INDIVIDUAL TAXES
SIGNIFICANT DEVELOPMENTS
There have been no significant tax or regulatory developments in the past year.
TERRITORIALITY AND RESIDENCE
Faroese tax legislation distinguishes between full and limited tax liability. The main criteria are residence, length of stay, place of work, employer's residence, and type of income, ass described below. Citizenship does not affect Faroese tax liability.
Individuals are subject to full tax liability when they(1)take up residence or (2) stay in the Faroe Islands without taking up residence when the stay exceeds six consecutive months interrupted only by shout stays abroad(and then as from the day of arrival). An individual subject to full tax liability in Faroe Islands is taxed on worldwide income and gains received or accrued.
Individuals are subject to limited tax liability on Faroese-situs services and other Faroese-source income. Dividends are taxed separately.
Separate rules apply to contract labor. With the introduction of a hydrocarbon tax bill in 1999, special rules will probably also apply for individuals participating in oil and gas exploration activities.
GROSS INCOME
Employee gross income/All remuneration from employment, whether in cash or in kind, is subject to tax when the employee has obtained a legal right to the remuneration, regardless of where payment is made and regardless of whether remitted. The liability extends to any living or housing allowance
and any reimbursement of tax or other personal liability, whether paid directly to an employee or borne by the employer on behalf of the employee.
Payments to an employee for expenses incurred for travel, entertainment or any other service to be performed on behalf of the employer are taxable only to the extent that they are not actually expended in the performance of the service. Special rules apply for free housing and other benefits-in-kind provided by the employer.
Capital gains and investment income/Taxable gains and investment income are added to taxable income. Certain allowances are available. Profit on the sale of a private house owned for more than two years is normally tax exempt. Gains on sale of shares are exempt if the shares have been owned
for at least three years and the individual has not been a majority shareholder(25% of total share capital). For a majority shareholder who is selling shares within the first three years of ownership, the same rules as for minority shareholders apply(gains are included in taxable income).
Gains on sales of shares after three years but within ten years of ownership are taxed at a rate of 25%. If the sale takes place more than ten years after the acquisition, gains are tax exempt.
Dividends, interest from bank savings or bonds and capital on bonds are taxed at a fixed rate of 35%. For dividends from Faroese companies or interest from Faroese banks, the tax will be withheld by the company/bank.
The taxable income of an individual subject to full tax liability includes interest(except form bank savings or bonds, see above), cash dividends from foreign companies, profits form the sale of shares owned less than three years, rents, royalties, professional fees, pensions, annuities, and
alimony from all sources(wherever located), subject to any limitation that may be imposed under a tax treaty.
DEDUCTIONS
Business deductions/No business deductions are available to individuals. However, travel expenses will be(partly) reimbursed to special rules. An application is necessary.
Nonbusiness expenses/An individual subject to full tax liability can deduct contributions or premium paid under certain pension schemes with a pension fund, a bank or an insurance company. Employee contributions under
certain pension schemes are withheld from salary payment and are not considered part of taxable income.
Mortgage or other interest is not deductible. However according to special rules, a part of mortgage interest can be reimbursed, provided that the mortgage is taken for private housing purposes. For 1998 the rate of reimbursement is 48%, but it will gradually be reduced from 2001(44%)until
the reimbursement is 40% in 2003.
Personal allowances/Single individuals on old-age pension are eligible for an allowance of DKK11,100. For married people, the allowance is DKK7,800 each. There are also personal allowances for individuals with children under the age of 16. The child allowance ranges from DKK3,900to DKK7,100 per child-the difference is due to the fact that part of the taxable
income is decided by the municipalities. These allowances are deducted in figuring the computed tax.
TAX CREDITS
An individual is entitled to deduct foreign income taxes paid or accrued on foreign-source income from the Faroese tax payable up to a maximum of Faroese tax paid on that part of the taxable income that is foreign-source income. Relief acc
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