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ICELAND: An Introduction

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Contributed by LOGOS Legal Services
Mr Þórólfur Jónsson – managing partner &
Mr Arnar Sveinn Harðarson – associate

General Introduction 

Iceland is a unitary parliamentary republic and a member of numerous international organisations. 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 2020”, Iceland is ranked number 26 in ease of doing business, out of 190 economies.

The Icelandic Economy 

Iceland made a strong recovery from the global financial crisis, which hit the country particularly hard in 2008. Since 2011, Iceland has witnessed constant growth in GDP and has one of the highest GDP per capita in the world. In 2018, there was a 4.6% increase in GDP, and in 2019, a 1.9% increase. However, due to the COVID-19 global pandemic, GDP is expected to have decreased by approximately 7.7% in 2020.

Iceland benefits from its rich natural resources and abundant renewable energy, modern infrastructure, a highly skilled workforce and a good educational system. Unemployment is generally low in Iceland (2.2% in July 2018 and 3.4% in July 2019) but has been severely affected by COVID-19, partly due to the country’s economic reliance on tourism. General unemployment in January 2021 was 11.6%.

The Icelandic economy has historically been reliant on the fisheries and aluminium sectors. Due to Iceland’s abundant electrical power, generated via geothermal and hydroelectric energy sources, manufacturing in Iceland grew rapidly in the years preceding the global financial crisis, with aluminium production being the largest manufacturing industry. In addition to this, following the financial crisis, tourism has established itself as an important pillar of the Icelandic economy. In the preceding decade, there was a considerable increase in the number of tourists visiting Iceland. Between 2011 and 2018, the yearly number of foreign visitors increased by 328%. The COVID-19 pandemic has had a detrimental short-term impact on tourism in Iceland. Tourist arrivals in 2020 decreased by approximately 76% compared to 2019.

In recent years, investment in technology sectors has increased, notably in data centre services, as foreign investors have taken an interest in Iceland’s relatively low price of electricity and renewable energy. The most exciting investment opportunities in recent years have been found in the IT, tourism, electronics and telecommunications, biotechnology and pharmaceutical sectors.

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 plus Iceland, Norway and Liechtenstein) are generally exempt from these restrictions, except for restrictions in the fisheries sector.

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 

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.

The development of the legal environment for businesses in Iceland generally corresponds with the EU. Among notable recent developments are, for example, the implementation of the EU financial regulations (e.g. MiFID II, AIFMD, MAR, etc.), new acts on whistleblowers and trade secrets, and the economic response packages to the COVID-19 pandemic.

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 are in general 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.

Near-future economic development in Iceland depends on the perseverance of and the domestic and international response to the global pandemic. Furthermore, Iceland must prepare for future disruptive global trends, such as digitalisation, climate change and ageing populations.