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: 20%.
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: 20%.
Limited companies and branches are registered with the Internal Revenue in the Register of Enterprises division (Fyrirtækjaskrá).
The registration fee is approximate ISK 256,000 for a new public limited company and ISK 130,500 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.
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 256,000.
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 36% instead of 20% 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 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 tax return, 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.
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:
a) have acquired a total of at least 40% of the voting rights in the company,
b) have the right, based on an agreement with other shareholders, to control at least 40% of votes un the company, or
c) have acquired the right to appoint or dismiss a majority of the company’s Board of Directors.