Iceland VAT Rules for Non-Resident Digital Services

Iceland has long been receptive to new technology, with one of the highest rates of internet access and internet use in Europe. Eurostat data showed that Icelandic households were among the most connected in Europe, while the World Economic Forum also rated the country highly for its ability to adopt and use new technologies. 

The growth of the digital economy and the digitalization of government were followed by the introduction of VAT rules and requirements for digital services. As a result of changes in VAT laws, Iceland has introduced a simplified registration mechanism known as VAT on Electronic Services, or VOES, specifically for foreign businesses supplying certain services to customers in Iceland.

Iceland's VAT Rules for Digital Services

Iceland's VAT system is primarily governed by the Value Added Tax Act, which provides that electronically supplied services or digital services are treated as supplied where the buyer is resident or established. This destination-based approach is particularly important for foreign digital businesses because the customer's location can determine whether Icelandic VAT applies.

The Icelandic Revenue and Customs (IRC) identifies digital services as including services such as downloads or streaming of software, smartphone applications, e-books, electronic games, music, movies and television programmes. The rules therefore cover many common digital business models, although the precise VAT treatment depends on the nature of the supply and the status of the customer.

A significant distinction is made between B2C and B2B supplies. Under the VOES rules, the simplified regime is designed primarily for foreign businesses supplying digital and certain other specified services to local consumers. If an Icelandic business customer is VAT-registered and can account for the VAT as input tax, the foreign supplier generally does not need to register under VOES.

VAT Registration and Other Compliance Requirements for Non-Residents

Non-resident digital service providers making B2C supplies in Iceland must register through VOES and account for Icelandic VAT when the value of those sales exceeds ISK 2 million (around EUR 14,500) in twelve months.

Notably, the simplified VOES scheme is only available where the foreign business does not have a permanent establishment in Iceland that makes the relevant sales. If an Icelandic permanent establishment is involved in supplying the goods or services, the simplified registration cannot be used. Once registered, foreign digital service providers must apply a standard 24% VAT rate to most of their supplies in Iceland. The exemption is the supply of e-books and e-publications, which is subject to a reduced 11% VAT rate.

Businesses registered under VOES must file VAT returns bi-monthly. The VAT return and payment are due one month and five days after the end of each reporting period. VOES is a payment-only VAT registration, meaning that foreign suppliers collect and pay Icelandic VAT but cannot deduct input VAT through the VOES scheme. Returns must be reported in Icelandic króna (ISK), with foreign-currency amounts converted using the he applicable exchange rate on the filing date.

All taxable persons, including foreign providers carrying out taxable activities in Iceland, must maintain proper accounting records for their Icelandic business activities. The accounting and tax records must be organized so that the Icelandic IRC can verify the information reported in VAT returns at any time, and the VAT records must remain accessible to the authorities.

Penalties for Non-Compliance

VAT returns in Iceland must be filed electronically, even when no sales were made during the relevant VAT period. The IRC typically sends an email reminder a few days before the filing deadline. If a business fails to submit its VAT return on time, the IRC may estimate the business’s sales and output VAT instead of relying on an actual return. If a return is filed after the IRC has issued an estimate, an additional ISK 5,000 (around EUR 36.5) surcharge applies.

Late payment of Icelandic VAT results in a 1% penalty for each day the payment is overdue, up to a maximum penalty of 10%. There is no minimum penalty, and the IRC may waive the penalty if the taxable person can demonstrate sufficient grounds for the late payment. If the outstanding VAT remains unpaid for more than one month after the original due date, additional late-payment interest applies. The interest rate is determined by the Central Bank of Iceland.

Key Compliance Takeaways for Non-Resident Digital Businesses

Obligations begin once the threshold is exceeded, so overseas providers should monitor their Icelandic B2C turnover. Since the destination principle applies, digital providers must be able to distinguish Icelandic customers from customers located in other jurisdictions and maintain appropriate information supporting their determination of the customer's location.

Customer classification is another important task. A foreign provider that treats every Icelandic customer as a B2C customer could incorrectly apply VOES to transactions involving Icelandic VAT-registered businesses. Conversely, treating customers as businesses without sufficient evidence of their taxable status could result in VAT compliance problems.

Foreign providers should also distinguish between the simplified VOES regime and ordinary Icelandic VAT registration. The existence of a simplified scheme for certain digital services does not mean that every foreign business supplying services into Iceland can use VOES. The nature of the services, customer status, and presence in Iceland all need to be considered.

Lastly, providers should keep their VAT systems aligned with Icelandic filing periods and payment deadlines. Registration alone does not satisfy the compliance obligation: VAT must be correctly calculated, reported, and paid within the prescribed deadlines.