ICELAND: An Introduction

Overview 

Contributed by LOGOS Legal Services
Ms Helga Melkorka Óttarsdóttir managing partner
Mr Kristján Jónsson associate

General Introduction 

Iceland is a unitary parliamentary republic and a member of several international organisations, such as the WTO and the UN. Iceland participates in the European Union’s internal market through the Agreement on the European Economic Area. Accordingly, Iceland implements EU secondary legislation in various fields incorporated into the EEA Agreement and applies the EU’s rules on the four freedoms, state aid and competition. Iceland has a very strong trading relationship with the EU, which is underpinned by the EEA Agreement, with more than half of all Icelandic exports going to the EU.

In the World Bank Group’s report “Doing Business 2019”, Iceland is ranked number 21 in ease of doing business, out of 190 economies, an improvement of 2 places from the World Bank Group’s ranking in 2018.

The Icelandic Economy 

Iceland has made a strong recovery from the global financial crisis, which hit the country especially hard in 2008. Since 2011, there has been a constant growth in GDP. In 2016, there was a 7.4% increase in GDP, and in 2017, a 4% increase. Iceland has one of the highest GDPs per capita in the word. Iceland benefits from its rich natural resources and abundant renewable energy, in addition to low unemployment (4.1% in 2017), modern infrastructure, a highly skilled workforce and a good educational system.

The Icelandic economy has historically been reliant on the fisheries and aluminium sectors. Iceland’s largest manufacturing industry is aluminium production, which has experienced considerable growth in the past decade. In addition to this, following the financial crisis in 2008, tourism has established itself as a pillar of the Icelandic economy. In the preceding years, there has been a considerable increase in the number of tourists visiting Iceland. In 2016, there was a 40% increase in tourists visiting Iceland, and in 2017, a 24.2% increase. There has also been increasing investment in technology sectors, notably data centre services, as foreign investors have taken an interest in Iceland’s relatively low price of electricity and renewable energy.

The Icelandic Legal System and the Market for Legal Services

Iceland has a well-developed and transparent legal system based on the civil law tradition. There is an efficient and reliable judicial system, with procedures before Icelandic courts being very expeditious in comparison with many other European countries. In 2018, the Icelandic Court of Appeal (Landsréttur) began operating, increasing the number of judicial instances in Iceland from two to three. Additionally, there is a strong institutional framework within the administration, with a number of independent administrative boards deciding on complaints concerning a variety of issues, the decisions of which are subject to judicial review by the ordinary courts.

Iceland has a relatively stable market for legal services, dominated by domestic firms varying in size and expertise. There has been a gradual increase in activity in the fields of securities transactions, corporate work and M&A, after a few years of lower levels of activity in those fields.

Recent and Future Developments 

After the collapse of the Icelandic banking sector in 2008, extensive capital controls were put in place, subjecting cross-border and currency transactions to strict control. These capital controls were mostly lifted by the entry into force of the Icelandic Central Bank’s Rules no. 200/2017 on Currency Issues. As a consequence, most restrictions on foreign exchange transactions and cross-border capital movements were lifted. The majority of businesses and households have in general been unaffected by the restrictions that remain in place. The remaining restrictions mostly concern derivatives trading for purposes other than hedging, foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking, and in certain instances, foreign-denominated lending by residents to non-residents when part of carry trades.

However, certain ISK-denominated assets continue to be subject to special restrictions under Act no. 37/2016.

Even though most restrictions on capital movements have been lifted, some are still in place with the aim of reducing the likelihood of certain trading practices, such as carry trades via investments in interest-bearing instruments with new inflows of foreign currency. On 2 November 2018, the Icelandic Central Bank issued a report on the plans for lifting capital controls and amended its Rules no. 490/2016 on special reserve requirements for new foreign currency inflows. The amendments to the rules entailed lowering the special reserve requirements for new foreign currency inflows from 40% to 20%.

Additionally, the report stated that the Icelandic Central Bank was still working on releasing the remaining ISK-denominated assets subject to special restrictions under Act no. 37/2016, legislative amendments facilitating which are pending before parliament.

The Icelandic market is in general open and unrestricted for foreign investors. However, some limitations apply to specific sectors according to Act no. 34/1991 on investment by non-residents in Iceland, namely fishing, primary fish processing, energy production and aviation. Nationals of EEA States (EU Member States + Iceland, Norway and Liechtenstein) are generally exempt from these restrictions, except for restrictions in the fisheries sector.

Iceland remains a highly attractive place for investment. Its participation in the EU’s internal market within the framework of the EEA Agreement provides for privileged access to a market of over 500 million inhabitants. Iceland continues to endeavour to make its business environment increasingly attractive to foreign investors and to fully utilise its competitive strengths in the global economy.