Business and Economic Background

Possible Invalid Migration Content Doing Business in Iceland
By thinking globally and acting locally, PricewaterhouseCoopers in Iceland makes an ideal service firm for foreign parties looking to invest or do business in Iceland.
You know PricewaterhouseCoopers - we know Iceland.

The following pages contain a short economic overview.

Economic overview
Iceland's Scandinavian-type economy is basically capitalistic, yet with an extensive welfare system, low unemployment, and remarkably even distribution of income. In the absence of other natural resources (except for abundant hydrothermal and geothermal power), the economy has historically been depending on the fishing industry.

Recently Iceland's economy has been diversifying into manufacturing and service industries, and new developments in software production, biotechnology, and financial services are taking place. The tourism sector is also expanding, with the recent trends in ecotourism

Business & Economic Background

Regulatory Constraints and Reliefs
Exchange Controls
No restrictions are imposed in Iceland on buying or selling of foreign exchange.

Foreign Ownership of Business
In principle, foreign ownership of business is unrestricted. However, some limitations apply to specific sectors, namely fishing, primary fish processing, energy production and aviation. A wide range of portfolio investment options are available through licensed securities trading companies.

Official Attitude and Incentives
Iceland has systematically made its business environment increasingly attractive for investment and location, among other things with the series of tax cuts which now give Iceland one of the lowest levels of corporate income tax in Europe.

Financial Reporting and Audit Requirements
Every company resident and operating in Iceland must submit annual accounts that comply with statutory accounting rules and disclosures, and reflect a true and fair view of the company’s assets, liabilities, results and financial position. Presentation is modelled upon standard EU requirements.

Companies above a certain size which are publicly quoted and have subsidiaries are required to prepare consolidated group accounts. Tax returns are filed with local tax authorities.

Government and Political System
Iceland is a parliamentary democratic republic. The head of state is the President, elected for a term of four years at a time, whose duties lie outside day-to-day party politics. The government is led by the Prime Minister.

Investment and Business Environment
Currency
The official currency unit of Iceland is the króna (ISK). Iceland is not a member of the EU and therefore not of its monetary union, and is not mandated to use the Euro.

Regulatory Environment
Operating licences are required for businesses in certain sectors, for example manufacturing industries, and are granted on fulfilment of clearly defined rules. Details of regulations, monitoring and inspection agencies, etc., vary from one sector to the next. As a member of the European Economic Area Iceland operates its regulatory environment on the same principles as the European Union.

Financial Sector
Iceland has a financial system in broad line with those of other European and Western nations, and based to a large extent on EU directives. Business credit is offered by commercial and savings banks, investment banks and securities houses. A strong non-bank sector has evolved, covering stock broking, leasing and a wide range of other financial services. International players are established in insurance and Icelandic finance companies have associations with global funds.

Main Sources of Finance
The bulk of finance used by foreign companies investing in Iceland has traditionally been raised in international finance markets. Foreign-owned subsidiaries or branches may raise funds in any country without restriction and have full access to Iceland’s finance market. Icelandic domestic finance companies offer a broad standard range of services, including:

  • Medium-term and long-term financing: Longer loans may be negotiated directly with banks and other credit institutions, and are generally indexed. There has been an increasing trend towards raising longer-term capital through bond issues.
  • Leasing, hire purchase, factoring: and a full array of other financial services are available in Iceland within the banking and non-bank sectors.
  • Export guarantees: may be negotiated with banks.

Establishing a Business in Iceland

Types of Business Presence in Iceland
The most common and economically important type of business in Iceland is the limited company. Other structures are partnerships, cooperative societies, official limited companies, businesses run by the self-employed and branches of foreign limited companies.

Limited Companies and Branches of Foreign Companies
There are two types of limited companies in Iceland, public and private, regulated by two separate Acts. These Acts are in line with the requirements of the company law provisions of the EEA agreement.

Foreigners investing in Iceland have customarily chosen to establish limited companies or branches of limited companies. Tax considerations have historically played a large role in that decision. Furthermore, corporate form offers the benefits of limited liability, while partnerships entail full and unlimited liability for all partners.

Foreign public or private limited companies and companies in a corresponding legal form having legal domicile within the European Economic Area may engage in activities with the operation of a branch in Iceland.
Corporate income tax: 18%.

Limited companies and companies in a corresponding legal form domiciled outside the European Economic Area may operate a branch in Iceland, if this is permitted in an international treaty to which Iceland is a party or by the Minister of Commerce. Corporate income tax: 18%.

Limited companies and branches are registered with the Internal Revenue in the Register of Enterprises division ( Fyrirtækjaskrá ).

Establishment Procedures
Incorporation Fees
The registration fee is approximate ISK 171,000 for a new public limited company and ISK 88,500 for a new private limited company.

Number of Founders
A public limited company must have at least two founders, at least one of whom must reside in Iceland or be a resident and a citizen of an EEA or OECD country. A private company may be founded by one or more persons. At least one entity must reside in Iceland or be both a citizen and resident of an EEA or OECD country.

Maximum Number of Shareholders
No limits are set on the number of shareholders.

Initial Capital Requirements
A public limited company must have an initial capital of at least ISK 4 million, and a private limited company at least ISK 500,000.

Articles of Association for Limited Companies
When a limited company is established a memorandum of association must be prepared containing a draft of articles of association, names and addresses of founders, subscription price of the shares and deadline for subscription and payment of subscribed capital. The draft of articles must contain information including the name and location of the company, its objectives, share capital, board of directors, legal venue, auditors and financial year. The articles of association are adopted by the shareholders at the first general meeting and the company must be registered with the Register of Limited Companies within six months of the date of the memorandum of association in the case of a public limited company or two months in the case of a private limited company. An unregistered company can neither acquire rights nor assume duties.

Other distinctions between public and private limited companies are as follows:

Public Limited Companies
Public limited companies are mainly aimed at seeking capital from a wide number of shareholders among the public at large, for example on the stock market. The minimum stock required for a public limited company is ISK 4 million. Other minimum requirements are that the company has two founders, two shareholders, three directors on the board of directors, and a manager. The provisions on branches are similar for both public and private limited companies, except that disclosure requirements for the Register of Enterprises are somewhat stricter with respect to public limited companies.

Publicly Listed Companies
For companies quoted on Iceland Stock Exchange, a number of specific rules apply in addition to the Companies Act requirements. These rules, which are determined by the Ministry of Commerce and the Board of Iceland Stock Exchange, have become stricter in recent years. Two independent auditors must be appointed and at least one must be a state-authorised public accountant.

When establishing a financial undertaking, there are stricter conditions, set forth in Act no. 161/2002, have to be fulfilled, in addition to the conditions set forth in the Act about limited liability companies. The most significant condition is about share- and guarantee capital. The share capital of a commercial bank and credit undertaking, and the guarantee capital of a savings bank must amount to a minimum of ISK 450 million, but never less than the equivalent of EUR 5 million in ISK, on the basis of the current official exchange rate (buying rate).
  • The share capital of an electronic money undertaking must amount to at least ISK 90 million, but never less than the equivalent of EUR 1 million in ISK.
  • The share capital of a securities company must amount to at least ISK 65 million, but never less than the equivalent of EUR 730,000 in ISK.
  • The share capital of a securities brokerage authorized to trade for own account must amount to at least ISK 11 million, but never less than the equivalent of EUR 125,000 in ISK.
  • The share capital of a securities brokerage which is not authorized to trade for own account must amount to at least ISK 4.5 million, but never less than the equivalent of EUR 50,000 in ISK.
  • The share capital of a UCITS management company must amount to at least ISK 11 million, but never less than the equivalent of EUR 125,000 in ISK.
An operating license will not be granted if close links between a financial undertaking and individuals or legal entities obstruct supervision of the undertaking by the Financial Supervisory Authority. The same shall apply if Acts or rules applying to such linked parties obstruct supervision.

Private Limited Companies
Rules for private limited companies are simpler than for the public ones. The minimum stock required is ISK 500,000. Other minimum requirements are to have one founder, one shareholder, and one director (with one deputy) in cases where shareholders are four or less. There is no obligation to have a manager.

On their establishment, private limited companies must state whether they have one or more shareholders. In one-party private limited companies, meetings of the board of directors and shareholders are not obligatory.

The Minister of Commerce can grant an exemption from the otherwise general principle that the majority of the board of directors and the general manager of a limited company must be domiciled in Iceland or in a country within the European Economic Area or OECD.

Branches of Foreign Companies
Branches of limited companies are registered with the Internal Revenue in the Register of Enterprises department and the head office must file the following documents:
  • A copy of the articles of association of the head office.
  • The incorporation certificate of the head office.
  • A written commitment from the head office to abide by Icelandic law and Icelandic jurisdiction.
  • A letter of representation for the branch manager together with documentation that the branch manager meets the requirements as to residency, citizenship and solvency.
  • The Financial Statements of the head office for the preceding year.
A registered branch must have a name which includes the name of the foreign limited company.

Note that documentation filed with the Icelandic authorities must be submitted in certified Icelandic translation.

The registration fee is ISK 171,000.

Partnerships
A partnership is an association of two or more persons, including individuals, corporations or other legal entities, who operate a business as co-owners for profit. Many professions operate as partnerships.

No specific legislation governs the operation of a partnership, but relations between the partners usually require the preparation of a formal set of agreements (bylaws). Minimum accounting requirements are set out in the Accounting Act.

The tax percentage on those partnerships that pay income tax (some partnerships divide the income and assets between the partners) is 26% instead of 18% for companies, but then distribution of profit to the owners is not taxed.

Under Icelandic law, partners in a partnership have full and unlimited liability in solidum (“one for all and all for one”) which generally means that this is not an attractive choice of form for a foreign investor.

Sole Proprietorships/Self-Employed
Sole proprietorships are mainly confined to self-employed in Iceland and the form is rare for large enterprises. Sole proprietors are taxed on business income and any other additional income.

Iceland traditionally has a higher level of self-employed persons than in neighbouring countries.

Residence Requirements for Board of Directors and Management
A public limited company must have a board of directors consisting of at least three persons, and must appoint at least one managing director. The managing director(s) and at least half of the members of the board must reside in Iceland or be residents and citizens of any other EEA or OECD country, but an exemption may be granted by the Minister of Commerce.

A private limited company shall have one or two persons on its board of directors if it has four shareholders or fewer; otherwise, the minimum is three persons. One or more managing directors may be appointed by the board, and if there is only one person on the board of directors he may also serve as managing director. The managing director(s) and at least half of the members of the board must reside in Iceland or be residents and citizens of any other EEA or OECD country, but an exemption may be granted by the Minister of Commerce. If there is only one person on the board of directors, he must fulfil the residence qualification.

Annual Requirements for Corporations
Income Tax Filing
Corporations and registered branches of non-resident entities must file an annual income irrespective of whether or not they have any taxable income. The official filing time if before the end of May but if the filing is done by a professional service (audit) company the filing time is extended until September.

Audit Requirements
Every limited company in Iceland is required to elect an auditor or inspector and have its annual accounts audited. For public limited companies, a state-authorised public accountant must perform a full-scale audit. Publicly listed companies must elect two auditors, one of whom must be a state-authorised public accountant.

Mergers and Acquisitions
The Competition and Fair Trade Authority ( Samkeppniseftirlitið ) is entitled to take action including the imposition of limiting conditions if a company which is created by a merger is likely to acquire a dominant market position. Planned or possible mergers may be referred to the Authority for consideration, and it can do so on its own initiative. An appeal against the Authority’s ruling may be lodged with its appeals board. Laws on competition are implemented by the Minister of Commerce.

A shareholder owning nine-tenths of stock in a company and controlling the same proportion of votes may jointly decide with the board of directors to redeem the holdings of other shareholders.

If one shareholder owns nine-tenths of stock in a company and controls the same proportion of votes, any of the other minority shareholders may insist on their shares being redeemed.

If a company’s articles of association do not stipulate how to determine the buying price of shares and no agreement can be reached, the value of the shares for redemption is assessed by officials appointed by a court.

Provisions concerning takeover bids
If a party has directly or indirectly acquired control of a company, which has obtained a listing for one or more classes of its shares on a regulated securities market, this party must, no less than four weeks after achieving such control, make a takeover bid to other shareholders in the company, i.e. a bid to purchase their shares in the company. Control means that the party concerned, and the parties acting in concert with that party:
  1. have acquired a total of at least 40% of the voting rights in the company,
  2. have the right, based on an agreement with other shareholders, to control at least 40% of votes on the company, or
  3. have acquired the right to appoint or dismiss a majority of the company’s Board of Directors.
Parties will be deemed to be acting in concert if the following connections exist, unless the opposite is proved to be the case:
  1. married couples, registered or co-habiting partners, and children of the party who are not financially competent;
  2. connections between parties which directly or indirectly involve control by one party of the other, or if two or more companies are directly or indirectly under the control of the same party.
  3. companies in which a party directly or indirectly holds a substantial holding, i.e. where the party directly or indirectly owns at least one-third of the voting rights in the company concerned.
  4. connections between a company and its Board of Directors and managing directors.
A mandatory bid, as mentioned above, becomes the obligation of the party acting in concert who increases his/her share with the result that the limit referred to in the first paragraph is reached.

The Financial Supervisory Authority may grant exemptions from mandatory bids if special circumstances so warrant. The Financial Supervisory Authority may set conditions for such exemptions, e.g. concerning the time limit which the party in question shall have to dispose of holdings which are in excess of allowable limits and the treatment of voting rights during that period.

The offeror must make all shareholders of the same class of shares an offer on the same terms. The price offered in a mandatory takeover bid must be equivalent to the highest price paid by the offeror, or by parties acting in concert with him/her, for shares acquired in the company in question during the past six months prior to making the bid. The bid must, however, be at least equal to the latest transaction price for shares in the company in question the day before the bidding obligation arose or notification was given of the proposed bid.

If an offeror, or parties acting in concert with him/her, pays a higher price or offers better terms for shares in the company in question during the three months following the conclusion of the offer period, those shareholders who accepted the original offer shall be paid a supplemental payment corresponding to the difference. ]]>