Taxation
The Faroese tax system includes personal income taxes, value added tax and special taxes and excise duties on various goods and services.
All individuals who are residing or staying for at least 180 days in any 12 month period in the Faroe Islands must pay tax on all income derived in the Faroe Islands and abroad.
Individuals who work temporarily in the Faroe Islands for less than 180 days per year pay tax only on income derived in the Faroe Islands.
The total tax rate for individuals staying less than 180 days per year in the Faroe Islands is 42 per cent.
Personal income is collected on wages, interest, gifts and inheritance.
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.
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TAX SYSTEM |
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Personal income tax is paid to the government, the municipality and the church. All individuals who have a Faroese ID-number are automatically registered in the Faroese tax system. All wages from Faroese employers are 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. Individuals who only have wages from Faroese employers receive a preliminary income assessment once a year. If any information is incorrect or missing, they will have to submit a tax return. Self-employed individuals are liable to keep accounts and are required to submit a tax return along with their accounts. Rental income from real estate property in the Faroe Islands or abroad has to be registered as business income. The total government and municipal tax paid on regular taxable income cannot exceed 50 percent. |
The government tax rate is set according to a progressive tax system. A person earning between DKK 330,000 and DKK 800,000 pays DKK 44,500 of the first DK 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 6,500 (2016).
Municipal tax rates are determined each year by each municipality. The rates vary from 16 to 23.25 percent (2016). On average, the municipal tax is 20.67 per cent of the income.
No municipal tax is paid on the first DKK 30,000 earned.
A deduction in the municipal tax is made for each child under the age of 18. The deduction is determined by the municipalities and varies between between DKK 3,000 and DKK 10,000 (2016).
Church tax is levied at a rate of 0.6% to 0.9% of regular taxable income. Church tax is payable by members of the National Evangelical Lutheran Church.
Individuals residing 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 lives.
The subsidy is 35 percent of the interest. Subsidy for loans for private housing can be granted for interest up to DKK 110,000 (2016).
Interest subsidy is paid out once a month.
An allowance can be granted for travelling by road or sea between the home and the place of work in the Faroe Islands.
In order to qualify for mileage allowance the applicant must have a distance of more than 20 km, round-trip, between home and place of work.
Second home allowance may be granted to married individuals who, for work-related reasons, have two homes.
The monthly allowance for renting a second home is DKK 488 and the daily allowance for additional board expenses is DKK 20.50 per day.
Individuals who pay child support for children under the age of 18 are entitled to a subsidy of 40 per cent of the amount exceeding the normal support 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.
Resident individuals are required to pay contributions to various funds. The contributions are withheld by the bank together with the income taxes.
Resident individuals, between the age of 16 and 67, 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 temporary work permits can seek exemption from contributing to ALS.
Resident individuals, between the age of 16 and 67, 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 under the age of 67 liable to pay tax in the Faroe Islands have to contribute to the Supplementary Labour Market Pension Fund (AMEG). The contribution is 2.25 per cent of the taxable income.
All residents over the age of 18 have to pay a monthly contribution to the public health insurance fund. The contribution is a fixed amount of DKK 175 and 0.6 percent of the taxable income.
All residents aged 24 and over are liable to pay broadcast license. Individuals between the age of 24 and 66 pay DKK 150 per month. Individuals aged 67 and over 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 on sales and is levied whenever a sale of goods and services occurs throughout the distribution chain. VAT is also levied 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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