VAT Guide for Freelancers in Iceland

Everything a freelancer needs to know about VAT in Iceland

If you are a freelancer in Iceland whose annual turnover is more than ISK 2,000,000, you are required to register for VAT with the government of Iceland. The Iceland Revenue and Customs agency coordinates VAT procedures and controls VAT payment in the country; you can find routine updates regarding VAT laws on their website.

Once you are VAT registered, you are obliged to charge your customers and pay a standard VAT rate of 24%, or a reduced rate of 11%, to Iceland Revenue and Customs depending on what products or services you supply. While Iceland is not a part of the EU, it is still obligated to follow the EU’s recommendation to keep the standard VAT rate over 15% because it lies within the EU’s economic area.

If you’re a freelancer who’s new to Iceland’s VAT system or simply looking to learn more about it, we’ve got you. Let’s keep scrolling! 

What are the different VAT rates in Iceland?

The government of Iceland charges three different VAT rates. Depending on the products and services you deliver, you must set the appropriate VAT rate for their consumers.

  • The Standard Rate of 24% - Unless the items or services you offer are in the reduced rate or zero-rated category, you should charge the standard VAT rate of 24%.
  • The Reduced Rate of 11% - The reduced rate applies to all charges related to hotel accommodations, rental parking spaces or playground, food and catering services, sale of alcoholic beverages, non VAT exempt transportation of passengers - including sea and animal-based transportation, sale of books, audiobooks and newspapers, radio and TV subscriptions, etc.
  • No VAT (0%) - Exports, inter-country transport of goods, travel agencies for touristic purposes outside Iceland, airline transportations in and out of country, design, and planning of construction and real estate, fuel used for inter-country vessels (except luxury ships and private aeroplanes), etc. are exempted from VAT. However, you should still record VAT-exempt transactions and report on these goods and services.

When should you register for VAT?

If your annual sales turnover is more than ISK 2,000,000, you are required to register for VAT. If your turnover is less than that amount, registering for VAT is voluntary. However, once you exceed ISK 2,000,000, you must register for VAT within eight days to avoid fines or penalties.

Expat freelancers in Iceland have the exact requirements as domestic freelancers. However, if you are not a permanent resident in Iceland, you must appoint a fiscal representative in Iceland responsible for correctly filing VAT on your behalf.

In addition to the threshold, you should check for other situations that determine when you need to register for VAT in Iceland. 

How to register for VAT in Iceland

After determining that your product is eligible for VAT registration in Iceland, be sure to check and prepare the following documents for submission:

  • Information about your annual revenue, taxable financial transactions, and bank account 
  • Information regarding categories of VAT-able and VAT-exempt goods and services you supply and the business operations if you are a solopreneur
  • Estimated forecast of total income and costs, expected within the following year.
  • Identification:
    • Your Icelandic identification number (if you are an Iceland citizen)
    • Information about your fiscal representative, including their Icelandic identification number (If you are a non-Iceland citizen) 

You need to appoint a fiscal representative if you are a foreign freelancer without a permanent residence in Iceland. They are responsible for notifying Revenue and Customs about your financial activities, collecting VAT on taxable services, and paying the VAT to the Iceland treasury.

How to Register for VAT Online as a Freelancer?

Once you have prepared all the required documents, you can fill up the registration form ‘RSK 5.02’ from the Iceland Revenue and Customs’ website and submit it to the Directorate of Internal Revenue.

Expat freelancers selling digital or telecommunication services, paper and magazine subscriptions, radio or television broadcasting services, or touristic services (subject to VAT) to non-taxable individuals in Iceland can alternatively use a simplified VAT registration scheme called VOES (VAT on Electronic Services). 

After registering, you will receive a registration certificate with the VAT registration number from the Iceland Revenue and Customs. Then, you must file VAT statements electronically, using your registration number and a unique password provided to you for all VAT-related purposes. After the VAT has been filed, you can make payments through online banking. 

If you start a new activity or cease your current operations, you are responsible for informing the Iceland Revenue and Customs within eight days. 

Starting from the date of your VAT registration, you need to charge and pay VAT periodically to continue your practice in Iceland legally.

Alternatively, you can also hire an accountant (or agency) to handle your VAT registration and dealings with the Iceland Revenue and Customs Board. Xolo provides services like Xolo Go and Xolo Leap, which help with precisely this and any other VAT concerns you may have.

Financial Obligations of VAT Registered Freelancers in Iceland

Registering for VAT is just part of the process. After registering, you must fulfil the remaining essential responsibilities, including:

  • Charging the appropriate VAT rate to your customers
  • Filing VAT returns and paying any VAT owed to the Iceland Revenue and Customs on a bimonthly basis
  • Maintaining VAT records and a complete VAT account (purchases and sales) for at least seven years

Furthermore, every VAT-registered individual is required to:

  • Store all purchase bills, invoices, and records of transactions
  • Maintain a running total of their VAT account
  • Check if their VAT invoices are accurate and in a proper format

How to Maintain financial Records

You are required to maintain the following VAT-related records electronically for a minimum of seven years:

  • Copies of invoices you send out and receive
  • Copies of self-billing agreements and names, addresses, and VAT numbers of self-billing sellers
  • Notes (debit/credit)
  • All financial records of imports and exports
  • Records of bank statements, balance part of the checks (stubs), and paying-in slips in addition to your VAT account

If you have already sold or purchased items without issuing invoices for them, you cannot claim VAT on those records.

We understand that organising, maintaining, and accessing all these financial records can be a struggle. At Xolo, we would rather have you focus on your business while we securely store and maintain your financial records on our servers for as long as you need them.

How Xolo Can Help

Why submit your tax reports with help from certified tax consultants? Learning all the Icelandic tax guidelines can be challenging, especially if you’re a sole proprietor and in charge of several aspects of your business. Luckily, at Xolo, we offer a range of solutions that can handle all the paperwork and legal jargon, allowing you to focus on your core competencies.

With Xolo Go, you can easily freelance and invoice your clients, even without a registered company or LLC. 

  • Signing up takes only 10 minutes, and once you do, taxation, corporate compliance, and all the tricky VAT calculations are all automatically taken care of in the background!
  • We charge a flat rate of 5% from every withdrawal to your personal bank account. No surprise fees, no contracts, and no BS.
  • Xolo Leap requires Estonian e-Residency, but you can start your own company with us once you have it!
  • We offer different tiers of service depending on the solopreneur’s, or as we call them, Xolopreneur's, individual needs.
  • Once you get your business set up, you can run it from anywhere in the world! So whether you’re looking to gain access to the EU market or a digital nomad - this is the place for you! 

Simply put, we do the hefty work for you so that you can enjoy the freedom of freelancing. So connect with us immediately, and we’ll help you get your one-person business up and running in Iceland in no time!