Published on and written by Cyril Jarnias
Long perceived as a niche market, ICELAND is nonetheless one of the European countries with the most structured real estate taxation… and sometimes the most favorable, provided you master the rules. With massive VAT refunds on renovation work, gentle taxation of rental income, and a total exemption on certain capital gains, the Icelandic tax framework offers several concrete advantages for investors, whether they are residents or not.
This article details, in plain language, the main tax mechanisms to know for investing in real estate in Iceland. It is based on the most recent legal provisions and updated figures to provide a comprehensive overview of the situation.
A Broadly Competitive Tax Environment for Real Estate
Before delving into the specifics of real estate schemes, it is useful to outline the general framework. In ICELAND, taxation rests on a few simple pillars.
For companies owning or developing real estate in Iceland, the corporate income tax is 20% for capital companies (like LLCs) and 37.6% for certain partnership forms. Resident companies are taxed on their worldwide income, while non-resident companies are only taxed on their Icelandic-sourced income, such as rental income or local real estate capital gains.
For individuals, employment income is subject to a progressive scale, but what directly interests the real estate investor are the revenues classified as “capital income”: interest, dividends, capital gains… and, in some cases, rental income. These incomes are, under normal rules, taxed at the fixed rate of 22%.
This relatively clear framework is complemented by several important adjustments in favor of real estate: VAT refund on renovation work, privileged regime for residential rentals, capital gains exemption on the primary residence, double taxation agreements, and specific instruments for non‑residents. It is this combination that ultimately shapes the tax attractiveness of ICELAND for real estate investors.
VAT on Renovation Work: A Major Lever to Reduce Investment Cost
One of the most powerful – and least known outside the country – schemes is the VAT refund granted to owners of residential buildings for work performed “on-site.”
A Refund of Up to 35%… or Even 100% Depending on the Period
Normally, a homeowner can obtain a refund of 35% of the VAT paid on work performed directly on the property: new construction, major renovation, routine maintenance. This concerns services performed on-site, not those done in a workshop or via certain mobile machinery.
With the standard VAT rate being 24% in 2025, this refund represents a significant reduction in the renovation bill. When VAT is calculated “included” (from an all-inclusive price), the effective rate is approximately 19.35%, which gives an idea of the potential savings.
Exceptionally, Iceland has, for certain periods, increased this refund to much higher levels to support activity in the sector and the energy transition.
| Period for On-Site Work | VAT Refund Rate | Deadline to File a Claim |
|---|---|---|
| From March 1, 2020 to August 31, 2022 | 100% of VAT paid | 6 years from when the right arose |
| From September 1, 2022 to June 30, 2023 | 60% of VAT paid | 6 years |
| General Regime (outside special periods) | 35% of VAT paid | 6 years |
For an investor who carried out major projects during these time windows, the possibility of recovering 60% or even 100% of the VAT is a massive advantage that directly improves the net profitability of projects.
Strict but Predictable Conditions
To benefit from these refunds, a few key conditions apply:
– The company performing the work must be registered in the Icelandic VAT registry and have an active VAT number at the time of execution;
– The owner must keep valid invoices and proof of payment;
– The work must be performed on-site, on the residential building in question.
The tax authorities recommend that owners verify, before any payment, that the service provider is indeed VAT-registered.
Icelandic Tax Administration, Iceland Revenue and Customs
Claims can be filed for six years from when the right arose, which provides comfortable leeway, provided complete documentation is kept.
Bonus for Electric Vehicle Charging Stations
In the same spirit of incentive, ICELAND has implemented a full VAT refund (100%) on the purchase and installation of electric vehicle charging stations when they are placed in or on residential buildings. For installations completed between January 1, 2020 and December 31, 2023, owners can still file a claim within the six-year deadline.
This very favorable tax treatment significantly reduces the net equipment cost and can be integrated into a strategy to enhance the value of a residential building, particularly in condominiums or residences aimed at a clientele sensitive to environmental issues.
VAT, Rental, and Accommodation: A Nuanced but Exploitable Regime
Understanding how VAT works on rental income and accommodation-related services is essential for anyone considering short-term rental, operating tourist residences, or hotel development in ICELAND.
Two VAT Rates and a Major Exemption for Property Sales
The Icelandic VAT system is based on:
– A standard rate of 24%;
– A reduced rate of 11% for a series of goods and services, including hotel room rentals and accommodation, certain food products, books, access to road infrastructure, electricity and hot water for heating, travel agency services, passenger transport, entry to spas and saunas.
The sale of buildings is generally exempt from VAT, which is a crucial point for investors. Thus, buying or reselling a home does not incur VAT. However, it’s important to note that rental operations can themselves be subject to VAT in certain specific cases, such as for tourist accommodation.
Long-Term Rental Exempt, Short-Term Subject to Reduced Rate
Long-term residential housing rentals are considered VAT-exempt transactions. This means that a classic residential landlord does not charge VAT on their long-term rents and, in principle, does not have the right to deduct input VAT on costs related to this activity.
Reduced VAT rate applicable to tourist accommodation in Iceland, including hotels, furnished rentals, and campsites.
For these activities, the VAT due is as follows:
| Type of Accommodation-Related Service | Subject to VAT | Applicable Rate |
|---|---|---|
| Long-term rental of a residential home | Exempt | 0% |
| Hotel / guesthouse room rental | Taxable | 11% |
| Campsite / caravan pitches | Taxable | 11% |
| Access to spas and saunas | Taxable | 11% |
This environment is particularly important for investors focused on short-term rental geared towards tourism: benefiting from a reduced rate rather than the standard rate lessens the burden of VAT on the business model, while allowing the recovery of input VAT on a portion of costs.
Residential Rental Income: Surprisingly Gentle Personal Taxation
From an individual’s perspective, the taxation of rental income constitutes one of the greatest tax advantages in ICELAND.
50% of Rents Completely Tax-Exempt
When rents come from residential housing and the landlord rents no more than two properties subject to Icelandic residential rental legislation, this income is considered capital income, with a very specific treatment:
– 50% of gross rents are purely and simply exempt from any tax;
– the remaining 50% are taxed at the fixed rate of 22%, without any deduction for expenses.
The tax regime for non-professional furnished rental (LMNP) offers a significant advantage on the taxation of rental income.
Half of the rent collected never enters the income tax base.
The combined effect of the scheme results in taxing only about 11% of the gross rent collected.
This mechanism applies to both residents and non‑residents, provided the conditions (maximum two properties, residential housing) are met.
This regime can be summarized as follows:
| Element | Value |
|---|---|
| Maximum number of rented properties to benefit from the regime | 2 properties |
| Part of rent exempted | 50% |
| Tax rate on the taxable portion | 22% |
| Effective rate on gross rent | 11% |
| Deduction for expenses | None (under this specific regime) |
For the investor, the advantage is threefold: simplified reporting, a very moderate effective rate, and predictability of the tax burden, regardless of the rental amount.
Temporary Rental and Offsetting One’s Own Housing Costs
A complementary mechanism allows, when an owner rents their home for a limited duration, to offset the costs of their own housing against the rental income received, by matching them with their personal housing expenses. This more technical scheme can offer occasional optimizations, particularly for short or medium-term rentals of the primary residence.
Treatment of Rental Income for Couples
When married or cohabiting spouses are subject to joint taxation, capital income, including residential rental income under this regime, is allocated to the spouse with the higher employment income. The principle of the 50% exemption still applies, but the tax burden is concentrated on the tax household with the higher salary income.
Real Estate Capital Gains: A Regime Tough on Paper, Very Favorable in Practice
Formally, the Icelandic capital gains tax is simple: for individuals, gains from asset sales (including real estate) fall into the category of capital income, taxed at a rate of 22%.
But in the real estate domain, several adjustments transform this nominal rate into a true advantage.
Total Exemption on Primary Residence Held for More Than Two Years
The most attractive mechanism concerns the primary residence. When a taxpayer sells a home used as their primary residence and owned for more than two years, the capital gain realized may be fully exempt from tax, subject to certain size limits for the property.
This means that an Icelandic resident who buys, occupies for at least two years, and then resells their primary residence can, in many cases, pay no tax on the gain realized, even if it is substantial.
For investors moving to ICELAND or already living there, this provision is strategic in building a residential estate, especially when anticipating significant appreciation in the real estate market.
Rollover: Deferral and Reinvestment of Capital Gain
When the primary residence has been owned for less than two years, the capital gain does not automatically benefit from the exemption. However, legislation allows, under conditions, to defer this tax by “rolling it over” into the acquisition cost of a new home.
Concretely, the owner can reduce the acquisition cost of a new primary residence by the amount of the capital gain realized, thereby postponing the taxation to a later date. This deferral mechanism is possible for two years from the end of the year of sale, and reinvestment can take place in an EEA, EFTA state, or the Faroe Islands, in addition to ICELAND.
Losses incurred from the sale of private assets are generally not deductible. However, it is possible to offset them with gains of the same nature realized during the same year.
For Companies: Neutrality on Certain Gains and Integration into Ordinary Income
For companies, capital gains are generally treated as ordinary income and taxed at the corporate income tax rate (20% for capital companies). Nevertheless, Icelandic taxation offers particularly favorable treatment for gains on shares:
– Gains from the sale of shares in Icelandic companies can be fully deductible, resulting in an effective zero tax rate;
– The same logic applies to gains on shares of foreign companies, if these are located in OECD, EEA, EFTA countries, or the Faroe Islands and subject to taxation comparable to that of ICELAND.
For vehicles holding real estate interests via companies, this neutrality on share capital gains can therefore be a significant advantage in structuring the investment.
Local Taxation: Property Taxes and Transfer Duties
As in most countries, real estate investment in ICELAND entails recurring taxes and transaction costs. The interest lies in their relatively moderate level and predictability.
Municipal Property Tax: A Reasonable Recurring Cost
The property tax is levied by municipalities based on the official value of the property. Each municipality sets its rates, with an upper limit of 1.65% of this value.
Base tax rate applied in Reykjavik for residential housing.
In reality, the annual bill combines several municipal elements (property tax, waste fees, recycling center fees, land fees), but remains, in most cases, moderate relative to property values.
The order of magnitude can be illustrated:
| Type of Property in Reykjavik (example) | Calculation Base | Indicative Rate |
|---|---|---|
| Residential Housing (Category A) | Property Value | ≈ 0.18% |
| Commercial / Industrial Building (Category C) | Property Value | ≈ 1.60% |
Reductions or exemptions may be granted to low-income elderly persons or persons with disabilities, which may apply to some owner-occupiers but is less relevant for pure rental investors.
Transfer Duties and Stamp Duty: A Contained Entry Cost
When acquiring real estate, ICELAND applies a stamp duty on deeds recording the change of ownership. The rate depends on the buyer’s profile:
– 0.8% of the officially registered value for individuals;
– 1.6% for legal entities (companies, funds, etc.).
The right of first refusal does not apply in the context of certain restructurings like company mergers or splits. Its exercise involves moderate registration fees and can incur legal and notarial fees.
In practice, the “entry cost” for the buyer (excluding the agent’s commission, usually borne by the seller) falls within a broad range of approximately 0.9% to 2.7% of the property price, and the “round-trip” cost (purchase + resale) typically reaches between 2.4% and 5.2%.
Non-Residents: Tax Treatment, Double Taxation Agreements, and VAT Refund
For a foreign investor, the key question is how these rules apply when one is not an Icelandic tax resident.
Icelandic-Sourced Real Estate Income: Targeted Local Taxation
Non-resident persons, meaning those who do not meet the conditions for tax residency in ICELAND (notably presence for less than 183 days in a 12-month period), are subject to “limited tax liability.” They are only taxed on their Icelandic-sourced income, which includes:
– rents from properties located in ICELAND;
– capital gains on the sale of these properties;
– certain financial income related to Icelandic investments.
For residential rents, when the conditions are met (maximum two properties subject to residential rental law), the favorable regime of 50% exemption and 22% on the remainder also applies to non‑residents. Similarly, capital gains are, in principle, subject to the 22% rate, with the possibility of benefiting from the primary residence exemption rules if the conditions are met.
Dividends, Interest, and Royalties: Role of Withholding Taxes
For income paid to non‑residents, the Icelandic system uses withholding taxes:
Withholding tax rate applicable to dividends paid to non-resident individuals in Iceland.
However, many investors are protected by the double taxation agreements signed by ICELAND with over forty countries (USA, France, Germany, United Kingdom, Canada, Nordic countries, etc.). These agreements can reduce, or even eliminate, the withholding tax, or allow the taxpayer to recover the excess Icelandic tax via a tax credit or refund.
To benefit from treaty advantages, an investor must generally:
To benefit from an exemption, a reduced rate, or a tax refund in Iceland, you must be a tax resident of a partner country and file the appropriate application with the Icelandic administration. Use form RSK 5.42 for an exemption or reduced rate at source, and form RSK 5.43 to request a refund of taxes already withheld.
VAT Refund for Foreign Companies
Foreign companies without a permanent establishment in ICELAND can, in certain cases, obtain a refund of the VAT incurred on goods or services acquired for business needs in ICELAND, provided they would have been required to register for VAT if they conducted a similar local activity there.
This right to a refund excludes certain sectors, such as travel agencies, insurance companies, or banks, but can concern foreign companies involved in real estate projects (acquisition of materials, technical service invoices billed locally, etc.), as long as they themselves do not make taxable sales in ICELAND during the period in question.
Persons domiciled abroad can also obtain a partial VAT refund on goods purchased in ICELAND and taken in their luggage, if certain conditions are met (minimum amount of 4,000 ISK, exit from the territory within three months, presentation of goods and documents to customs or a refund company).
Structuring and Real Estate Companies: Corporate Tax, Depreciation, and Losses
Beyond direct ownership, many investors structure their acquisitions via a capital company, often to facilitate management, transfer, or bringing in partners.
Corporate Income Tax and Building Depreciation
Resident companies are subject to corporate income tax at a rate of 20% for the most common legal forms. Rental income is integrated into the results, but the major difference compared to personal ownership is the ability to deduct all expenses necessary for generating the income, notably:
– interest on loans related to financing the property;
– management, personnel, and maintenance fees;
– building depreciation.
Depreciation rules for buildings generally impose a straight-line method with variable annual rates. For example, residential, commercial, and office buildings can be depreciated between 1% and 3% per year, industrial buildings, garages, and warehouses between 3% and 6%, and specific structures like greenhouses, docks, or drillings at higher rates.
The depreciation base is the acquisition value minus depreciation already taken, with a floor rule preventing it from going below 10% of the initial value.
To assess the economic interest of structuring via a company, one must therefore compare:
Two main tax regimes apply to rental income. The so-called “simple” regime for individuals taxes gross rents at an effective rate of 11%, with no possibility to deduct expenses. For companies, taxation occurs at a 20% rate on net profit (rents minus actual expenses and depreciation). Additional taxation may then apply upon distribution of dividends to shareholders.
Loss Carryforward and Tax Consolidation
Tax losses incurred by a company can be carried forward and offset against future profits for a period of ten years. No carryback is possible.
When a group holds at least 90% of a subsidiary, a tax consolidation regime allows for offsetting profits and losses between member companies, which can be interesting for diversified real estate groups (development, operations, service provision).
Other Tax Parameters to Consider
Even if the main advantages for a real estate investor are concentrated in the points already mentioned, other elements of the Icelandic system deserve to be integrated into a comprehensive analysis.
Social Charges, Pensions, and Ancillary Levies
Employers, including those managing in-house maintenance, concierge, or property management teams, are subject to a social security contribution of 6.35% on salaries, as well as a mandatory 0.1% contribution to the VIRK rehabilitation fund. Pension contributions total at least 15.5% of salary (4% borne by the employee, 11.5% by the employer).
Total amount of specific contributions for individuals in Iceland, including the broadcasting fee and contribution to the elderly fund.
International Agreements and Legal Security
On the international front, ICELAND is integrated into the main multilateral frameworks: member of the European Economic Area and EFTA, active participant in the OECD, signatory to the Multilateral Convention to Prevent Base Erosion and Profit Shifting (BEPS) and the CRS framework for automatic exchange of information.
It maintains an extensive network of double taxation agreements (over 40 states), including most major investor home countries. These agreements, combined with the transparency of the Icelandic tax administration and the possibility of obtaining advance rulings on contemplated operations, constitute an important element of legal security for the international investor.
Summary: Why Icelandic Taxation Appeals to Savvy Real Estate Investors
On the surface, ICELAND’s taxation does not seem particularly “low tax”: a 22% rate on capital income, a corporate tax at 20%, a VAT at 24%. Yet, in detail, several mechanisms converge to make real estate investment attractive, especially for those who know how to exploit them:
An overview of the main advantageous tax schemes for property owners and real estate investors in Iceland.
Substantial VAT refund on residential renovation work, with periods allowing refunds of 60% or even 100%.
Ultra-simplified and very advantageous regime for individual landlords (50% exemption, effective 11% rate with no rent cap).
Capital gains exemption on the primary residence held for more than two years, with deferral possibilities for shorter holding periods.
Significant optimization margins via companies (deduction of actual expenses, depreciation, neutrality of gains on certain holdings).
Reasonable level of property taxes and transaction costs, compared to other developed markets.
Access to a dense network of double taxation agreements and clear procedures for refund or reduction of withholding taxes.
Targeted schemes in favor of the energy transition (charging stations 100% VAT-refunded during certain periods, incentives for green investment).
This framework, combined with a relatively transparent real estate market, a stable economy, and strong rental demand supported notably by tourism and supply scarcity, places ICELAND in the category of high-potential destinations for investors willing to master a less-known but opportunity-rich tax system.
The key for a savvy investor lies in intelligently articulating the tax instruments in Iceland. This involves choosing the right ownership structure, timing renovation work with VAT refund windows, and optimizing the combination between long-term residential rental and tourist accommodation subject to VAT. For non-residents, it is crucial to fully exploit tax treaties and refund mechanisms. Thus, Icelandic real estate taxation can become a true competitive advantage.
A French business owner around 50 years old, with a financial portfolio already well-structured in Europe, wanted to diversify part of his capital into residential real estate in Iceland to seek rental yield and exposure to the Icelandic krona. Allocated budget: 400,000 to 600,000 euros, without leverage.
After analyzing several markets (Reykjavík, Kópavogur, Hafnarfjörður), the chosen strategy consisted of targeting an apartment or small townhouse in a dynamic neighborhood of the capital, combining a target gross rental yield of 6 to 8% – the higher the yield, the greater the risk – and medium-term appreciation potential, with an all-in ticket (acquisition + fees + potential light renovation) of around 500,000 euros. The mission included: market and neighborhood selection, introduction to a local network (real estate agent, lawyer, tax specialist), choice of the most suitable structure (direct ownership or Icelandic company), and definition of a long-term estate diversification plan.
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Cyril Jarnias is an independent expert in international wealth management with over 20 years of experience. As an expatriate himself, he is dedicated to helping individuals and business leaders build, protect, and pass on their wealth with complete peace of mind.
On his website, cyriljarnias.com, he shares his expertise on international real estate, offshore company formation, and expatriation.
Thanks to his expertise, he offers sound advice to optimize his clients' wealth management. Cyril Jarnias is also recognized for his appearances in many prestigious media outlets such as BFM Business, les Français de l’étranger, Le Figaro, Les Echos, and Mieux vivre votre argent, where he shares his knowledge and know-how in wealth management.
