Payroll and Employee Benefits in the Faroe Islands

Payroll in the Faroe Islands operates under a distinct tax and social contribution system, separate from mainland Denmark. Employers must account for national and municipal income taxes, pension savings, labour market contributions and statutory holiday payments. The calculation depends on the employee’s tax residence, municipality, remuneration and employment terms.

For international companies, these distinctions can materially affect the cost of hiring. A salary agreed in Danish kroner does not tell the whole story: the employer’s statutory contributions, pension arrangements and holiday obligations must also be included.

Acumen International provides payroll and employee benefits administration in the Faroe Islands through its Global Employer of Record (EOR) services. We employ eligible professionals under the applicable local arrangements and manage payroll as part of the employment relationship.

Our services cover:

• Salary administration: Gross-to-net calculations, regular payments and remuneration adjustments.
• Tax withholding: Employment income tax deductions and reporting through the Faroese tax system.
• Employer contributions: Administration of applicable labour market and parental benefit contributions.
• Pension administration: Mandatory pension savings and contractual pension arrangements.
• Holiday pay: Accruals, payments and holiday supplements according to the employee’s remuneration model.
• Employee benefits: Administration of statutory entitlements and agreed supplementary benefits.
• Payroll reporting: Employment records, statutory submissions and payroll documentation.

How the Faroese payroll system works

The Faroese Tax and Customs Authority, TAKS, administers the country’s income tax and various statutory contribution systems.

Most employment income paid through a Faroese employer is classified as A-income. This income passes through TAKS’ automatic withholding system, which deducts income tax and applicable contributions before the employee receives their salary.

The role of TAKS

TAKS administers:

• National income tax.
• Municipal income tax collection.
• Applicable church tax.
• Statutory payroll deductions.
• Certain pension and labour market contributions.
• Holiday allowance administration.

Employees generally receive an annual tax statement showing their income and tax deductions.

A-income versus B-income

The distinction matters particularly for international businesses.

A-income generally includes wages and salaries processed through the Faroese withholding system.

B-income includes self-employment income and, under TAKS guidance, income paid by employers that are not based in the Faroe Islands.

B-income is not automatically taxed at source. Individuals receiving it must generally make preliminary income assessments and arrange tax payments.

This creates a practical difference between paying a Faroese professional directly from an overseas company and administering their remuneration through a local employment payroll arrangement.

Source: TAKS – Taxation in the Faroe Islands.

Income tax in the Faroe Islands

Faroese employees may pay national income tax, municipal income tax and, where applicable, church tax.

Unlike a payroll system based on one national tax percentage, the Faroese calculation combines several elements.

National income tax

National income tax is progressive, with the amount payable determined by the employee’s taxable income.

TAKS publishes the applicable national tax tables.

Municipal income tax

Each municipality sets its own income tax rate.

According to TAKS, municipal rates range from approximately 16% to 23%.

Consequently, the employee’s registered municipality affects their net salary.

This is relevant when comparing employment offers for professionals living in Tórshavn and other Faroese municipalities.

Church tax

Members of the Evangelical Lutheran Church may also pay church tax.

TAKS identifies municipal church tax rates ranging from approximately 0.6% to 0.9%.

Tax residence

An employee’s tax residence affects the applicable calculation.

Individuals who establish permanent residence in the Faroe Islands or remain there for more than 180 days within a 12-month period generally become fully liable to Faroese income tax.

Different arrangements apply to individuals subject to limited tax liability.

Payroll deductions and statutory contributions in 2026

Faroese payroll includes several contributions associated with pensions, healthcare and social protection.

The following figures are published in TAKS’ 2026 taxation guidance.

The application of individual deductions depends on eligibility, age and tax circumstances. These are not all additional employer costs.

Source: TAKS – 2026 taxation and mandatory contributions. <Cite ref=”turn471474search0″/>

Employer payroll contributions in the Faroe Islands

Employers have statutory obligations beyond paying the employee’s agreed salary.

TAKS identifies contributions to several labour market schemes.

These contributions are distinct from the deductions made from an employee’s salary.

The Parental Benefits Fund also publishes employer billing arrangements and identifies an additional occupational disease contribution in its guidance.

The applicable contribution base and any sector-specific arrangements must be reflected in the payroll calculation.

Sources: TAKS – Employer labour market contributions and Parental benefits for employers. <Cite refs={[“turn471474search11″,”turn471474search5”]}/>

Mandatory pension savings in the Faroe Islands

The Faroese pension system includes individual pension savings and the Labour Market Supplemental Pension Fund.

These are separate arrangements.

Mandatory individual pension savings

For 2026, TAKS identifies a minimum pension contribution of 12% of salary for individuals subject to the mandatory pension savings requirement.

The requirement generally applies to adults aged 18 and over who are fully liable to Faroese tax, subject to the applicable age and eligibility provisions.

The employer administers pension payments to the employee’s pension account.

Pension arrangements may also be established through employment contracts and collective agreements.

Labour Market Supplemental Pension Fund

The Labour Market Supplemental Pension Fund, also known as the AM-fund or Samhaldsfasti, is a collective pension arrangement.

Employees and employers generally contribute to the fund.

TAKS identifies a contribution rate of 3%, with certain employment categories subject to different treatment.

Pension arrangements under collective agreements

An applicable collective agreement may establish pension terms affecting the employee’s remuneration package.

Employers should distinguish between the mandatory pension savings requirement, AM-fund contributions and any additional contractual pension arrangements.

Source: TAKS – Labour Market Supplemental Pension. <Cite ref=”turn471474search9″/>

Holiday pay and annual leave in the Faroe Islands

Holiday pay administration is one of the more distinctive features of Faroese payroll.

TAKS distinguishes between hourly-paid wage earners and monthly-paid salaried employees.

Hourly-paid employees

Employers generally contribute 12% of wages to the holiday allowance system.

The allowance is accumulated through the relevant accrual year and ordinarily paid to the employee on 2 May.

Monthly-paid salaried employees

Monthly-paid employees generally receive their usual salary during annual holiday.

They are also entitled to a holiday supplement of 1.5% of salary earned during the accrual year.

The supplement is commonly paid with April’s salary.

Holiday accrual periods

The standard accrual year generally runs from 1 April to 31 March, although some collective agreements use a calendar-year arrangement.

The holiday year normally runs from 2 May to 1 May of the following year.

Holiday entitlement

TAKS describes a full year’s entitlement as equivalent to 30 days of paid holiday under its holiday allowance arrangements.

Employers must account for the applicable holiday entitlement and payment method when establishing the employment terms.

Source: TAKS – Holiday Allowance. <Cite ref=”turn471474search3″/>

Parental benefits and payroll administration

The Faroe Islands operate a collective parental benefit system, Barsilsskipanin.

The scheme is funded through contributions associated with employment income and employer payments.

Employer contributions

TAKS identifies an employer parental benefit contribution of 0.86% of A-income, alongside an additional occupational disease fund contribution.

Employers are billed monthly.

Salary during parental leave

Where an employer continues paying an employee’s salary during parental leave, the employer may be entitled to reimbursement from Barsilsskipanin.

TAKS states that reimbursement is based on the employee’s average monthly A-income over the preceding 12 months, subject to a maximum of DKK 30,000 per month.

The reimbursement arrangement and the employer’s contractual salary obligations must be considered separately.

Payroll implications

Employers should establish how parental leave affects:

• Salary continuation.
• Statutory benefit payments.
• Reimbursement applications.
• Pension contributions.
• Payroll reporting.

Source: TAKS – Parental Benefits for Employers. <Cite ref=”turn471474search5″/>

Health insurance and unemployment contributions

Two further components of Faroese payroll are the national health insurance scheme and unemployment insurance.

Heilsutrygd: National health insurance

Heilsutrygd provides public health insurance for Faroese residents.

TAKS collects the applicable premium, which comprises a fixed monthly amount and an income-based contribution.

For employees receiving A-income, the premium is normally deducted automatically through payroll.

ALS: Unemployment insurance

ALS is the Faroese unemployment insurance system.

Employees and employers contribute according to the applicable requirements.

Certain individuals undertaking fixed-term employment may qualify for exemptions from employee unemployment contributions, subject to approval.

Source: TAKS – National Health Insurance. <Cite refs={[“turn471474search6″,”turn471474search2”]}/>

Payroll for temporary foreign employees

International companies may employ professionals in the Faroe Islands for fixed-term assignments, technical projects or other temporary engagements.

The employee’s tax status can materially affect payroll.

Limited tax liability

TAKS states that individuals working in the Faroes for 180 days or less, without registering a permanent address, may be subject to limited tax liability.

Its published guidance identifies a fixed income tax rate of 42% for ordinary wage earners under the limited-liability regime, together with an additional 3% contribution to the labour market pension fund.

Different rates may apply to certain maritime employment categories.

Temporary personal identification number

Individuals subject to limited tax liability generally need a temporary Faroese personal identification number (p-tal) to receive wages.

Full tax liability

Individuals establishing permanent residence or exceeding the applicable 180-day threshold generally become fully liable to Faroese tax.

Their payroll treatment then follows the relevant resident tax arrangements.

International tax considerations

A foreign employee’s previous country of residence and any applicable tax treaty may affect the overall tax position.

For companies engaging professionals on temporary assignments, these questions should be addressed before the employment commencement date.

Source: TAKS – Moving to the Faroes for Work. <Cite refs={[“turn471474search1″,”turn471474search10”]}/>

Budgeting for an employee in the Faroe Islands

An accurate employment budget should distinguish between gross salary, employee deductions and employer-funded costs.

For example, a company considering a professional appointment at a gross salary of DKK 50,000 per month needs to account for more than the contractual salary.

The employment budget may include:

• Gross monthly salary.
• Applicable employer labour market contributions.
• Contractual pension costs.
• Holiday allowance or holiday supplement.
• Insurance obligations.
• Supplementary employee benefits.
• Employer of Record service fees.

The employee’s net salary will depend on national and municipal taxation, pension deductions and other applicable contributions.

A reliable calculation therefore requires the proposed salary, employee circumstances, location and employment terms.

Payroll reporting and administration

Employers must maintain accurate records of remuneration, deductions and statutory payments.

Payroll administration should account for changes occurring throughout the employment relationship.

These may include:

• Salary increases and bonuses.
• Changes in working hours.
• Overtime and other additional payments.
• Holiday pay and supplements.
• Pension adjustments.
• Parental leave.
• Changes in tax status.
• Final salary payments.

Annual tax statements

TAKS generally issues annual tax statements to individuals receiving employment income through the withholding system.

The statement records income and relevant tax information.

Employee identification

A Faroese personal identification number is important for tax and payroll administration.

Temporary employees may require a temporary number under the applicable registration arrangements.

Payroll corrections

Incorrect salary information, deductions or employee details may require adjustment through the relevant payroll and tax reporting processes.

These responsibilities form part of ongoing employment administration rather than a one-off onboarding exercise.

Payroll administration through Acumen International

Acumen International provides Faroese payroll as part of its Global Employer of Record service, rather than as a standalone payroll outsourcing product.

The EOR arrangement combines local employment with the payroll administration required for the individual employee.

For international companies, this can be particularly relevant when:

• Employing a Faroese professional who works remotely for an overseas team.
• Hiring a technical specialist to support a local customer.
• Engaging a project manager for a defined assignment.
• Employing a foreign national who requires a local employment arrangement.
• Managing employees across several countries with different payroll systems.

Acumen International administers the agreed employment terms and statutory obligations, while the client company directs the employee’s professional responsibilities.

Our international services cover more than 190 countries, with local employment administration and centralised account management.

For a broader explanation of the employment model, see our Global Employment Guide.

Frequently asked questions about Faroese payroll

Is Faroese payroll the same as Danish payroll?

No. The Faroe Islands have their own tax legislation and statutory contribution arrangements, administered through TAKS.

Does the employee’s municipality affect income tax?

Yes. Municipal income tax rates differ across the Faroe Islands and affect the employee’s net remuneration.

What is the mandatory pension savings rate in 2026?

TAKS identifies a minimum mandatory pension savings contribution of 12% for individuals covered by the relevant requirement.

Do employers contribute to unemployment insurance?

Yes. Faroese employers generally contribute to ALS under the applicable rules.

How is holiday pay calculated?

Hourly-paid employees generally accrue holiday allowance at 12% of wages. Monthly-paid salaried employees generally receive their normal salary during holiday and a 1.5% holiday supplement.

Can a foreign employee be paid through Faroese payroll?

Yes, provided the employment arrangement and applicable tax and immigration requirements are satisfied.

Does Acumen International provide standalone payroll outsourcing?

No. Acumen International administers payroll in the Faroe Islands as part of its Global Employer of Record services.

Put Your Faroese Employment Plans into Practice

A salary offer in the Faroe Islands needs to work for both the employee and the business. Municipal taxation, pension arrangements and statutory contributions can change the financial picture considerably.

Acumen International can establish the local employment arrangement and provide a clear commercial proposal for your intended hire.

Request a Faroe Islands Employment Proposal