Iceland bank taxes exceed Western Europe average fivefold

Iceland’s special taxes on commercial banks are more than five times higher than the Western European average, according to a KPMG analysis commissioned by the Federation of Icelandic Financial Enterprises, Morgunblaðið reports. A planned tax increase on financial companies would widen the gap further.

The analysis compared special bank taxes as a share of banks’ average assets in 2025. The ratio was 0.307% in Iceland, compared with an average of 0.059% in the comparison countries. Spain had the second-highest ratio, at 0.113%.

Icelandic banks therefore face a tax burden more than five times the Western European average, the analysis found. If taxes rise by 6 billion Icelandic krónur, the burden would be more than seven times the average.

Three special taxes

Three special taxes are currently imposed on banking activities in Iceland. A special bank tax is 0.15% of liabilities exceeding 50 billion krónur. A special financial activities tax adds 6% to ordinary income tax, while a financial activities tax on wages adds 5.5% to the social security contribution.

The banks also pay fees to the Central Bank of Iceland’s financial supervisory authority and to the Debtors’ Ombudsman.

Heiðrún Jónsdóttir, director general of the Federation of Icelandic Financial Enterprises, also pointed to a recent Gallup survey conducted for the federation on public attitudes towards the tax increase. The survey found that a majority believed the planned increase would have negative effects on the public, Icelandic companies, and the banks’ customers and shareholders, but positive effects on the state treasury.

“This public attitude, together with Iceland’s clear distinction in special taxation, should be sufficient reason for the government to pause and reconsider these plans,” Heiðrún told Morgunblaðið.

She also referred to a 2018 government white paper setting out a vision for the future of the financial system. It identified high special taxes as part of what was known as the Iceland premium.

The Central Bank, the Financial Supervisory Authority and Bankasýsla ríkisins, the government’s banking agency, had also pointed to shortcomings in the taxes and called for them to be reviewed, she said.

Heiðrún said no final details of the planned tax increase had been presented, but that she understood the government’s goal of balancing the national budget. The route towards that goal should nevertheless cause as little harm to the economy as possible, she said.

She also noted that the state owns about 40% of the commercial banks through Landsbankinn and collects a 6% additional income tax from financial companies on top of the ordinary 20% income tax.

Heiðrún further pointed to state revenues increasing by an average of 57 krónur for every 100 krónur commercial banks earn after tax. This calculation includes income tax, additional income tax and Landsbankinn’s dividend payments. Non-income-based taxes and fees paid by the banks to the state come on top of that.

Heiðrún said a higher tax burden could work against the government’s goals of improving living standards, increasing business investment, reforming the housing market and attracting foreign investors.