Recent tax reforms in Iceland have produced a steady drop in corporate income tax rates throughout the 1990's and, since 1995, decreased marginal rates and increased thresholds for personal income tax. The corporate income tax rate, at 50% in 1989, was decreased from 30% in 2001 to 18% in 2002. The income tax on partnerships, was decreased from 38% in 2001 to 26% in 2002. Since March 1999, Iceland has also offered an offshore corporate tax rate of 5% to international trading companies (ITCs) that exclusively trade in goods and services outside of Iceland. Since 1997 all capital income from interest payments, dividends, capital gains and rental income has been subject to a uniform 10% income tax rate, and all has been subject to a 10% withholding tax at the source. For businesses, the capital income tax withheld is credited towards their corporate tax liability.
The personal income tax schedule in Iceland consists of a tax free allowance (about $10,457 in 2002 increased to $10,785 in 2003); a total tax rate that is the sum of the central government's general rate (25.75% in 2002 and 2003) and the municipal tax rate (12.8% in 2002 and 2003) giving a total tax rate of 38.55%; and a central government surtax (7% in 2002 reduced to 5% in 2003) which is applied to income above a certain threshold ($51,404 in 2002 and $52,818 in 2003) creating a three-bracket structure with maximum tax rate of 45.54% in 2002 decreased to 43.54% in 2003. Seamen are allowed special a special tax reduction amounting to about $9.20 a day in 2002 and $9.40 a day in 2003. The social security tax is 5.73%. Since 1999, reductions in social security taxes (0.2% in 1999 and 0.4% as of May 2000) have been offered to employers in exchange for their contribution to supplementary employee pension premiums. Capital income is taxed at 10% and subject to a 10% withholding tax. In 2003 the wealth tax rate, applied to assets above about $61,000, was halved from 1.2% to 0.6% and a 0.25% surtax on net wealth above approximately $81,800 was abolished largely because of increases in real property values following an assessment review by the Valuation Office in 2002. Inheritance and gift taxes range from 11% to 15%. There is a 2% to 6% tax on the transfer of housing, and a 10% tax on the transfer of large estates. Local authorities may levy individual income and corporate taxes.
The major indirect tax is Iceland's value-added tax (VAT) with a normal rate of 24.5% on domestic goods and services. There is a reduced rate of 14% applied to most foodstuffs, books, newspapers and periodicals, subscriptions to radio and the TV, hotels, electricity, geothermal heating. Exempted from VAT are exports of goods and services, as well as services connected with imports and exports. Other categories for exemption include health services, social services, education, libraries, the arts, sports, passenger transport, postal services, rental of property, insurance and banking.