Quick answer: Virðisaukaskattur (VSK), Iceland's Value Added Tax, is a consumption tax added to most goods and services sold in Iceland. There are two main rates — 24% (standard) and 11% (reduced, for things like accommodation and passenger transport) — plus a zero rate for exports and a separate exemption for specific sectors like healthcare, education, and financial services. Businesses generally must register for VAT once their taxable turnover exceeds ISK 2,000,000 in any 12-month period, charge VAT on their sales (output VAT), and can reclaim VAT they paid on business purchases (input VAT).
How Icelandic VAT actually works
VAT is collected at each stage of a sale, but the burden ultimately falls on the final consumer. A VAT-registered business charges VAT on what it sells — this is called output VAT — and can deduct the VAT it paid on its own business purchases, called input VAT. The difference between the two is what gets paid to Skatturinn (or refunded, if input VAT is higher in a given period).
One point worth clarifying early: Iceland is a member of the European Economic Area (EEA), not the European Union. Its VAT system is broadly similar to the EU VAT Directive in structure, but it is governed by Iceland's own national VAT Act, not EU law directly — which matters for things like cross-border digital sales and refund mechanisms.
VAT rates, zero-rating, and exemptions: what's the difference?
These three categories are often confused, but they have very different financial consequences for a business.
| Category | VAT charged? | Can the business recover input VAT? | Examples |
|---|---|---|---|
| Standard rate (24%) | Yes | Yes | Most goods and services |
| Reduced rate (11%) | Yes | Yes | Hotel/guest accommodation, passenger transport |
| Zero-rated (0%) | No (charged at 0%) | Yes | Exported goods and services |
| Exempt | No | No | Healthcare, education, financial services, insurance, sale of real estate |
The distinction between zero-rated and exempt matters a lot in practice: an exporter charging 0% VAT can still reclaim VAT on its own costs, while a healthcare provider making exempt supplies cannot — the input VAT it pays becomes a real cost to the business.
Who has to register for VAT?
Icelandic-established businesses and self-employed individuals must register for VAT once their taxable turnover exceeds ISK 2,000,000 in any rolling 12-month period. Below that threshold, registration is optional. Foreign businesses making taxable supplies in Iceland generally follow the same underlying rules, though the exact registration route can differ — for example, foreign providers of digital services can use the simplified VOES registration instead of standard registration.
Registration is done through form RSK 5.02, submitted to Skatturinn, after which the business receives a VAT registration number (VSK-númer) and certificate.
Filing and paying VAT
Most VAT-registered businesses file bi-monthly returns (six periods per year), reporting output VAT, input VAT, and the net amount owed or refundable. Filing is done electronically through Skatturinn's online system.
Where to go next
This page is a starting point. Depending on your situation, these guides go into much more depth:
- [INTERNAL LINK TARGET: VAT Rates in Iceland: 24%, 11%, and Exemptions Explained] — a full breakdown of what falls under each rate
- [INTERNAL LINK TARGET: VAT for Freelancers and Sole Traders in Iceland] — registration thresholds and invoicing for the self-employed
- [INTERNAL LINK TARGET: VAT on Digital Services and E-Commerce in Iceland] — for SaaS, apps, and online sellers
- [INTERNAL LINK TARGET: Common VAT Bookkeeping Mistakes and How to Avoid Them] — practical pitfalls to avoid
- [INTERNAL LINK TARGET: How to Calculate VAT: Step by Step] — formulas and worked examples
- [INTERNAL LINK TARGET: VAT on the Sale of Used Goods in Iceland] — private sales, charity shops, and resellers
- [INTERNAL LINK TARGET: VAT and E-Invoicing Requirements for Public Contracts] — for suppliers to government bodies
Important / Heimild og fyrirvari
VSK.is is an independent informational resource and is not affiliated with Skatturinn or any Icelandic government body. VAT rates, thresholds, and exemptions can change. Always verify current requirements directly with Skatturinn or a qualified Icelandic tax advisor.
Frequently Asked Questions
VSK is the abbreviation for virðisaukaskattur, the Icelandic term for Value Added Tax (VAT).
They're structurally similar, but Iceland is in the EEA, not the EU, so Icelandic VAT is governed by its own national VAT Act rather than EU law directly — this matters for things like cross-border digital sales rules.
A zero-rated business charges 0% VAT but can still recover input VAT on its costs. An exempt business doesn't charge VAT at all and cannot recover input VAT, so it becomes a real cost.
No, registration is optional below that threshold — though you may still owe income tax on that turnover regardless of VAT status.
Most file bi-monthly — six filing periods per year — electronically through Skatturinn's online system.
Important
VSK.is is an independent informational resource and is not affiliated with Skatturinn or any Icelandic government body. VAT thresholds, rates, and registration procedures can change. Before registering or making a business decision, verify current requirements directly with Skatturinn or a qualified Icelandic tax advisor.