ICELAND: An Introduction
Contributed by LOGOS Legal Services
Mr Þórólfur Jónsson managing partner &
Mr Arnar Sveinn Harðarson associate
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 was 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. From 2011 and until the emergence of the COVID-19 global pandemic, Iceland witnessed constant growth in GDP and has one of the highest GDPs per capita in the world. In 2019, there was a 2.6% increase in GDP. However, due to the impacts of COVID-19, the GDP decreased by 6.6% in 2020. In November 2021, the economic forecast of Statistics Iceland predicted a 3.9% increase in GDP in 2021 and a 5.3% increase in 2022.
Iceland benefits from its rich natural resources and abundant renewable energy, modern infrastructure, a highly skilled workforce and a good educational system. Furthermore, Iceland’s ideal geographical location between two major markets, the EU and the US, and key position in the Arctic Region, constitute opportunities for foreign investment. Unemployment is generally low in Iceland. Although general employment was severely affected by COVID-19, partially due to the country’s economic reliance on tourism, the recovery was relatively fast. General unemployment in Q3 2021 was 4%, compared to 5.8% in Q3 2020.
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 had a detrimental short-term impact on tourism in Iceland. Tourist arrivals in the summer high season in 2021 increased by 164% compared to the same period in 2020 but were still 55% below 2019 numbers.
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, computer games and e-sports, carbon storage, 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 + 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 in place, 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 a 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.), and the implementation of PSD2.
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. The capital controls were fully lifted in 2021, after partial withdrawal in 2017.
Near-future economic development in Iceland depends on the perseverance of and the continuing domestic and international response to the COVID-19 global pandemic. Furthermore, Iceland continuously prepares for future disruptive global trends, such as digitalisation, climate change and ageing populations.