VAT in Iceland 2026: the rates, input VAT and what you cannot deduct

Kassify · 6 November 2026

Icelandic VAT (virðisaukaskattur) is 24% at the standard rate and 11% at the reduced rate, under the VAT Act no. 50/1988. A company charges output VAT on its sales, deducts the input VAT it paid on purchases for the business, and pays the difference to Skatturinn every two months.

The duty to register starts when sales of taxable goods and services reach 2.000.000 kr. in a 12 month period. Below are the rates, what falls outside VAT, one return period worked out in krónur, the invoice that gives a right to input VAT, and the purchases that give no input VAT even when they are for the business.

Output VAT and input VAT

VAT is charged at every stage of trade, from producer to retailer, but each company pays tax only on the value it adds.

• Output VAT (útskattur) is the tax the company charges on its taxable sales.
• Input VAT (innskattur) is the tax the company pays to other registered businesses or to customs on goods and services used in the business.
• The return is output VAT less input VAT. If input VAT is higher, the company has a credit with the treasury.

VAT is added to the price before VAT. When a price is quoted with VAT, the tax is 19,35% of that price at the 24% rate and 9,91% at the 11% rate. Of 1.240 kr. with VAT, 1.000 kr. is the price and 240 kr. is tax.

Return periods are two months long, and the return and the payment are due one month and five days after the period ends. This year's dates are in the article on VAT returns.

Who has to register

Anyone who sells taxable goods or services as a business is liable for VAT, whether a sole trader, an ehf. or an hf. The exemption covers only those who sell for less than 2.000.000 kr. in each 12 month period from the start of trading. The threshold was 1.000.000 kr. until 1 January 2017.

• Registration is made on form RSK 5.02 no later than eight days before trading starts, and Skatturinn issues a VAT number.
• The duty starts as soon as the company can see that sales will reach 2.000.000 kr. in 12 months, not at the end of the year.
• A company under the threshold may register. It then charges VAT on its sales but also gets input VAT on purchases, which counts in the first year when equipment is bought.

The registration itself, the forms and where the number appears are in the article on the VAT number.

The rates: 24%, 11%, 0% and outside VAT

The standard rate of 24% applies to every taxable good and service the Act does not place at another rate. This is how sales divide:

The difference between the last two rows matters. An exporter charges no VAT on its sales but deducts all of its input VAT. A dental clinic charges no VAT on its services either, but gets no input VAT and so carries the tax on everything it buys. A company with both taxable and exempt activity deducts input VAT on shared purchases in proportion to its taxable turnover for the year, under what is called the turnover rule (velturegla).

Example: one return period in krónur

Assume a wholesaler that sells kitchenware at 24% and coffee beans at 11%. Every amount here is an assumption for the example, not a figure from Skatturinn. In January and February the period looks like this:

Output VAT is 808.000 kr. and input VAT is 428.000 kr., so the wholesaler pays 380.000 kr. for the period.

The last three items carry 86.400 kr. of VAT that the company pays and never gets back. The car and the gift are barred by the Input VAT Regulation no. 192/1993. The input VAT on the monitor is lost only because the invoice is in the wrong name: on the company's kennitala the return would have been 332.000 kr. The rent carries no VAT unless the landlord has opted to register, and then the VAT on the rent can be deducted.

The invoice that gives a right to input VAT

Input VAT always rests on a valid document: the original sales invoice, an e-invoice or a printed copy of one, or the customs payment document for an import. A purchase contract, a deed or a bank payment slip is not enough. The invoice must show:

• An invoice number in an unbroken sequence and the date of issue.
• The seller's name, kennitala and VAT number.
• The buyer's name and kennitala. A till receipt may leave them out if the amount is 6.000 kr. or less.
• A description of what was sold, the quantity, unit price and total.
• The amount of VAT and the rate.

The seller must also be on the VAT register when the sale takes place, and can be looked up in Skatturinn's company register. Only the buyer named on the invoice can deduct the VAT, so a limited company gets no deduction for an invoice in a shareholder's name. An e-invoice counts as an original, as the article on e-invoices explains.

Cars, entertainment and other things you cannot deduct

In some cases no input VAT is allowed, even when the purchase is only for the business. Under article 2 of Regulation no. 192/1993 and Skatturinn's guidance, nothing is deductible on:

• Passenger cars, including estate cars and SUVs, whether bought, leased or run.
• Entertainment and gifts, such as meals, alcohol and flowers for customers. Low-value items plainly meant for advertising are the exception.
• The company's staff room, canteen and food purchases of any kind.
• Housing, holiday homes and summer houses for the owner or staff.
• Benefits in kind for the owner or staff.

Cars weigh the most. The rules depend on the type of vehicle:

A van gets VAT plates only if the passenger capacity is under half its load capacity, the cargo space behind the rearmost seat is at least 1.700 mm or longer than the passenger space, and there are no seats in the cargo space.

Services bought from abroad

Software, advertising and consulting from foreign companies often arrive on an invoice with no Icelandic VAT. Under article 35 of Act no. 50/1988 the buyer then pays the tax itself, and a service supplied from abroad counts as used where the buyer has its place of business.

A registered company is exempt from paying if it could deduct the tax in full as input VAT. Assume the wholesaler in the example buys a software subscription from abroad for 60.000 kr. in the period. It pays nothing on it, because all of its business is taxable. A company with exempt or mixed activity pays 24% on the part it cannot deduct, so a dental clinic with the same subscription pays 14.400 kr.

The mistakes that cost money

In the example, the car, the gift and the invoice in the wrong name cost 86.400 kr. in one period. These are the other mistakes that cost companies money:

• 24% worked out on the price with VAT. Of 124.000 kr. with VAT, 24.000 kr. is tax, not 29.760 kr. The share of a price with VAT is 19,35%.
• Registering late. VAT paid on purchases before registration can only be reclaimed if Skatturinn accepts a retroactive registration, and output VAT is then due on sales for the same time. A retroactive registration covers the current year so far and the whole previous year, if it is applied for before 15 March.
• VAT on an invoice from a business off the register. A business that is not on the VAT register, or only has exempt activity, may not show VAT. If it does, it must still pay the tax, unless the invoice is corrected with the buyer.
• Input VAT in the wrong period. The invoice date decides the period, not the payment date. Input VAT is deductible even when the invoice is unpaid.
• A forgotten credit note. When a seller gives a discount or reverses an invoice, the buyer must reduce its input VAT by the VAT on the credit note.
• Private use of a car on VAT plates. It costs the right to input VAT, unless the use is reported in advance on form RSK 10.60 and counted as a benefit in withholding tax.
• Full input VAT in mixed activity. Purchases that serve both taxable and exempt activity give only proportional input VAT.

Kassify: the right VAT on every transaction, the return on time

Everything above is work someone has to do six times a year: pick the rate for every line, find a receipt behind every input VAT claim, take the car and the entertainment out, and work out the tax on foreign subscriptions. Kassify is an accounting firm that uses AI and does this work for the company, as a whole finance department for a fixed price.

• Every transaction gets the right VAT treatment, 24%, 11% or exempt, and Kassify's bookkeepers review the exceptions.
• Input VAT is only claimed with a receipt behind it. Bills from email find their own way into the books and receipts come from Messenger and the app, so no input VAT is lost to a missing receipt.
• VAT on services bought from abroad, such as software and advertising, is worked out and filed correctly.
• The VAT return is prepared from the books and sent to Skatturinn every two months, before the due date. The payment itself stays in the company's hands in its online bank.
• Each bank is connected directly, and there are 0 manual entries. A bookkeeper replies within 24 hours, and accredited bookkeepers and certified auditors stand behind the work.

VAT returns are part of a fixed monthly price with bookkeeping, payroll and the app, 20% below a traditional accounting firm. The annual accounts and tax return are included in the same price, and the price comes in writing before the company decides. The move takes less than 7 days and is included in the price: Kassify talks to the old bookkeeper and the history comes along. More on the page about VAT filing at Kassify.

Questions

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