Iceland’s 2027 Budget proposes higher financial institution taxes, VAT increases, new tourism charges, and adjustments to tax indexation and vehicle kilometre fees, with measures aimed at broadening the tax base and supporting a return to an ISK 4.7 billion Budget surplus in 2027.
Iceland’s Ministry of Finance presented the 2027 Budget proposal on 7 September 2026, proposing higher taxes and fees, reduced tax incentives, and adjustments to existing charges to raise government revenue.
The proposed tax and revenue measures represent a deliberate strategy to shift Iceland’s public finances from a deficit of ISK 28.1 billion in 2026 to a surplus of ISK 4.7 billion in 2027. These targeted measures are expected to generate ISK 34.1 billion in additional revenue.
The primary focus of these reforms is to broaden the tax base, curb tax expenditures (exemptions), and adapt the tax structure to structural economic changes, including the tourism boom, the domestic energy transition, and shifting productivity trends.
Increase in the financial institution tax
The tax rate on deposit-taking financial institutions is proposed to increase from 0.145% to 0.254%, while retaining the ISK 50 billion exemption threshold. The measure is expected to generate an additional ISK 6.0 billion in Treasury revenue, although the new rate would remain below the 0.376% rate applied from 2014 to 2020.
VAT adjustments
The government proposes reducing two VAT-related tax subsidies to create a more level tax framework across sectors. VAT on geothermal lagoons, steam baths, and related facilities would increase from 11% to the standard 24% rate. Meanwhile, the VAT refund for residential construction, renovation, and maintenance labour costs would be cut from 35% to 20%.
Tourism-related charge
The government is developing a new charging scheme for state-owned tourist sites, effectively introducing a resource fee for access to Iceland’s natural attractions. The measure aims to ensure tourists contribute to infrastructure maintenance and environmental protection, while also helping to spread tourist activity more evenly across the country.
Extension of the Reykjanes infrastructure charge
This prevention charge on property fire insurance values was established to fund public expenditures protecting local communities and critical utilities on the Reykjanes Peninsula from volcanic and seismic threats. The charge has been extended through the end of 2027.
Other revenue proposals
- Minor incidental income & business deductions: The government is reviewing rules surrounding minor incidental income and deductions allowed for self-employed individuals and businesses to improve compliance and tighten tax loopholes, which is budgeted to raise ISK 0.5 billion.
- Inflationary fee adjustments: Flat-rate taxes (on alcohol, tobacco, nicotine, carbon, vehicles, and tourism nights) will increase by 5.2% to align with late-2026 inflation forecasts, bringing in ISK 6.5 billion (including indirect VAT effects).
- Kilometre fee: Following the introduction of the kilometre fee system to adapt to the energy transition, the fee will be increased to generate ISK 4.0 billion beyond normal inflation adjustments, keeping transport revenues at roughly 1.7% of GDP. This follows Iceland’s Ministry of Finance and Economic Affairs issuing a legislative proposal on 2 September 2026 to amend the Vehicle Kilometre Tax Act (Law No. 100/2025), which has been in force since 1 January 2026.
Changes to personal income tax indexation
Iceland plans to revise the productivity factor used to index personal income tax brackets and credits, reducing the long-term assumption from 1% to 0.5% annually. The change follows a review that found productivity per employed person had grown more slowly than productivity per hour, partly because of shorter working hours, which meant tax brackets were adjusted more than intended.
For 2027, a temporary 0% productivity factor will apply to correct previous over-adjustments. As a result, tax brackets and personal tax credits will increase only in line with the projected 5.2% inflation rate. The temporary measure is expected to generate approximately ISK 3.1 billion in additional Treasury revenue in 2027.
