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New Iceland. Ur doin’ it wrong.

One of the fallouts of the meltdown here in Iceland an increase in all sorts of taxes. This was predictable enough and is, obviously, a way for the state to compensate for loss of revenues and the growing national debt.

The new tax law was pushed through parliament in a big rush just before Christmas. One of its implications is that those who run small private limited companies – like YT – face pretty hefty tax increases, over and above the regular income tax increase. Basically it means that the tax paid on the company’s revenues increases from32% to around 50%.

It should be noted that the abovementioned increase almost exclusively affects the little man – i.e. those companies who have only one permanent employee. As a result, many of us who are in this position are rushing to alter the legal form of our companies before the changes take effect.

Most of us had no idea of this change until it hit the news over the holidays, and now we have three days before the end of the year to respond. Consequently YT has spent a fair amount of time on the blower, trying to access various types of information.

I’ll spare you the details of the unbelievably boorish reception I received from the legal advisor at the District Commissioner’s Office – the first port of call for new registrations. Suffice it to say that the woman went out of her way to make things difficult, in addition to being just plain rude. The epitome of the frustrated bureaucrat.

After about 30 minutes on the phone in total I had managed to extract from her only about 1% of the information I needed, so I moved on to the next port of call – the Company Registrations department of the National Tax Office. There I got excellent service – got all the information I needed literally within three and a half minutes. [I swear the staff of the tax office was sent on a public relations course a few years back – they used to be the Crusty Dinosaurs of the Icelandic public administration system but that changed virtually overnight and they are now, as a rule, amazingly accommodating and helpful. The Crusty Dinosaur title has clearly been assumed by the District Commissioner of Reykjavík. But I digress.]

One of the bits of info that the Crusty Dinosaur lawyer was not willing to provide [I say “willing” because it transpired during the conversation that she actually knew a lot more than she was choosing to share] was that the fee for registering a new company will likely go up by around 50% in a few days’ time – i.e. in the new year. Fifty fricking percent! The fee is hefty enough already, particularly for those of us who work solo and whose operations are pretty limited in the whole scheme of things – right now, it costs ISK 88,000 to register a new PLC plus all the supplementary fees you pay for registration, etc. etc. — so probably around ISK 100,000. At today’s exchange rate, that’s USD 800 / EUR 550. A 50% increase is … well, you do the math. The fee for a SF company is a little bit lower, or around ISK 62,000 with everything, and will also likely go up by 50% in the new year.

To me, this kind of strategy kind of defies logic when you’re trying to rebuild an economy. First, by increasing taxes on small companies that are way out of proportion to other increases, and second, by making it more difficult than before for people to establish new companies. Here I thought New Iceland was supposed to be about fostering innovation and nurturing seed companies – but, alas, it seems to be more about letting the Big Fish get off scot free and playing musical chairs with many of the main players in the collapse.

We all expected tax increases and most of us were prepared to take the hit – but it seems to me that this new government, which started out with such promise, is making a lot of ill-informed and illogical decisions. I don’t manage to write about most of what’s going on [for that I would probably need a staff of about 50], but suffice it to say that in a lot of ways they seem to be fumbling around in the dark, which is very disheartening. I definitely prefer them to the Independence Party and all their ilk and I am firmly in favour of a left-of-centre government, but in my view they need to become a bit more adept at walking those fine lines, including the one between raising taxes and stifling entrepreneurship.

IT’S BEAUTIFUL AND SNOWY
And very cold. Right now it’s -4C and windy [windchill alert!] which would make it 25°F. The sun came up at 11.22 and will set at 3.37.

Comments

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  • Michael Schulz December 29, 2009, 2:34 pm

    Dear, its the old saga and not about left or right. Its about disingenuous politicians. They think and act in traditional linear fashions … taxes and fees … as opposed to non-linear. The only way towards change is the latter in form of creative deconstruction. Oooops, I forgot they are politicians and creativity aint their trade.
    Cheers,
    Michael

  • Michael Schulz December 29, 2009, 2:38 pm

    Re-submitting as I had used wrong email address.
    Dear, its the old saga and not about left or right. Its about disingenuous politicians. They think and act in traditional linear fashions … taxes and fees … as opposed to non-linear. The only way towards change is the latter in form of creative deconstruction. Oooops, I forgot they are politicians and creativity aint their trade.
    Cheers,
    Michael

  • Sigga December 29, 2009, 3:11 pm

    As an sf you would then be in the 23,5% bracket – which depending on the total nett income would mean that you will be paying less tax than the average wage earner. I am sorry if I am not feeling your pain. Some of us just work for a living.

    I do agree though that the way that this is being carried out is a bit unsystematic, however, dodging taxes seems to be a forté of the Icelandic community in general – not really mattering where you are in the system as usual the PAYE wage earner is the only one who is always able to pay and will end up paying. So I figure that there will be a way to make this come to your benefit – afterall the establishment of a company goes on the expense side of the P&L.

    As for the people working for the tax man – you are so right they have been in my experience an absolute pleasure – which is so different to anything else that I have encountered anywhere in the world and deserve all you praise!

  • alda December 29, 2009, 3:16 pm

    Sigga – 23.5% is just the beginning. Most of us “einyrkjar” take the revenues out of the company as we go – we don’t make enough profit to stash it for the entire year and then pay dividends the following year. Which means we pay 23.5% plus the now 15% capital gains tax as we go along – a total of 38.5%. We also pay tryggingagjald – 5-6%.

    Incidentally, this is after we have paid ourselves wages, of which we pay regular income tax.

    I hardly think wanting to pay around 43% tax as opposed to 55% constitutes a tax dodge.

    We all work for a living.

  • Laurence December 29, 2009, 5:40 pm

    Alda,

    I had been considering forming a new company here in Iceland, but have been waiting to see how the policies and the economy pan out. Each new tiding from this current government appears to constrict development of any sort. I can see that not only would I be paying around 50% corporate tax, I would be paying something to the tune of 40-45% on any salary drawn from the company. What’s left to earn?

    Additionally, any earnings in foreign currency would have to be converted to ISK at the current rate of exchange immediately – and to top it all off who knows which bank is a safe bet anyway?

    Honestly, I cannot see how investing in Iceland could be interesting for any small or medium-sized company given the current conditions. It’s very difficult to live on potential alone…

    Laurence

  • Alva December 29, 2009, 6:20 pm

    It all comes down to “it all depends on whose ox is being gored.”

  • Sari December 29, 2009, 7:53 pm

    I’m glad – well, as glad as one can be, considering the topic – that you wrote about this, I couldn’t agree with you more.

    I believe that more and more people work independently/for themselves these days. It is both a trend and reality in a country that many have had to figure out new ways to make a living.

    To block their possibilities and/or encourage operating “black” seems backwards and silly.

    Anyway, thanks for a very good blog and happy new year, nevertheless!

  • James December 29, 2009, 8:19 pm

    Those new costs and tax rates look extremely unfriendly. If they’re indicative of the current government’s attitude towards small business, then I guess it’s time for entrepreneurs to give up and become civil servants.

    Is there a status of self-employed in Iceland? That simple option works well for many sole traders in the UK. You lose some tax benefits (eg no company dividends) and the limited liability, but can gain other benefits (eg no employer NI, broader expense claims) and can mitigate the risks (eg professional indemity and public liability insurance). Swings and roundabouts.

  • Alexander E. December 29, 2009, 8:19 pm

    Latest weather reports .

    PS. I love this “new” government 😉

  • alda December 29, 2009, 11:03 pm

    James – there is a status of self-employed here in Iceland, but I’m not sure if it’s exactly as you describe. I worked like that for many years, but the expense claims were limited and it generally was not as advantageous as having a plc. However, the rate of taxation is similar.

  • BRADSTREET December 29, 2009, 11:45 pm

    I can see your problem. Whilst the Left have some of the correct instincts, they have a problem with letting people use their own money. It often seems a case of “Look, you ought to realise that we can look after your money much better than you can. You’re just going to waste it, whilst we can spend it on the correct things.” Unfortunately, after the recent bog-up with the economy, people have been shown that the people who run things are simply Other People.
    In the UK, Gordon Brown has used our money to prop up the banks, and is going to ask us to pay more tax to prop up the goverment. I don’t mind paying for my own mistakes, but I’ll be damned if I’ll pay for the mistakes of somebody else!

  • JoeInVegas December 30, 2009, 12:23 am

    Politicians are the same everywhere, here they are looking for more ways to raise taxes rather than ways to reduce expense. Economy not picking up, why not gore it some more?

  • MishaBear December 30, 2009, 5:59 am

    Alda, thanks for this article, it is very detailed , useful, and writes about things that is difficult to understand from other online websites focusing on Iceland.

    We are two young web developers/mobile phone developers that are planning to move to Iceland from an EU country. I know it may sound like a crazy move, but we love Iceland so much for a lot of different reasons. This said, the tax increases seem something we need to take into account seriously before doing the move. We had a lot of help from rsk.is, but we are still trying to figure things out.

    Anyhow, I do not understand one thing in your post; leaving aside limited liability, which in some cases is not an immediate necessity for a low risk business, what are the advantages of working in a PLC as the only owner/employee vs working as a freelancer, as you did in the past?

    Starting up as freelancers, isn’t taxation limited to social security contributions and the personal income tax?

    If you could expand a bit on the matter I would be immensely grateful. Also keep us posted about what you decided to do in the light of these new taxes!

  • Finnguy December 30, 2009, 8:37 am

    Somehow these two visions appeared upon me:

    1. There will be tremendous expansion of black market.
    2. Media will not touch issue until it’s smell is undeniable to everyone.

  • SLM December 31, 2009, 12:20 pm

    For MishaBear; I don’t know the detailed differences between plc and self employed, but here some details about being a self employed. I chose to be self employed due to the costs in the beginning and simplier book keeping system; I didn’t want to hire an accountant. As a self employed I work with my own kennitala. This year I paid taxes as much (a bit less than 40 % – personal tax discount) as a normal wage earner. Before I pay this state tax I also pay my own pension (all together 12 % of what I earn*) and insurance fee (9 % of what I earn*).

    As a journalist my business is VAT-free, so I don’t know how PLC and being self employed differ from each other regarding the VAT system.

    Hopefully this helped you a bit 🙂

    Farsaelt komandi ár!

    *) It’s a bit complicated to explain here how the insurance fee (9 %) and the different pension fees (8 % + 4 %) are being calculated (too much excel-stuff), but when I say I pay them from what comes in it gives an idea. (My other costs are pretty small so basically my turnover is my salary.)

  • SLM December 31, 2009, 12:27 pm

    Ups, insurance fee in 2009 was 7 %, not 9 % like I first said. But next year it seems to be 8,65 %, I just recived e-mail from RSK. Yippee 😀

  • MishaBear December 31, 2009, 7:35 pm

    SLM, you helped a lot. It is the first time I get direct experience information like this, and it is relieving to know that it is more or less as I had figured it out. Being software developers and internet journalists for some gaming websites, we will be almost exactly in your situation (other costs will be small for us as well), so your case applies perfectly to us.

    Being a foreigner, I will likely need the help of an accountant at least at the very beginning (rsk.is has good info, but some documents are still only in Icelandic), to understand how to do things by ourselves later. But believe me, overall there is no comparison with the nightmare that self-employement has always been in Italy.

    Thanks again, you cannot imagine how helpful you were 😉

    Oh, and happy new year also to you, to Alda, and all people in Iceland! We hope to be there with you next year!

  • alda January 1, 2010, 10:39 pm

    MishaBear – looks like SLM answered some of your questions at least, which is good.

    Regarding your PLC question — I’ll try to explain in a few words. Originally I worked as a self-employed freelancer, i.e. used my own “kennitala” (social insurance number), whichwas s perfectly fine. However, at some point in the last few years, taxes were lowered on corporations/businesses, so it became advantageous to establish a company.

    Let’s say I earned 100,000 krónur. As a freelancer, I paid regular income tax of that entire sum. However, as a plc. I perhaps paid myself 70,000 kr. as a salary, and the remaining 30,000 was revenue for the company, which was taxed at a lower rate. HOWEVER, at the end of the day it didn’t make that much of a difference, because in any case I had to pay capital gains tax on the dividends paid from the revenues of the company, which came pretty close to income tax levels — but not quite. (That capital gains tax has now been raised from 10 to 18% so it’s even less advantageous.)

    So the tax incentive was part of it — the other part was simply that, as a company, I had more options open for tax write-offs. Part of it was also psychological – it was a lot more professional towards clients to work as a company than as an individual.

    The advisor I consulted at the time suggested PLC, but in fact I could just as easily have established an LP (limited partnership) — which would have been a lot better for me now, since the new laws do not affect LPs. However, I could not have known that then.

    As for your final question, I debated whether to just go back to working as a self-employed freelancer, or to establish the LP. I decided to establish the LP and did so the day before yesterday.

    Hope that helps. Good luck with your move — and I think you’re right to just start off as a freelancer with your own social insurance number. You can always establish a company later, if you think that would work better for you.

  • James January 2, 2010, 9:42 am

    A small point… Everyone talks about PLCs in this article but, in the UK, Public Limited Companies have publicly-available shares. LTDs (Limited Companies) are the normal small businesses in UK that don’t have publicly-available shares; they convert to PLCs when they want to offer shares to the public.

  • MishaBear January 3, 2010, 8:22 am

    Alda, thanks a lot for your help! I was thinking about tax write-offs, and I agree that running your business under a company name is much better. But in these times, if you are starting up, better to start as simple as possible, unless you have decent funds to invest. And this said, working as a freelancer in Iceland is 10 times easier than in Italy, believe me.

    James, maybe inappropriately, I was referring to Private Limited Companies in Iceland, which should correspond to UK’s LTDs.