Taxation in the Faroe Islands

Pursuant to the Home Rule Act of 1948, the Faroe Islands are a self-governing region of the Kingdom of Denmark and have their own tax legislation.

All individuals living in the Faroe Islands are liable to pay tax on all income. The amount you are required to pay depends on your income and your municipality.

The tax system is designed to contribute to greater equality between individuals. A lot of services in the Faroes are paid for by the public sector, among these are, for example, hospitals, healthcare, education, transport and maintenance of infrastructure. The taxes we pay, go to these public services.

Our income taxes are divided into national tax, local tax and many also pay a church tax. Taxes can be collected on, for example, income, interest, gifts and inheritance. Additionally, there are fees and dues that are paid by the public at large. An example is the value-added tax, which we call MVG, that is paid on almost all transactions relating to goods and services. Customs are paid on all goods and services that are imported.

Other taxes, such as pension tax and capital gain tax, are not paid off your income and does not necessarily apply to everyone. 

If you have full tax liability in the Faroe Islands, you start to pay taxes on income when you earn more than DKK 30,000 a year.

National tax
A large part of our income tax goes to the state in the form of national tax. You start paying national tax on income over DKK 65,000 a year. The national tax is progressive, meaning that the higher your income, the higher amount of tax you have to pay. In the section below, you will find a link to income tax tables, which you can use to figure out how much you pay.

Local tax
The local tax is paid to your municipality. Contrary to the national tax, 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%. See the section below.

Church tax
If you are a member of the national church, the Evangelical Lutheran Church, you also pay a church tax. The church tax rate varies between 0.6% and 0.9% depending on your municipality. See the section below.

Other taxes and fees
Other taxes, such as pension tax and capital gain tax, are not paid off your income, but rather off your pension and capital gains. 

In addition to taxes, we are also required to pay fees for public services such as health insurance, parental benefit fees, labour market fees etc. 

Income tax rates are regularly updated. Below you will find links to the current tax rates.

National tax

Click this link to see a table displaying the current rates of national tax. The table is in Faroese. See the following table for an English version of the titles:

Local tax, church tax and child tax credit by municipality

Click this link to see a table displaying the current rates of local tax, church tax and child tax credit. The table is in Faroese. See the following table for an English version of the titles:

The way we pay our taxes depends on whether our income is A-income or B-income.

A-income
If you receive wages or salaries from a Faroese employer in the Faroes, it will go through the automatic tax withholding system and is called A-income. This means that TAKS has already withheld taxes on your income before it arrives in your bank account.

B-income
If you are self-employed, or if your employer is not based in the Faroes, you will not receive your income through TAKS' automatic tax withholding system. In this case, you must make a preliminary tax assessment at the beginning of the year in which you estimate how much you are going to earn in the coming year. Based on this information, TAKS will write tax bills that are sent out once a month.

Tax statement
Regardless of whether you receive A or B-income, you will receive a tax statement every year which tells you whether you have paid the correct amount of tax in the year. If you have paid too much, you are entitled to a tax refund. If you have paid too little, you are required to pay the outstanding tax.

If you live in the Faroe Islands for 180 days or less, and without registering a permanent address, then you are liable to limited tax payment only. Limited tax liability means that you pay a fixed tax rate that is not contingent on your income or municipality. The fixed tax rate is at 42% for ordinary wage earners, and 35% if you are employed on a FAS-ship or a bareboat-ship. Added to that you have to pay a additional contribution at 3% to the Labor market pension fund. Having a limited tax liability means that you are not entitled to a child tax credit or interest subsidy from the Faroes.

If you work in the Faroes for a limited period of time only, you need to apply for a temporary p-tal. Read more about this under quick links.

If you stay in the Faroes for a period longer than 180 days, within a 12 month period, you are fully tax liable in the Faroes.

If you have an A-income, there are a number of additional contributions that are automatically settled when you receive your wages. Below is a summary of these. 

In the Faroes, we distinguish between A income and B income.

A-income
Most commonly, A-income is wages or salaries that you receive from an employer in exchange for your labour. A-income could also be unemployment benefits, daily benefits, public assistance for sick children and so on. A-income is taxed at source. This means that the money goes through TAKS' automatic tax withholding system which holds back taxes and dues before it reaches your account.

B-income
B-income is income from self-employment, if you, for example, have a business of your own. If your employer is not based in the Faroes, your income also counts as B-income. In these events, the money will not go through TAKS' automatic tax withholding system, and is therefore not taxed at source. If you have a B-income, then you must make a preliminary tax assessment at the beginning of the year in which you estimate how much you are going to earn in the coming year. Based on this information, TAKS will write tax bills that are sent out once a month. If you are self-employed, you have a duty to submit your accounts and tax return annually.