Iceland’s Ministry of Finance and Economic Affairs has proposed amendments to the vehicle kilometre tax regime that would introduce new exemptions, allow corrections to inaccurate assessments, and clarify business deductibility. The changes would also provide greater flexibility for odometer reporting and vehicle inspections, with the amendments proposed to take effect on 1 January 2027.
Iceland’s Ministry of Finance and Economic Affairs issued a legislative proposal on 2 September 2026 to amend the existing law on the vehicle kilometre tax (Law no. 100/2025), which has been in effect since 1 January 2026. A public consultation has been initiated regarding the proposal, which ends on 16 September 2026.
The original tax system was introduced to offset declining state revenues caused by the shift toward electric vehicles and energy transitions. Based on the initial operational experience from the first few months, this new amending bill aims to strengthen the legal framework, improve tax administration, and refine specific exemptions.
The proposal would introduce exemptions for off-road vehicles, make the tax deductible as a business expense, and allow tax authorities to correct inaccurate assessments. It would also simplify administration by permitting more frequent odometer readings and ensuring previous owners’ unpaid fees do not block vehicle inspections.
Key proposed amendments
- Off-road vehicles gain statutory exemption: Vehicles operating exclusively off-road now receive clear exemption from the kilometre tax. Mining equipment, tracked machinery used solely in enclosed worksites, and airport vehicles restricted to premises fall outside the tax obligation. The amendments provide explicit statutory language for these categories.
- Assessment corrections and business deductibility: The Director of Internal Revenue gains explicit authority to reduce assessed kilometre tax when calculations rest on incorrect assumptions and produce overcharges. The amendments clarify that kilometre tax qualifies as a deductible operating expense for income tax purposes under Law no. 90/2003, allowing businesses to offset the cost against taxable income.
- VAT treatment and search and rescue rules: Kilometre tax charges—including daily charges and fixed rates—do not form part of the taxable base for Value Added Tax under Article 26 of the law. Search and rescue organisations will operate under more defined statutory criteria governing their existing exemptions.
- Provisions under further examination: The Ministry continues evaluating whether light motorcycles warrant complete exemption and is reviewing whether extended payment deadlines and coordinated due dates would benefit tax administration. Longer timelines could give authorities additional opportunity to correct odometer reading errors before issuing provisional bills.
Additional proposed changes in the bill
The official legislative document also outlines several other important changes aimed at enhancing administrative flexibility and fairness:
- More flexible odometer updates: Taxpayers will no longer have to wait 30 days between odometer readings. A new reading can be submitted sooner if needed.
- Exemption for vehicles abroad: Vehicles that were outside the country when the kilometre tax took effect on 1 January 2026 and have remained abroad can qualify for an exemption from provisional kilometre tax payments.
- Previous owner’s tax debt: A vehicle’s mandatory periodic inspection will not be blocked because a previous owner or operator has unpaid kilometre tax. This separates the vehicle inspection process from the previous owner’s tax liability.
- Miles-based odometers: Inspection stations must inform Skattinn when a vehicle records distance in miles rather than kilometres, helping the tax authority apply the correct distance-based tax calculation.
These amendments are scheduled to take effect on 1 January 2027.
