Before you start trading you must contact the relevant organisations and obtain the relevant trading licenses, permits and insurances.
Expected annual income less than ISK 2,000,000
If you are confident that your revenue will be less than ISK 2,000,000 for the year, it is possible to start trading using your own personal kennitala without informing RSK. You will just need to inform RSK of your income and expense figures in your annual personal tax return.
Expected annual income over ISK 2,000,000
You can start test-trading your business using your personal kennitala, but as soon as you are aware that you will generate over ISK 2,000,000 in the tax year you will have to file a RSK_5.02 form with RSK to register withholding payments for:
2. Payroll register
By registering your business with RSK you are committing to making monthly payroll payments (12 per year) and bi-monthly payments (6 per year) for VAT (technically, you should only have to do one VAT return per year if your revenue is less than ISK 4,000,000). It is important that you make these payments on time, as failure to do so will lead to fines, regardless of whether your business generates any income.
Payroll payments must be made by the 15th of each month and VAT payments are to be made by the the 5th of the following month (1 month plus 5 days). Late payments will incur a daily fine which increases up to 10% on both VAT and Payroll outstandings.
In Iceland there is a presumptive employment income on the self-employed. This means that dependent upon your proposed business activity sector, there are presumed income thresholds comparable to somebody employed in a similar job with similar work experience and qualifications. Your payroll withholding tax will be calculated in accordance with this presumed figure.
For example Category B (9) – A person who is starting a business and who works alone or with one employee. This category includes only those who are self-employed for the first time, and only for one year from the beginning of the activity.
Monthly salary ISK 465,000
Annual salary ISK 5,580,000
When completing the RSK_5.02 form, if the “Estimated monthly remuneration“ amount is less than the expected presumptive payment for your business activity in your relevant sector, then the monthly presumptive payment payroll withholding amount should be adjusted accordingly by RSK. This does have to be approved by RSK as detailed below.
Estimated income tax year
Income lower than the reference amounts
If the Director of Internal Revenue considers that the estimated repayment schedule in the tax year is lower than the minimum reference amount, he shall determine the repayment and withholding thereof in accordance with the rules. The Director of Internal Revenue may only deviate from the minimum according to the guidelines on the basis of written explanations and necessary documentation from the person and / or the employer.
If a person is asked to pay a lower remuneration than the reference amount, information must be provided on the scope and nature of the activity and his or her job, information on other paid employment and, as appropriate, information on the price of his or her employment or employees who work in his or her service. Furthermore, in the case of a person’s business operations, the results of operations in the past year must be accounted for and a projected plan of operations and income in the taxable year, as well as an account of the capital tied up in the operation.
Low calculated remuneration – annual report
If a person’s calculated remuneration is so low according to an approved plan that his or her own cash payments and his / her spouse will not be paid during the year, he can apply to the Director of Internal Revenue to submit “Definition for calculated remuneration” once a year. If the application is approved, the applicant must take care not to use his personal discount against other income.
Calculated remuneration less than ISK 450,000
If an estimated remuneration of operations is less than ISK 450,000 per year, this will be excluded from withholding
There are many advantages to test-trading your business as an Individual company before officially registering your business. It can save you time, effort and money. In order to register your business you need to set up a separate business bank account, pay money into the account (ISK 500,000 for a limited company and ISK 4,000,000 for a public company) register for withholding taxes such as VAT and Payroll which will likely mean that you need to hire an accountant unless you have a very strong understanding of bookkeeping and company formation rules in Iceland. You can test the market, fail quickly / pivot / iterate on your idea to find your core customer base before fully committing to all the time and money cost formalities of business formation. If your business does not succeed, you won´t have to pay to dissolve the business.
You are personally liable for any debts / fines / litigation on the business. This means that your personal assets are at risk if anything goes wrong with the business. There is also a lack of perceived business credibility compared to a limited company. You may also be unable to gain certain types of business insurances or to bid for particular jobs or tenders.