Freelancing in Iceland: sole-trader setup, the ISK 2,000,000 VAT threshold, and calculated remuneration
An Icelandic freelancer trades under their own kennitala (ID number) as a sole trader. VAT (VSK) registration with Skatturinn becomes mandatory once taxable turnover exceeds ISK 2,000,000 in any 12-month period. Business profit is taxed as personal income across three brackets, and the self-employed must pay themselves a 'calculated remuneration' (reiknað endurgjald) that carries withholding tax and the tryggingagjald payroll levy.
This article is general information, not tax advice. Regulations change — verify the current rules with the official sources below before acting.
Going freelance in Iceland is refreshingly direct: you can operate as a sole trader under your own kennitala (national ID number), so you and the business share one legal identity. The steps that matter are VAT registration and the way Iceland taxes what you pay yourself.
Registering as a sole trader
Many freelancers trade directly under their personal kennitala; you can also register a named sole proprietorship (einstaklingsfyrirtæki) with Skatturinn (the Directorate of Internal Revenue / Iceland Revenue and Customs). The key registrations are for VAT and, if you have any payroll-type obligations, the employer register. Registration is handled through Skatturinn's service portal, and you file electronically from then on.
The ISK 2,000,000 VAT threshold
You must register for VAT (VSK) once your taxable sales exceed ISK 2,000,000 in any 12-month period from when you start trading — a limit raised from ISK 1,000,000 back in 2017. You register with form RSK 5.02; changes must be notified within 8 days. The standard rate is 24% and the reduced rate is 11% (covering, for example, food, books, accommodation and passenger transport). VAT returns are filed electronically, normally every two months, due one month and five days after each period.
Calculated remuneration and social levies
Because a sole trader does not draw a formal salary, Iceland requires a calculated remuneration (reiknað endurgjald) — a reasonable wage for your work, set against official reference tables. That deemed salary carries income-tax withholding and the tryggingagjald payroll levy (a social-security contribution of roughly 6.35%, which self-employed people pay on their own remuneration), both reported and paid monthly. A mandatory pension contribution also applies.
Income tax
Personal income — including your calculated remuneration and business profit — is taxed on Iceland's three combined brackets (state plus municipal): 31.49%, 37.99% and 46.29% for 2026. A personal tax credit (persónuafsláttur) of about ISK 869,898 per year is deducted from the tax due, so modest earnings carry little or no income tax.
General information about freelancing in Iceland, current as of the review date above, and not tax advice. Thresholds and rates change — confirm current figures with Skatturinn (skatturinn.is) or a qualified accountant.
Frequently asked questions
What is the VAT registration threshold in Iceland?
ISK 2,000,000 of taxable sales in any 12-month period from the start of business activity (raised from ISK 1,000,000 in 2017). Below it you are exempt from registering; once you cross it you must register with Skatturinn using form RSK 5.02 and charge VAT (VSK). The standard rate is 24% and the reduced rate is 11%. Electronic VAT filing is mandatory, usually every two months.
What is reiknað endurgjald (calculated remuneration)?
Because a sole trader works in their own business rather than drawing a salary, Iceland requires them to set a 'calculated remuneration' — a reasonable wage for the work performed, based on reference tables. This deemed salary is subject to income-tax withholding and the tryggingagjald payroll levy, reported and paid monthly to Skatturinn. It stops self-employed people from avoiding wage-based taxes by leaving profit in the business.