The Faroese tax system is based around a set of direct and indirect taxes.
The tax system includes personal income taxes, value added taxes, customs and excise duties on various goods and services.
Taxes are also claimed on pension and capital gain.
All individuals residing in the Faroe Islands or working here for more than 180 days in a 12 month period are liable to pay taxes on all income in the Faroe Islands. The amount to be paid depends on income and municipality.
Taxes are collected on for example wages, interest, gifts and inheritance.
All individuals who have a Faroese ID number are automatically registered in the Faroese tax system.
Wages from a Faroese employer in the Faroes go through an automatix tax withholding system before they are paid out to a bank account.
Each tax payment is based on the income up to the date of the latest wage payment converted into annual income.
Income taxes are divided into national tax, local tax and in many cases also a church tax.
- National tax
The national tax is progressive, meaning that the higher the income is, the higher amount of tax has to be paid.
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
Local tax is paid to the municipality. The local tax rate is flat, meaning that everyone pays the same percentage, irrespective of how much they earn. Each municipality sets its own tax rate which varies from 16 to 23 per cent.
A deduction in the local tax is made for each child under the age of 18. Each municipality sets its own deduction rate which varies between DKK 4,500 and 10,000.
Members of the national church, the Evangelical Lutheran Church tax, pay a church tax. The church tax rate varies between 0.6% and 0.9% of the income exceeding DKK 30,000 depending on the municipality.
Individuals who are self-employed or have an employer who is not based in the Faroes will not receive their income through the automatic tax withholding system. They will have to make a preliminary income assessment at the beginning of the year. Based on this information they will receive tax bills once a month.
All individuals with full tax liability in the Faroe Islands will receive a tax statement every year. If the completed tax sheet is incorrect, the tax payer has to file a tax return.
Taxes deducted from the 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.
Individuals staying in the Faroe Islands for 180 days or less, and without registering a permanent address, are liable to limited tax payment only.
Individuals with limited tax liability pay a fixed tax rate at 42% and are not entitled to child tax credit or interest subsidy.
Individuals with limited tax liability must apply for a temporary ID-number.
If a person with full tax liability in the Faroe Islands has income or business activity in another Nordic country that is taxable both in the Faroe Islands and in the other Nordic country, the Faroe Islands will avoid double taxation in accordance with the provisions of the tax treaty.
In addition to the Nordic tax treaty, the Faroe Islands also have double taxation treaties with Greenland, UK, Switzerland, India, Bermuda, and Cayman Islands
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 persons 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 by law to save a portion of their salary in a pension scheme. Beginning in 2014 the required pension saving increases by 1% each year. Academic employees already pay 15% or more of their salary to a pension scheme set up by their trade union.
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.
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.
Customs are paid on most goods and services that are imported. 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.