Iceland lifted its capital controls in 2017, charges no VAT on services exported to a foreign buyer, and lets a foreign company contract directly with a self-employed person. What makes it different is cost and structure: the contractor pays tax, 6.35% tryggingagjald and at least 15.5% pension on a calculated remuneration (reiknað endurgjald), a salary they set for themselves that normally may not fall below Skatturinn’s floor, ISK 1,440,000 a month in 2026 for a specialist working alone (skatturinn.is, checked 2026-09-29). Contractor rates follow from that.
Self-employed individual or ehf.
| Form | Registration | Company-level tax | What the owner pays on their own work |
|---|---|---|---|
| Self-employed individual (einstaklingur í rekstri) | Skatturinn, on form RSK 5.02, on the person’s own kennitala | None; the business is the person | Calculated remuneration, taxed monthly as wages |
| Private limited company (ehf.) | Company register at Skatturinn; ISK 500,000 share capital paid in at founding | 20% corporate tax; 22% on dividends | Calculated remuneration if the owner controls the company |
Sources: registration from skatturinn.is and skatturinn.is (checked 2026-09-29); tax rates from PwC Tax Summaries (corporate, individual, reviewed 2026-06-22).
A sole trader on their own kennitala is the usual form for a developer or designer with one or a few clients. An ehf. suits someone who hires others or wants to keep profit in the company, but it does not escape calculated remuneration: the rule covers sole proprietors, partners and controlling shareholders alike. For you, an ehf. means a contract company to company.
Income tax, tryggingagjald and pension
Calculated remuneration. Anyone running their own business must set a salary for themselves at what an unrelated employer would pay for the same work, and not below Skatturinn’s annual guideline for their occupation unless a lower figure can be documented. Category A covers specialists, including computer specialists: ISK 1,440,000 a month for one working alone, ISK 1,199,000 in the first year of business (skatturinn.is, checked 2026-09-29). This figure is taxed as Category A income, like wages (PwC Tax Summaries, reviewed 2026-06-22).
Income tax. Withholding on it is paid every month at the 2026 rates, municipal tax included: 31.49% up to ISK 498,122, 37.99% up to ISK 1,398,450 and 46.29% above. The personal tax credit is ISK 72,492 a month (skatturinn.is, checked 2026-09-29).
Tryggingagjald. The social security tax is 6.35% in 2026: 4.90% general contribution, 1.35% unemployment insurance, 0.05% wage guarantee fund and 0.05% market fee. Employers pay it on wages, and the self-employed pay it on their calculated remuneration (skatturinn.is, checked 2026-09-29).
Pension. Contributing to a pension fund is compulsory. The minimum is 15.5% of remuneration, 4% as the employee share and 11.5% as the employer share, and a self-employed person pays both. Up to 4% more can go to a supplementary private fund (PwC Tax Summaries, reviewed 2026-06-22).
VAT. Registration is required once taxable sales pass ISK 2,000,000 in twelve months; the standard rate is 24%. Services sold to a buyer with no domicile or venue of operations in Iceland, and wholly used abroad, are zero-rated (skatturinn.is, checked 2026-09-29).
Requalification risk
Iceland has no statutory test that a label can satisfy. The Icelandic Confederation of Labour’s labour-law guide defines a services contract (verksamningur) as one where the contractor undertakes a specific piece of work for payment, and an employment contract as work under the employer’s direction and responsibility. It adds that parties cannot contract out of the law or collective agreements just by calling their contract a services contract; the substance decides. The factors weighed include how the work is bounded in time, whether it is separate from the client’s ordinary business, facilities, tools and materials, responsibility and risk, payment method, absences and leave, personal performance, independence, who directs the work, and working hours (vinnurettur.asi.is, checked 2026-09-29).
What is at stake is what employees get and contractors do not: collective-agreement minimum pay, paid leave, sick pay, accident insurance and notice. A foreign client found to be an employer also has to consider whether that work creates a permanent establishment. See contractor misclassification.
Project-scoped work for several clients, on the contractor’s own schedule and equipment, is low-risk. A monthly retainer for one client, set hours and your tools are where it concentrates.
Contract and IP
- A written services contract with the contractor’s kennitala (or the ehf.’s), the scope, the rate and its currency, and payment terms. The króna floats, so the currency clause decides who carries the exchange risk.
- A statement of who the buyer is and where the services are used, which supports the contractor’s 0% VAT invoice.
- Independence markers: the contractor’s own schedule, tools and right to serve other clients; deliverables rather than hours.
- IP assignment in writing. Under Article 42b of the Copyright Act, an employer acquires copyright in computer programs written under an employment contract; nothing equivalent covers contractors. An author may assign copyright wholly or partly (Article 27), but unless expressly agreed the assignee may not alter the work, nor assign it onward without the author’s consent (Article 28; English translation as amended to 2010, checked 2026-09-29). Grant the right to modify and to sublicense or transfer explicitly, and cover pre-existing code.
Taxes and paperwork on the client’s side
A foreign client pays gross and withholds nothing. EU clients account for VAT at home; Iceland is outside the EU VAT system, so there is no VIES check. US payers collect a W-8BEN (W-8BEN-E from an ehf.) and file no 1099: personal service income is sourced where the work is done (irs.gov, checked 2026-09-29). The US–Iceland treaty, signed on 23 October 2007, entered into force on 15 December 2008 (home.treasury.gov, checked 2026-09-29) and taxes independent services as business profits under Article 7; it matters only if the contractor works in the US.
How to pay contractors in Iceland
Payments go to the contractor’s Icelandic account, in euros over SEPA, since Iceland is in the SEPA schemes, or in krónur through a transfer service or platform with a local account. USD by SWIFT works but is converted by the receiving bank if it lands in a króna account. The contractor needs a kennitala to hold an Icelandic account at all. Rails, receiving fees, what breaks and a ranked list of platforms are on our page how to pay contractors in Iceland.
Contractor of Record in Iceland
For a contractor with several clients and scoped projects, a direct services contract is usually enough. A Contractor of Record earns its fee on the other cases: a full-time engagement for one client, or a team whose contracts, kennitala details and invoices have to stay consistent. 4dev acts as Contractor of Record — the contracting party for each contractor — which reduces reclassification risk. Other providers also sign with the contractor as the counterparty; read the liability clause in the COR contract, not the product name. Where the role is a job in substance, hire through an EOR instead. Compare providers in our COR rating.