Taxation
The Faroese tax system is based around a set of direct and indirect taxes.
The tax system includes personal income taxes, value added taxes and special taxes and excise duties on various goods and services.
All individuals who are living in the Faroe Islands must pay tax on all personal income.
Personal income is collected on wages, interest, gifts and inheritance. Personal income tax is paid to the state, the municipality and in most cases also to the church.
The total national and local tax paid on regular taxable income cannot exceed 50 percent.
The Faroe Islands have agreements on avoidance of double taxation with the Nordic countries, Greenland, India, Switzerland, Great Britain, Isle of Man, Guernsey and Jersey, Bermuda, Virgin Islands and Cayman Islands.
Limited tax liability applies to persons who work temporarily in the Faroe Islands for less than 180 days in a 12 month period and do not move their permanent address to the Faroe Islands.
Employees with limited tax liability pay a standard tax rate of 42 per cent on all income earned in the Faroe Islands but remain tax liable in their country of residence. Employees with limited tax liability are not entitled to child tax credits or interest subsidy in the Faroe Islands.
Employees with limited tax liability in the Faroe Islands must apply for a temporary Faroese civil registration number in order to receive wages.
Employees who move their permanent residence to the Faroe Islands or work here for more than 180 days in a 12 month period are fully tax liable in the Faroe Islands. Persons with full tax liability pay tax on all income earned in the Faroe Islands and abroad. The tax rate for persons with full tax liability depends on income and municipality of residence.
Tax system
Individuals with full tax liability in the Faroe Islands start to pay taxes on income when they earn more than DKK 30,000 a year.
All individuals who have a Faroese ID number are automatically registered in the Faroese tax system.
All remuneration has to be paid out through a financial institution which withholds taxes and duties for social funds.
Each tax payment is based on the income up to the date of the latest wage payment converted into annual income.
Wage earners who only receive wages from Faroese employers receive a completed tax sheet after each year from the Tax Administration. If the completed tax sheet is incorrect, the tax payer has to file a tax return.
Self-employed persons are obliged to keep accounts and must submit a Tax Return along with their accounts.
Taxes deducted from your income may have been over or underestimated. In these cases the tax payer will receive a payment from the Tax Administration or will be required to pay additional taxes.
National tax is based on a progressive system, meaning that the tax rate rises as the amount subject to taxation rises. No tax is paid on the first DKK 65,000 of the taxable income. A fixed amount and a tax rate increasing from 15 to 30 per cent is paid on the remaining income.
A person earning between DKK 330,000 and DKK 800,000 pays DKK 44,500 of the first DKK 330,000 and 25 percent of the remaining income.
A deduction in the government tax is made for each child under the age of 18. The deduction is DKK 9,200 for children under 7 years and DKK 6,500 for older children.
Local tax is paid to the muunicipality. The local tax rate is not progressive. Each municipality sets its own tax rate which varies from 16 to 22 per cent (2019).
A deduction in the municipal tax is made for each child under the age of 18. The deduction is set by each municipality and varies between between DKK 4,500 and DKK 10,000 (2019).
Church tax is levied at a rate of 0.6% to 0.9% of regular taxable income exceeding DKK 30,000. Church tax is payable by members of the National Evangelical Lutheran Church.
Residents in the Faroe Islands can apply for subsidies for certain types of private expenses.
Subsidies are given for interest on loans for private housing and for education. No subsidy is granted for private consumer loans.
Interest subsidy is only given to loans for houses in the Faroe Islands in which the owner is residing.
The subsidy is 35 percent of the interest. Subsidy for loans for private housing can be granted for interest up to DKK 100,000.
Houseowners with loans from foreign financial institutions must provide TAKS with an interest estimation every year.
A travel subsidy is granted to residents who have to travel at least 20 kilometres between home and work.
Dual household subsidy may be granted to individuals who, for work-related reasons, have two homes in the Faroe Islands. Dual household subsidy is granted to married and persons in a long-term cohabiting relationship residing in the Faroe Islands.
Individuals who pay alimony or child support for more than one child are entitled to a subsidy of 40 per cent. Subsidy for child support is only given for the amount exceeding the pay for one child.
All capital gains income earned by Faroese residents, irrespective of source, is subject to Faroese taxation.
Interest on deposits in Faroese and foreign banks is taxed as capital gains income. Tax on interest on deposits in a Faroese bank is withheld at source by the bank.
Individuals with other capital income than interest from deposits in Faroese banks have to file a capital income tax return.
The tax rate on capital gains income is 35 percent.
Capital gains income from foreign sources may be subject to tax treaty relief.
Contributions to pension plans are taxed at source at 40 percent before the net payment is transferred to the insurance company or bank.
No tax is charged when pensions are paid out.
Pension contributions made before January 1st, 2012, have not been taxed at source and will be subject to tax in the Faroe Islands when paid out.
In addition to taxes all employees with full tax liability have to pay a number of mandatory contributions. These are withheld from the income in the same way as ordinary taxes.
Residents between the age of 16 and 66 working in the Faroe Islands are liable to contribute to the Unemployment Scheme (ALS). The contribution to ALS is 1.25 percent.
Foreign residents with fixed-term employment may apply for becoming exempt from contributing to the unemployment insurance. The exemption may be granted for up to a year at a time.
Residents between the age of 16 and 66 working in the Faroe Islands are liable to contribute to the Parental Leave Fund (BAS). The contribution to BAS is 0.71 percent of the taxable income.
All individuals up to the age of 67 with full tax liability in the Faroe Islands are required to save up for a pension. The minimum pension contribution for 2019 is 5 per cent.
Employees with an employment contract stating that the employment is for a fixed period of time may be granted an exemption from compulsory pension contributions for up to a total of 60 months.
All employees under the age of 67 liable to pay tax in the Faroe Islands have to contribute to the Labour Market Supplemental Pension Fund (AMEG). The contribution is 3 per cent of the taxable income.
All residents over the age of 18 have to pay a monthly contribution to the National Health Insurance. The contribution is a fixed amount of DKK 175 and 0.6 percent of the taxable income.
All residents between 24 and 66 years pay DKK 150 kr. per month to the Faroese Broadcasting Corporation. Residents older than 66 years pay DKK 50 per month.
All cars registered in the Faroe Islands must pay a motor vehicle tax every half-year. The size of the tax depends on usage, weight and power of the vehicle.
Value added tax (VAT) is a consumption tax that is paid on almost all transactions relating to services and goods. VAT is also paid on the import of goods. A standard rate of 25 percent is applied on most goods and services.
Some goods and services are exempt from VAT. Among these are certain cultural activities and sports, personal transportation, financial and insurance transactions and literary, compositional and other artistic activities.
Goods imported to the Faroe Islands may be subject to customs duties. The charge varies with the classification of the goods.
Excise duties are levied on a variety of commodities, including alcoholic beverages, tobacco, tea, coffee, chocolate, confectionery and motor fuel.
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