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Measures in response to COVID19

The Government is taking unprecedented measures in response to COVID-19. The total scope of the measures could amount to more than 200 b.kr., entailing, on the one hand, deferral of paid taxes and other levies and, on the other hand, expenditure increases and tax cuts totalling more than 60 b.kr. In addition, the Treasury will support the economy with reduced tax revenues and increased expenditures as a result of weaker economic conditions. These broad-based measures complement the Central Bank’s decisions to lower interest rates, minimum reserve requirements, and countercyclical capital buffers.

The measures are intended primarily to counteract unemployment and temporary loss of personal income through partial unemployment benefits, access to third-pillar (private) pension savings, deferral of corporate tax payments, and operational loan facilities for companies. When the direct impact of the pandemic has begun to taper off, the authorities will give strong support to the revitalization of the economy with increased public investment intended to promote long-term GDP growth, tax cuts for labour done on-site at various workplaces, and a marketing campaign centring on Iceland as a tourist destination.

The COVID-19 pandemic has adverse economic impact on economies worldwide. We can expect a steep decline in the number of tourists who visit Iceland in coming months. Because of the pandemic, Icelanders go far less often to stores and restaurants, and it has already proven necessary to cancel many scheduled events. Production and manufacturing could contract as well. A large number of companies will suffer a decline in revenues because of this situation, not least in the tourism sector. It is likely than many firms will resort to laying off staff in response to this, but the Government measures aim to protect jobs as much as possible. Therefore, the epidemic profoundly affects the Icelandic economy; however, these effects are expected to reverse once the epidemic has passed, as the economy rests on solid foundations.

The Government measures are very extensive and provide a strong counterweight to the economic impact of the pandemic. They aim primarily to make it easier for households and businesses to withstand the temporary loss of income that they may suffer. In this way, we reduce uncertainty and keep the economy moving, as well as preventing financial hardship to the maximum extent possible. It should not be forgotten that this situation is temporary, and the Government measures will firmly support the economy when the epidemic has passed.

Inflation is currently 2.4%, which is very close to the Central Bank of Iceland’s 2.5% inflation target. As things stand, inflation is not expected to rise significantly in the months to come. One of the Central Bank’s roles is to ensure low and stable inflation, and the Bank is committed to taking action as necessary to ensure that inflation indeed remains low and stable.

Inflation is not expected to rise significantly in coming months; therefore, indexed loans are not expected to rise more than they would during normal times. Interest rates on mortgage loans have been falling and are currently very low in historical context. Interest rates are not expected to rise in the near future.

The Government measures aim at impeding the rise in unemployment as much as possible, but it is foreseeable that conditions in the labour market will be difficult while COVID-19 causes a reduction in the number of tourist arrivals and in economic activity more generally. After the pandemic dies down, there is no reason not to expect the economy to pick up again, and unemployment will then decline once more.

No. This situation is very different from that one. After the banking collapse in 2008, the authorities adopted a broad range of measures to strengthen the foundations of the economy and prevent such a situation from developing again. Debt levels have fallen steeply since then, and the authorities now have much more scope to support the economy during this downturn. The same is true of the banks, which are on a very solid footing. It is unlikely that inflation and loan payments will rise steeply, as they did following the collapse of the banks. It is also unlikely that purchasing power will fall as much as it did then.

It is difficult to say, but based on the information we currently have, it is most likely that the economy will pick up again next year.

The Government is introducing a number of measures for individuals, so as to help them weather this temporary storm, in addition to the measures aimed directly at protecting jobs:

  • Wages during quarantine
  • Partial unemployment benefits
  • Special child benefits
  • Access to third-pillar pension savings (private pension savings)
  • Increased and expanded reimbursement of value-added tax on labour

Wages during quarantine
The authorities, in cooperation with the Icelandic Federation of Labour and the Confederation of Icelandic Employers, have ensured that quarantined individuals will receive pay while they are in quarantine; however, during that time, other rights, such as sick days provided for in wage agreements, do not apply. This applies to the period from 1 February through 30 April 2020, and it applies to those who are unable to work while they are in quarantine. It is assumed that employers will pay wages to their employees and will then apply to the Treasury for reimbursement up to a specified maximum amount. The same applies to self-employed individuals if they have been forced to stop working due to quarantine during the above-mentioned period.

Payments are based on total wages during the calendar month(s) during which the individual is in quarantine. Payments will never exceed ISK 633,000 per month, or ISK 21,100 per day.

Yes. Payments to self-employed individuals in quarantine are based on 80% of their average monthly income in 2019. Payments are subject to a maximum of ISK 633,000 per month, or ISK 21,100 per day. Average income is based on the average of the estimated income used as the payroll tax base in 2019.

Decisions on quarantine are taken by the appropriate authorities, based on the authorisations in the Act on Communicable Diseases. Individuals who voluntarily impose quarantine on themselves are not entitled to payments.

Special supplemental child benefits will be paid out on 1 June 2020, in the amount of ISK 40,000 per child under age 18 if the income tax base of a single parent, or of the higher-paid spouse or domestic partner in the case of married or cohabiting couples, is less than 11.1 m.kr. If the income tax base is higher, the supplemental child benefit payment will be ISK 20,000. These special child benefits will not be considered taxable income.

Because of the difficulties that lie ahead, the authorities want to help companies and employees by providing partial benefits. This will enable companies experiencing operational difficulties to reduce workers’ employment percentage on a temporary basis, thereby maintaining the employment relationship during the most difficult months.

What are partial benefits?

Partial benefits are unemployment benefits for which employees can apply to the Directorate of Labour. (https://www.vinnumalastofnun.is/) if their employer requests that they work reduced hours because of the current economic situation. The employee will then receive partial unemployment benefits to complement the wages from their employer.

When your employment percentage is reduced, at your employer’s request, by at least 20% because of a contraction in the company’s activities. The employee must retain an employment percentage of at least 25% with the employer.

Employees who decide themselves to cut back on their working hours are not entitled to partial benefits.

If the requirements laid down in the Act are satisfied in other respects, the Act also applies to those whose employment percentage was reduced at their employer’s request before the Act entered into force.

Those who cut back to as low as 25% are entitled to partial unemployment benefits to complement the part-time wages they receive from their employer.

Payments to an individual who is cut back from 100% (full-time job) to 50% (half-time) will then be 50% of ISK 456,404, or ISK 228,202, plus a 11.5% matching pension fund contribution.

This is subject to the proviso that the wages from the employer plus the partial unemployment benefits may not exceed a combined ISK 700,000 per month, and shall not exceed 90% of the employee’s average total wages.

Wages lower than ISK 400,000 per month (for full-time work) are not reduced.

Therefore, an individual’s total income cannot increase as a result of cutting back to a lower employment percentage.

Example I: A full-time (100%) employee earns ISK 400,000 per month, but the employer decides to lower the employee’s job percentage by 75% because of operational difficulties. This individual applies for 75% unemployment benefits from the Directorate of Labour, and the employer pays 25% of the employee’s wages. This employee therefore receives ISK 100,000 from the employer and ISK 300,000 from the Directorate of Labour. The employee’s combined wages and unemployment benefits will be equal to the wages they earned before the cutback in working hours; i.e., ISK 400,000 per month.

Example II: A full-time (100%) employee earns ISK 600,000 per month, but the employer decides to lower the employee’s job percentage by 50% because of operational difficulties. This individual applies for 50% unemployment benefits from the Directorate of Labour. This employee therefore receives ISK 300,000 from the employer and ISK 228,000 from the Directorate of Labour. This person’s combined wages and unemployment benefits will therefore equal ISK 528,000 per month, or 84% of their total income.

Example III: A full-time (100%) employee earns ISK 900,000 per month, but the employer decides to lower the employee’s job percentage to 60% because of operational difficulties. This individual applies for 40% unemployment benefits from the Directorate of Labour. This employee therefore receives ISK 540,000 from the employer and ISK 160,000 from the Directorate of Labour. This person’s combined wages and unemployment benefits will therefore equal ISK 700,000 per month, or just under 80% of their total income.

Example IV: A half-time (50%) employee earns ISK 250,000 per month, but the employer decides to lower the employee’s job percentage to 25% because of operational difficulties. This individual applies for 25% unemployment benefits from the Directorate of Labour. This employee therefore receives ISK 125,000 from the employer and ISK 114,000 from the Directorate of Labour. This lowers the person’s total income, but not because benefits are reduced: the individual receives the full 25% of the maximum income-linked unemployment benefits because their wages are below ISK 400,000.

Yes. The same rules apply to part-time workers as regards the calculation of partial unemployment benefits.

Yes, provided that certain conditions are met. Self-employed persons must have reported a considerable contraction in operations and a change in their estimated income to the Directorate of Internal Revenue’s employer register.

Yes. Students who satisfy other requirements under the provision are entitled to partial benefits.

No. Partial unemployment benefits do not reduce accrued rights according to the Unemployment Insurance Act.

The Directorate of Labour is authorised to request data from employers, including further explanation of the contraction in activities — such as a reduction in project load or a contraction in services.

Yes. The measure is temporary and remains in effect until 1 June 2020.

No. The employee must always agree to reduced hours, and that employee will retain all rights under their wage agreement.

No. In cases where an employee’s employment percentage has been reduced at the employer’s request because of a contraction in operations, the claim against the Wage Guarantee Fund will be calculated based on the employee’s wages as they were before the reduction.

Yes. All individuals who own third-pillar pension savings (private pension savings) can withdraw up to ISK 12 million. This is based on the individual’s combined third-pillar pension savings as of 1 April 2020. The third-pillar pension savings are paid out over a 15-month period, beginning at the time the application is received. If the amount to be paid is less than ISK 12 million, the payout period is shortened proportionally.

Each monthly payment can range up to ISK 800,000 and will be taxed as regular income. The pension fund or bank that pays out the funds will withhold income tax from the payments.

The individual submits an application to the pension fund or bank that administers their third-pillar pension fund.

The application deadline is 1 January 2021; therefore, the individual can apply for payouts of pension savings at any time from 1 April 2020 through 31 December 2020.

It does not matter whether older authorisations for third-pillar pension savings withdrawals have been used, or if third-pillar savings have been used to pay down mortgage loans.

Those who own or are building residential property have hitherto received reimbursement of 60% of the VAT paid on the labour for work done on-site (on the property being built, renovated, or maintained). This percentage will now be increased to 100%; i.e., all VAT on this labour will be reimbursed. The authorisation will also be expanded to include vacation property; i.e., summer cottages. Furthermore, it will now cover design and supervision of construction. These expanded authorisations will remain in effect through year-end 2020.

Those who own or rent residential property can receive reimbursement of 100% of the VAT paid on the labour for work done in connection with household assistance or regular care of the home. For example, homeowners and renters can receive reimbursement of VAT for house cleaning, snow shovelling, lawn care and maintenance, etc. This authorisation also applies to registered residents’ associations and covers regular care and maintenance of the common areas of residential property. These authorisations will remain in effect through year-end 2020.

Those who are entitled to reimbursements in connection with work on residential property, household assistance, or regular care and maintenance of the home shall send an electronic application to the Directorate of Internal Revenue. They can do this through their private My Account pages on skattur.is website, using a digital certificate (e-ID) or Ice Key (password). Thereafter, they should send the originals of the invoices for which reimbursement is sought, together with proof that they have been paid, to the Directorate. Applicants who need more information on how to access the My Account pages in question can read more about digital certificates or request to have an Ice Key sent to their online bank or to their legal address.

Deferral, split payments, reduction, or cancellation of taxes and levies

  • Employers can request authorisation to defer up to three payments of pay-as-you-earn (PAYE) tax and payroll tax due and payable from 1 April 2020 through 1 December 2020, upon fulfilment of certain requirements.
  • Authorisation granted for the Minister to cancel or reduce companies’ income tax prepayments.
  • Upon fulfilling certain requirements, those paying property tax can request authorisation to defer up to three payments of commercial property tax due and payable from 1 April 2020 through 1 December 2020.
  • The tax on overnight stays (bed-night tax) will be suspended temporarily from 1 April 2020 through 31 December 2021, and the due date for payments from January through March 2020 will be postponed until February 2022.
  • Customs processing fees for ships and aircraft will be suspended temporarily, through year-end 2021.
  • Payment due dates for import levies for settlement periods beginning in March 2020 for those companies that use a grace period (deferred payments) will be split into two payment due dates, with authorisation for the entry of all input tax for the period concerned.
  • The bank tax reduction previously passed into law, which was to take effect in increments from 2021-2023, will be expedited and will take effect in full in 2021. This will give the banks extra scope to support households and businesses.
  • Reimbursement of VAT on labour for work carried out at a residential construction site will temporarily be increased from 60% to 100%. The authorisation will also extend to vacation property and to design or supervision.

Employers experiencing temporary operational difficulties due to a reduction in revenues are authorised to request deferral of up to three payments of PAYE tax and payroll tax with a payment due date from 1 April 2020 through 1 December 2020.

This entails three requirements, in addition to formal requirements, that must all be satisfied in order for the employer to request a deferral.

1) The employer must have suffered a loss of revenue.

2) The operational difficulties in question must not have originated prior to the beginning of 2020.

3) All public levies must have been paid and required information must have been submitted to the Directorate of Internal Revenue. In addition to the grace periods mentioned above, those suffering a severe loss of revenue can be granted an additional grace period for the payment due on 15 January 2021, so that it is split into instalments due in June, July, and August of that year.

In determining whether a business has suffered a loss of revenue, there must have been a decline in operating revenue of at least one-third over a full month, as compared with the same month in 2019. If the business has been active for less than two years, it is permissible to calculate this as a contraction of one-third in operating revenue as compared with average revenue over the preceding twelve months. The comparison is based on operating revenue; therefore, the impact of irregular income and, as applicable, investment income shall be ignored. It is also assumed that the loss of revenue can be traced to COVID-19; therefore, it is not possible to apply for a deferral if the revenue loss can be traced to unrelated causes.

Operational difficulties are defined in the law in negative terms, so that even if an employer suffers a loss of revenue, that employer is considered not to be in difficulties if:

  • The company has enough equity to obtain credit facilities in the market.
  • The company has enough cash to cover operating expenses when they fall due.

It is assumed that larger, more established companies will have an easier time obtaining financing during the temporary situation currently prevailing. The authorisations for deferral are intended primarily for small and medium-sized companies that have greater difficulty obtaining financing.

The authorisation for deferral only applies to those employers that are considered to be suffering temporary operational difficulties. As such, the measure does not apply to those that were in protracted operational difficulties before the beginning of 2020. In assessing this, consideration is given to whether the employer’s year-end 2019 equity was negative by an amount exceeding paid-in capital, initial capital, or capital contributions from owners.

There are two formal requirements:

  • The employer must not have been in arrears with public levies, taxes, and tax penalties with a final due date at or before the end of 2019. A summary of the company’s debt position vis-à-vis the Treasury can be obtained from the Directorate of Internal Revenue.
  • The employer must have submitted all tax returns and other legally required documents to the Directorate of Internal Revenue. This means that tax returns have been submitted in time for the tax levy not to be based on estimates. Other legally required documents chiefly include the annual report, which must have been submitted to the Directorate with the tax return.

The payment due date and final payment due date for deferred payments will be moved to 15 January 2021, provided that the requirements for deferral have been met.

If a payment is deferred but the requirements have not been met, the payment due date and final payment due date remain unchanged; i.e., the payment due date shall be the 1st day of the next month after the wage period ends, and the final payment due date is 14 days later. Payment received after the final payment due date will be subject to a surcharge in the amount of the Central Bank of Iceland penalty interest rate, from the payment due date until the date payment is made. In addition to the penalty interest surcharge, the PAYE tax base is subject to a 1% surcharge for each day payment is delayed beyond the final payment due date, but not to exceed 10%.

If the payment has been deferred properly and all requirements have been met, the payment due date and the final payment due date are moved to 15 January 2021. Payments delayed beyond that date are subject to a surcharge (described above) that is applied from 15 January 2021 until the date payment is made.

On the Directorate of Internal Revenue website , there will be a link to a page for employers’ applications, declarations that the requirements for temporary operational difficulties have been met, and other communications relating to the deferral.

Those employers who have properly deferred one or more payments may apply for an additional deferral of payments due on 15 January 2021. If the requirements for an additional deferral are met, the payment due on 15 January 2021 will be split into instalments payable in June, July, and August.

An application for an additional deferral shall be filed with the Directorate of Internal Revenue and is subject to the requirement that the employer have suffered a severe loss of revenue for the entire operating year, as compared with the prior operating year. The law does not specify what is meant by a severe loss of revenue; however, it is stated in the comments on the legislation that it generally refers to a contraction in revenue of at least half.

Payment and collection of the tax on overnight stays (bed-night tax) will be suspended from 1 April 2020 through 31 December 2021. Therefore, no tax need be paid on overnight stays during that period.

Payment of tax on overnight stays from 1 January 2020 through 31 March 2020 is deferred. The payment due date for tax on overnight stays during this period is deferred until 5 February 2022.

If an invoice was issued before 1 April 2020 but the overnight stay takes place after that date, the service is nevertheless considered to have been rendered, and delivery of the service is considered to have been performed, on the date the invoice was issued. In such an instance, payment of the tax on overnight stays is not due until 5 February 2022.

Local authorities are authorised to defer payment due dates for property tax for companies that have suffered a severe loss of revenue. The local authorities will set their own rules and criteria for this.

The total impact of these measures equals ISK 13 billion. The reduction in the bank tax in 2021-2023 totals ISK 10.6 billion, and the cancellation of the tax on overnight stays is estimated at ISK 1.6 billion. Finally, it is estimated that the Directorate of Internal Revenue’s revenue from customs processing fees will decline by ISK 600 million in 2020-2021.

The aim of lowering the bank tax is to enable the banks to lower their lending rates to accord with reductions in Central Bank interest rates. The reduction in the bank tax also helps the banks to increase lending when conditions allow.

Banks, savings banks, and government credit funds[1] have made an agreement on arrangements for the deferral of debt collections for firms that suffer temporary payment difficulties because of the pandemic. It is assumed that those companies that satisfy specific requirements concerning the assessment of temporary payment difficulties will be able to defer payments of principal and interest for up to six months. Deferred payments will be added to loan principal, and the term of the loan will be lengthened by the number of deferred payments.

[1] Municipality Credit Iceland Plc, Housing and Construction Agency (HMS), ÍL Fund, New Business Venture Fund, and Regional Development Fund.

The authorities will issue guarantees for up to 50% of new operating loans to companies fulfilling certain conditions. The Treasury’s total exposure to risk from these loans could range up to ISK 35 billion.

Deciding which companies can receive guaranteed loans will be in the hands of credit institutions. The loans will have to meet certain requirements, however, and must be used for operating companies.

The conditions for a Treasury guarantee include the following:

  • Guarantees apply only to new loans granted to companies that have suffered at least a 40% year-on-year loss of revenue as a result of the COVID-19 pandemic.
  • Guaranteed loans may range up to a maximum of two times the company’s annual wage expense for the prior year.
  • Loans shall be limited to companies whose wage expense accounted for at least 25% of their total expense in 2019.
  • It will be permissible to restrict the use of the loans so that the proceeds can only be used, for instance, to pay wages, purchase operational inputs, and pay rent.

Treasury-guaranteed loans come in addition to the Central Bank’s interest rate cut and other measures that make it easier for the banks to continue lending to households and businesses, including the reduction in the countercyclical capital buffer and in minimum reserve requirements.

Charitable organisations, sports organisations, and rescue squads

Charitable organisations, sport organisations, rescue squads, the Icelandic Association for Search and Rescue (ICE-SAR), accident prevention associations, and individual units operating under the banner of ICE-SAR can apply for reimbursement of 100% of the VAT they pay from 1 March 2020 through 31 December 2020 on-site for construction, maintenance, or renovation of buildings and structures wholly owned by these organisations, subject to certain conditions.

VAT on the purchase of design or supervision of construction is also included. For instance, if an athletic organisation decides to engage an architect and/or engineer to design a building, the VAT on such service also qualifies for reimbursement.

Various conditions must be met in order for reimbursement to be authorised. For instance, the applicant must be registered in the Directorate of Revenue’s Enterprise Register, it may not be partly or wholly owned by public entities, and it may not be in arrears with payments of public levies or deducted pension contributions. Further conditions for reimbursement can also be found in the Act on Value-Added Tax.

When the temporary shock caused by COVID-19 passes, the economy will pick up again, as the Government’s measures are focused on keeping viable companies in operation. Furthermore, the foundations of the economy are strong. In order to enhance resilience, the Government intends to take special measures to support the tourism industry and to bolster public investment, which will help the economy in both the short term and the long term.

Currently in preparation is a harmonised promotion and advertising campaign for 2020-2021, outlining responses to the adverse effects of the pandemic on Iceland’s tourism sector. It will be rolled out when conditions allow and when travel can be expected to resume.

A marketing campaign encouraging Icelanders to travel within the country will begin in coming months, with the aim of supporting domestic tourism.

The Government has placed strong emphasis on investment and on strengthening societal infrastructure. Plans have now been expanded, with an expedited investment initiative. Special consideration is given to projects that can be expedited and to other profitable projects that can create a variety of jobs at short notice. The investments are in areas such as road construction and maintenance, real estate, and information technology. Furthermore, contributions to various scientific and innovation funds will be increased. The scope of the initiative is 20 bn.isk  (15 bia.ISK) financed by the Treasury and (5 bn.isk.) public companies 


Currently in preparation is another initiative that will take over in 2021-2023, involving large-scale investment requiring more planning and preparation.

Increased investment creates jobs and stimulates demand. In addition, investment boosts productivity, thereby contributing to long-term GDP growth.

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