Iceland - New Taxability Rules Concerning the Cross-Border Supply of Services

Earlier this year, the Ministry of Finance proposed an amendment to the VAT Act to modify the VAT rules regarding the taxability rules surrounding the provision of cross-border services. The goal was to sync domestic rules with the EU VAT Directive and OECD VAT Guidelines.  

The Parliament adopted the amendments on June 21, 2024. These amendments introduced changes that affected the country's place of supply rules and determined whether a supply is exempt from VAT.

New Rules

Amendments to the VAT Act introduced two new items to broaden the list of transactions not included in the taxable turnover.

The first item states that taxable turnover does not include sales of services to businesses that neither have a permanent address in Iceland nor do business in Iceland from a permanent establishment. However, certain services to businesses outside Iceland are excluded from being treated in this way and remain taxable in Iceland. Some of those services are:

• Renting out real estate in Iceland when the landlord has been authorized to register in the VAT register freely;

• Services that concern real estate, including their collateral or structures in this country; this includes intermediation services for sale, lease, and other types of use or rights over real estate or structures, as well as services of experts and others related to operation, design, construction, maintenance, renovation, and demolition;

• Rental of hotel and guest rooms and rental of campsites in Iceland regardless of the length of the rental period, as well as other accommodation services in Iceland when rented for less than one month;

• Telecommunication services and radio or television services are used in Iceland.

The second item stipulates that taxable turnover does not include sales of the services to individuals with no domicile, legal domicile, or permanent residence or who do not usually stay in Iceland since the actual use of the service occurs outside of Iceland. These services to individuals include:

• Services provided electronically, i.e., services provided online, automatically with minimal intervention where the use of information technology is a necessary element in the provision of the service;

• Telecommunications services include the service, transmission, transmission or reception of messages, words, images, sound, or other information via wire, radio, light signals, or other types of electromagnetic systems, as well as telecommunications services that also include services from the parties that provide access to the services mentioned above as well as access to electronic communications networks and their interconnection;

• Radio and television services, i.e., services that consist of sound or video and are communicated to the public via communication media in real-time according to a specific program under the editorial responsibility of the relevant media;

• Transfer of copyright, proper to patent, trademark, and design, as well as transfer of other similar rights.

Conclusion

With these new rules, the destination principle will now be the main rule for cross-border service sales to non-resident businesses. This means that, except for exempt services, the VAT will be levied in the country where the receiving business is located.

Contrary to this,  services relating to real estate, including their collateral, structures, or movable assets in Iceland, are always considered taxable.

Source: Icelandic Parliament, Value Added Tax Act