Do Americans pay taxes in both the US and the Faroe Islands?
Short answer: Yes, you must file tax returns in both countries. However, through the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits, most Americans avoid actual "double taxation" on their local Faroese salary.
- Local Taxes: Faroese income taxes (federal + municipal) are high, frequently exceeding 40%. You pay this to TAKS (the Faroese tax authority).
- FEIE (Form 2555): Allows you to exclude roughly the first $120,000+ of your Faroese earned income from US federal income tax.
- FATCA Banking Friction: Faroese banks (Betri, BankNordik) hate dealing with Americans because the US government forces them to report your account balances directly to the IRS.
The true cost of being an American expat is not necessarily the double tax, but the exorbitant accounting fees required to file complex international tax returns (FBAR, FATCA form 8938) every single year to avoid $10,000+ fines from the IRS.
The FBAR Requirement: Don't Go Bankrupt
If the combined total of all your Faroese bank accounts (checking, savings, corporate) exceeds $10,000 USD at ANY moment during the calendar year, you must file a Report of Foreign Bank and Financial Accounts (FBAR) with the US Treasury. Simply moving an apartment deposit can trigger this. Failure to report carries devastating fines.
Top Misconceptions
- Myth: If I use a Faroese bank, the IRS won't know about it. Reality: Absolutely false. The Faroe Islands (vis-a-vis Denmark) signed FATCA treaties. Your Faroese bank will demand your US Social Security Number and automatically transmit your balance to the IRS.
- Myth: I don't owe US taxes because I pay higher taxes in the Faroes. Reality: Even if you owe $0 to the IRS due to tax credits, you must still file the return. If you ignore filing, you lose the right to claim the credits and will be taxed on the gross amount.
The Dual Tax Friction Matrix
| Tax / Compliance Factor | The Faroese Requirement (TAKS) | The US Requirement (IRS) |
|---|---|---|
| Income Tax on Salary | Deducted automatically at source (PAYE system) every month. | Must be reported annually. Offset via FEIE or Foreign Tax Credit. |
| Bank Account Balances | Standard domestic banking. | Mandatory FBAR filing if aggregate exceeds $10,000 USD. |
| Opening a local Bank Account | Requires a P-Tal and lease. | Bank forces you to sign a W-9 declaring US citizenship under FATCA. |