Tax Law & Master Hub Act No. 50/1988 2026 Fiscal Year

VAT in Iceland: Everything You Need to Know (Virðisaukaskattur Master Guide)

The definitive English reference to Icelandic Value Added Tax: Statutory rates (24% & 11%), 2,000,000 ISK threshold, bi-monthly filing deadlines, input deductions, and legal compliance.

Author: Icelandic Tax & Legal Editorial Board Jurisdiction: Iceland (Skatturinn) Reading Time: 16 min read

Executive Overview of Icelandic VAT

  • 24% & 11% Tiered System: The standard 24% rate covers most goods and services; 11% covers food and lodging.
  • 2,000,000 ISK Threshold: Compulsory VAT registration upon reaching 2M ISK in rolling 12-month sales.
  • Bi-Monthly Return Cycles: Standard filings due on the 5th day of the second month post-period.
  • Input Recovery: 100% deduction on certified business supplies; prohibited on personal expenses.

1. The Core Architecture of Icelandic Value Added Tax

In Iceland, Value Added Tax—locally known as Virðisaukaskattur (VSK)—is a general consumption tax regulated primarily by Act No. 50/1988. The tax is collected fractally at every stage of the commercial supply chain using the input-output deduction mechanism. Registered entities charge output tax (útskattur) on taxable sales and claim credit for input tax (innskattur) paid on legitimate business purchases. Check the interactive math tools in our How to Calculate VAT Guide.

Rate Tier Nominal % Applicable Commercial Sectors
Standard Rate 24% Retail merchandise, consumer electronics, motor vehicles, legal and IT consulting, fuel, construction.
Reduced Rate 11% Human food and groceries, restaurant catering, hotel accommodation, printed books, geothermal heating.
Zero-Rated (Export) 0% Cross-border exports of goods, international transport, and remote software development services (with input deduction).
Exempt (Article 2) Exempt Medical and dental healthcare, academic schools, insurance, banking operations, and residential rentals (without input deduction).

2. Mandatory Registration Threshold: 2,000,000 ISK

Any individual, sole trader, or legal entity operating a commercial enterprise in Iceland must register for VAT with Skatturinn when total taxable turnover exceeds 2,000,000 ISK over any rolling 12-month period. Operating and issuing invoices with VAT without an official VAT identification number is illegal under Article 40 of Act No. 50/1988 and triggers criminal fines and statutory penalties. Learn about freelance registration in our VAT for Freelancers Guide.

3. Filing Cycles and Payment Deadlines

The standard tax period is bi-monthly (two calendar months). Tax returns and net payments are due on the 5th day of the second month following the end of the tax period (e.g., January–February return is due on April 5th). Late filings trigger an automatic 10% statutory surcharge (álag) plus penal interest.

Universal Bi-Monthly VAT Settlement Simulator

Calculate your bi-monthly tax position with standard 24% output sales and input expenses.

Output VAT Collected (24%): 840,000 ISK
Input VAT Deductible (24%): -432,000 ISK
Net Remittance Due to Skatturinn: 408,000 ISK

Frequently Asked Questions (Algengar Spurningar)

❓ What is the difference between Virðisaukaskattur and corporate income tax?
Virðisaukaskattur (VAT) is an indirect transaction tax levied on consumption, whereas corporate income tax (20% for companies) is levied annually on net taxable business profit.
❓ How can foreign businesses claim back Icelandic VAT?
Non-resident businesses without a fixed establishment in Iceland can apply for VAT refunds on business expenses under Article 43 of Act No. 50/1988, subject to reciprocity agreements.
❓ Do international tourists pay VAT in Iceland?
Tourists pay VAT at checkout but can claim a Tax-Free refund on physical retail purchases exceeding 12,000 ISK per receipt when departing the country.
Statutory Disclaimer & Verification: This guide represents statutory tax provisions under Act No. 50/1988 and administrative directives issued by the Directorate of Internal Revenue (Skatturinn).