ICELAND: An 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 IMD’s 2023 competitiveness report, Iceland ranked 16th out of 63 countries, whereas infrastructure and business efficiency rank 7th and 10th, respectively.

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, with one of the highest GDP per capita in the world. Following a GDP decrease in 2020 caused by the impacts of COVID-19, the GDP increased by 4.4% in 2021, by 7.2% in 2022 and is set to increase by approximately 3.6% in 2023. In November 2023, the economic forecast of Statistics Iceland predicted a 2.1% GDP increase in 2024. Iceland benefits from its rich natural resources and renewable energy, modern infrastructure, a highly skilled workforce and a good education 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, amounting to 3.7% in 2022.

The Icelandic economy has historically been reliant on the fisheries and aluminium sectors. Due to Iceland’s production of electrical power, 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 annual number of foreign visitors increased by 328%. The COVID-19 pandemic had a detrimental short-term impact on tourism in the country, and in 2022, tourism accounted for approximately 6.1% of the gross national product.

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, that has remained stable in contrast to international developments. The most exciting investment opportunities in recent years have been found in the IT, tourism, electronics and telecommunications, computer games and e-sports, environmentally friendly energy dependant industries, 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 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 in place, with procedures before Icelandic courts being very expeditious in comparison to 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.

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.

After the collapse of the Icelandic banking sector in 2008, extensive capital controls were put in in place, subjecting cross-border and currency transactions to strict control. The capital controls were fully lifted in 2021, after partial withdrawal in 2017.

Iceland continuously prepares for future disruptive global trends, such as digitalisation, climate change and ageing populations.