The Icelandic Government gave final approval to tax reforms and announced that the implementation of the new system will begin January 1st, 2010. Initial tax reforms plans were announced on June 18th 2009, which consisted of restructuring of personal taxes from the current flat-rate to a three tier system, along with increases in capital gains, VAT and tax-free exemptions.

Beginning in 2010 Iceland will replace its lat-rate personal tax rate of 24.1% with a three tiered system. Those earning less than ISK200,000 per month will pay the same 24.1% that they do now. Earnings between ISK200,001 and ISK650,000 will attract a rate of 27%. Salaries above ISK650,001 will attract levies of 33%. The additional local government tax of 13% will remain the same.

The Icelandic tax-free limit will also be raised, from ISK113,000 to ISK119,000. Value Added Tax (VAT) will be raised by 0.50%, from 24.5% to 25%. VAT on food items will remains at its current rate of7%, but a new taxation level of 14%, dubbed the “sugar tax” will be instated for candy and sugar based beverages. Capital gains tax will be raised by 3%, to 18%. Couples with assets valued at above ISK120 million and individuals with over ISK90 million in assets, will see a 1.25% special asset tax applied to them.