FAQs concerning the pension issues of foreign nationals temporarily employed in Iceland
Are foreign nationals temporarily working in Iceland obliged to contribute to a pension fund in Iceland?
Yes, according to Section 1.4 of Act No. 129/1997 on mandatory pension insurance and the operation of pension funds, all employees and employers or self-employed persons are obliged to secure their pension rights through membership of a pension fund from the age of 16 years until 70 years of age.
An exception to this is when a foreign national within the European Economic Union area is an employee of an overseas company and works in Iceland temporarily, i.e. a maximum of 12 months. In such a case, he is not under obligation to pay premiums into a pension fund in accordance with Icelandic legislation, provided that he has an E-101 form from his home country. The E-101 form is certification that the employee is insured in accordance with the social security legislation of his home country.
Can pension premiums paid by foreigners temporarily working in Iceland be reimbursed?
According to Section 19.4 of Act No 129/1997, on mandatory pension insurance and the operation of pension funds, pension contributions of foreign nationals emigrating from Iceland may be reimbursed, provided this is not prohibited in accordance with international agreements to which Iceland is a party.
Reimbursement can not be limited to a specific portion of the contributions except on proper actuarial premises. This means that a pension fund may retain the part of the paid premium that is equivalent to the fee for the entitlements that the said individual has enjoyed in the fund while he contributed to it (invalidity, spouse or child pension).
Which international agreements limit the reimbursement of pension fund premiums to foreign nationals?
The only international agreement that limits reimbursement of pension fund premiums between countries is the EEA Agreement. This is based on the mutual agreement between member states concerning the implementation of social security rules for employees, self employed individuals and members of their families who emigrate between member states. According to Annex VI to the EEA Agreement, mandatory pension insurance is subject to the social security scheme.
More specifically, this is based on Article 29 of the EEA Agreements, cf. Act No. 2/1993, Annex IV to the EEA Agreement and Item 2 of Article 10 of Council Regulation (EEC) No. 1408/71 on the application of social security schemes to employed persons and to members of their families moving with their communities, with subsequent amendments, cf. Regulation No. 589/2000 on the entry into effect of European Union regulations concerning social security schemes (pension fund entitlements and child care benefits (I)).
Is the reimbursement subject to taxation?
Yes, because the premiums were paid into the pension fund before taxes. When premiums are paid out these are payments that previously formed a tax deduction from the income of individuals and also for the employer. Thus, this is an amount that has not been taxed and the person receiving the payment is therefore subject to taxation.
In cases where an individual has emigrated from Iceland and where double taxation avoidance treaties apply between the country where the individual is resident and Iceland, the double taxation avoidance treaty shall determine whether the income is subject to taxation in Iceland or not. According to the provisions of most double taxation avoidance treaties, full tax obligation applies in Iceland for such reimbursements, as these payments are regarded as income accrued from employment in Iceland.
What happens to deposits in a defined contribution plan or pension entitlements if a foreign national emigrates from Iceland and does not transfer the entitlements?
In cases where a foreign national leaves the country without transferring his deposited premiums, he continues to own a deposit in the defined contribution plan and/or entitlements in the defined benefit plan on the basis of the premiums that he has deposited in the fund. Thus, he is entitled to withdraw from the defined contribution plan or receive payment of old-age pension when he has reached the appropriate age.
Can supplementary premiums be reimbursed to foreign nationals when they emigrate from Iceland?
According to Section 19.4 of Act No 129/1997, on mandatory pension insurance and the operation of pension funds, pension contributions of foreign nationals emigrating from Iceland may be reimbursed, provided this is not prohibited in accordance with international agreements to which Iceland is a party.
The only international agreement that limits reimbursement of pension fund premiums between countries is the EEA Agreement. This is based on the mutual agreement between member states concerning the implementation of social security rules for employees, self employed individuals and members of their families who emigrate between member states. According to Annex VI to the EEA Agreement, mandatory pension insurance is subject to the social security scheme.
More specifically, this is based on Article 29 of the EEA Agreements, cf. Act No. 2/1993, Annex IV to the EEA Agreement and Item 2 of Article 10 of Council Regulation (EEC) No. 1408/71 on the application of social security schemes to employed persons and to members of their families moving with their communities, with subsequent amendments, cf. Regulation No. 589/2000 on the entry into effect of European Union regulations concerning social security schemes (pension fund entitlements and child care benefits (I)).
