal Revenue may permit taxable persons with annual VAT periods to file VAT in paper form.

Taxable persons shall manage their accounts and their settlement in such a manner that tax authorities can always verify VAT returns.

All books, settlements and data related to VAT returns shall be safeguarded for seven years from the closure of the relevant accounting year. Those who use cash registers are not obligated to keep paper registers longer than three years from the close of the relevant accounting year, provided the accounts have been fully closed, and signed annual accounts are at hand.

Annual returns. Taxable persons shall file annual VAT return RSK 10.25 if they have not filed tax return RSK 1.04.

Penalties

If VAT is not paid on time, the party is subject to a surcharge. The same applies if a VAT return has not been submitted or has been deficient and the VAT therefore estimated, or a reimbursement has been excessive.

The surcharge is 1% of the amount not paid in full for every day beginning the next day after the due date, although no higher than 10%. This applies for the 5th to 15th day of the payment month. If VAT is not paid within a month of the due date, interest on arrears must be paid.