With a Gross Domestic Product (GDP) of approximately USD20 billion in 2019, the size of the economy is relatively small. However, with GDP per capita of USD56,066 in 2019, evenly distributed across the population, living standards are among the highest in the world.

Following a period of robust economic growth from the start of the millennium, with a rapid surge in private consumption, the economy hit a bump in late 2008. Iceland's financial system became engulfed in the worst financial and banking crisis since 1930 and in October 2008 the three big commercial banks of Iceland became insolvent and were taken over by the state, following which the Icelandic króna depreciated sharply. Iceland's recovery from the meltdown of the financial sector has been boosted by tourism. Private consumption, disposable income, employment and real exchange rate have recovered to similar levels as it was pre-crisis.

The global COVID-19 pandemic and the public health measures imposed in order to curb the spread of the disease have had enormous economic repercussions. In response to this situation, the Central Bank has taken a wide range of actions, including lowering interest rates, boosting domestic financial institutions' access to capital, using the international reserves to mitigate exchange rate volatility, and commencing secondary market purchases of Treasury bonds. Indicators imply that the GDP contracted by 7.7% in 2020 as a whole. The outlook for 2021 has improved somewhat, with a poorer outlook for exports offset by more favourable prospects for domestic demand. The National Budget for 2021 was passed with a deficit of 10.8% of GDP. However, GDP growth is forecast to measure 2.5% in 2021 as a whole and then rise to 5.1% in 2022 before easing back to 4.1% in 2023. To a large extent, economic developments will depend on how successful efforts to control the pandemic prove to be, both in Iceland and elsewhere.

The economy, based on fisheries and agriculture at the beginning of the last century, has diversified into manufacturing and service industries in recent decades, with tourism as one of the main sectors in Iceland. Important primary and secondary industries are based on the use of renewable natural resources, namely the coastal fishing banks, hydroelectric power and geothermal power. There is a relatively high ratio of trade to GDP.

With only 3.5 inhabitants per square kilometre, Iceland is one of the most scarcely populated countries in the world. The population of Iceland was 368,590 as of January 2021. Around 64% of the population lives in the capital city of Reykjavik and its surrounding municipalities. The native language is Icelandic.

The business culture in Iceland is egalitarian, perhaps rooted in Iceland having been a classless society. Consequently, there are hardly any cultural taboos as are common in countries with strong authoritative groups and class divisions. The people in Iceland have a high language proficiency, with close to everyone speaking English, also accompanied by good understanding of a Nordic language (usually Danish).

Being an egalitarian country, the power distance is small, meaning that superiors are accessible and rely on employees or teams for their expertise. Consultation and communication between employees and their superiors is frequent, informal, direct, and participative. Iceland is also a very individualistic society. In the business context, this means that employees are expected to be self-reliant and display initiative and hiring an employee is fundamentally based on merit and evidence.

Iceland is also considered a definitively feminine society, meaning that the society (starting in school and continuing throughout working life) is driven by caring for others and quality of life, over competition, achievement and winning.

Iceland is considered to have a fairly pragmatic culture. There is a focus on planning, but plans can be rescheduled on short notice or improvisations made. Consequently, people are fairly relaxed and not opposed to risk-taking, and thus more open to new ideas. When it comes to long-term orientation, Icelandic society has a normative culture as opposed to a pragmatic one. In other words, they prefer to maintain the societal norm, are concerned with establishing the absolute truth, and have a focus on achieving quick results.

As of 2019, information on the beneficial ownership of legal entities must be registered with the company registry, due to the implementation of the Fourth EU Anti-Money Laundering Directive ((EU) 2015/849) through the Act of Beneficiary Ownership Registration No. 82/2019.

The current coalition government is formed of the Independence Party, Progressive Party and Left-Greens and was seated 30 November 2017. Parliamentary elections were held on 25 September 2021 and the new coalition government will be announced soon.

In April 2021, Parliament passed changes to Act No. 90/2003 on Income Tax, allowing temporary increased depreciation of movable investment in 2021 or 2022 at the rate of 50% a year. In addition, the changes introduce a special depreciation premium that can be calculated on the initial value of assets acquired between 2021 to 2025 that are considered environmentally friendly, promote sustainable development, meet required conditions and are considered to be one of the following:

The legal system is based on civil law and is similar to the legal systems of other Scandinavian countries, with an emphasis on written statutory law and delegated legislation. Iceland is a member of the EEA, and EU commercial regulations and directives are effective in Iceland (except in a few limited areas).

The relevant minister must be notified of all foreign investment that is subject to limitations, when a contract or a decision regarding the investment is made.

Special permission must be obtained from the relevant minister in the case of investment in Iceland by foreign states, foreign municipalities or other foreign authorities.

Stricter limitations generally apply to investors domiciled in a country outside the:

However, special permissions can be granted under certain circumstances, provided that the permission is stipulated by an international treaty to which Iceland is a party or the relevant minister grants permission.

The restrictions on foreign investment described in this chapter also apply to acquisition of shares in a company.

The Foreign Investment Act No. 34/1991 poses restrictions on shareholding in fishing and aviation. Fishing is restricted to a foreign shareholding of 25% (share capital or initial capital) but can be increased to 33% under certain circumstances. Similarly, collective foreign shareholding in an Icelandic aviation company cannot exceed 49%.

In general, there are no restrictions on foreign investment, although there are notification requirements in some instances. However, some limitations apply to specific areas as provided in the Act on Investment by Non-Residents in Business Enterprises No. 34/1991 (and other specific legislation) including:

Under Act No. 19/1966 on the Right of Ownership and Use of Real Property, the ownership or use of real property in Iceland, including fishing and hunting rights, water rights or other real property rights, is subject to limitations for individuals and companies that are resident outside Iceland.

Non-resident persons can obtain authorisation from the relevant minister allowing them to own or lease property in Iceland. As of 2020, disposal of real property rights permanently or for longer than seven years is subject to approval from the minister responsible, after parliament passed changes to the Farmland Act No. 81/2004, irrespective of the acquirer being Icelandic or a foreign national. Legal entities owned by foreign nationals or registered in another country must now report their direct or indirect ownership in real property rights to the Directorate of Internal Revenue by 1 February annually, along with information on their owners.

Limited liability companies registered in Iceland can only own or lease real property if all board members are Icelandic nationals or have resided in Iceland continuously for at least five years. In such a company at least 80% of shares and the majority of voting rights must be in the hands of Icelandic nationals. Otherwise, permission from the ministry is required.

Persons that possess rights in Iceland under the rules of the European Economic Area (EEA) Agreement (including EU resident persons) or the Convention establishing the European Free Trade Association (EFTA), applying to the free movement of persons, the right of establishment, services or movement of capital, and also including nationals and companies domiciled in the Faroe Islands, can acquire real property rights in Iceland without permission from the relevant minister (see Regulation No. 702/2002 on the rights of aliens who come under the EEA Agreement on the or the Convention establishing the EFTA to acquire the right to own or use real property).

Because of its participation in the European Economic Area (EEA), Iceland implements the same sanctions regime as the European Union. Export control is similarly influenced by international organisations, agreements, and co-operation.

The Icelandic government publishes up-to-date information in English at https://www.government.is/topics/foreign-affairs/legal-affairs/.

A comprehensive list of sanctions and restrictions, including their corresponding implementing regulations, can be accessed (in Icelandic only) at: https://www.stjornarradid.is/verkefni/utanrikismal/lagamal/thvingunaradgerdir/#listi.

Since the implementation of Act No. 82/2019 on the registration of beneficial owners, legal persons engaging in business operations in Iceland must be registered in the Register of Enterprises. This includes branches of foreign public limited companies and private limited companies. The purpose of the Act is to ensure the availability of accurate and reliable information on the beneficial owners of entities to enable detection and prevention of money laundering and terrorist financing. Notification of beneficial owners must be submitted when new entities are registered in the Register of Enterprises, including information on the rights of their own beneficial owners.

See also Question 2 and Question 4.

A list of government funds and Nordic funds can be found at www.stjornarradid.is (in Icelandic).

The Technical Development Fund, operated by the Icelandic Centre for Research (Rannís), offers a variety of grants. For more information, see https://en.rannis.is/funding/. One of which is the Technology Development Fund from the Icelandic Centre for Research (rannis.is). It offers a maximum of ISK45 million to each company over a period of three years and calls for proposals twice a year.

Incentives are offered to companies that invest in commercial operations in Iceland. The investment must meet certain requirements, such as being beneficial for the Icelandic economy and society. This requirement can be met through the creation of jobs, rural development, export, tax revenues and know-how.

Approved investment projects will receive benefits, including derogations from taxes and charges. In addition, the following benefits can be granted, for example:

The criteria for incentives and application processes are simple and based on Act No. 41/2015 on Incentives for Initial Investments in Iceland and subject to state aid rules of the EEA Agreement. The purpose of the Act is to enhance initial investment, the competitiveness of Iceland and regional development, by stipulating which incentives can be granted to initial investment projects in Iceland and how they should be used. However, the Act does not apply to investments in companies that provide services based on legislation on financial undertakings, insurance operations or securities. The Act also does not apply to incentives granted to airports or projects for energy production.

The relevant minister is authorised to enter contracts on behalf of the government relating to involvement by the state and, as applicable, municipalities in new investments in Iceland.

Applications for an incentive in respect of new investments in Iceland must be submitted to the relevant ministry. The committee on new investment incentives examines applications for incentives and submits recommendations to the relevant minister.

Local municipalities can offer certain further incentives. However, as a member of the EEA, Iceland has access to EU research funds for research and development (R&D) programmes and joint ventures undertaken with companies from at least one other EEA country.

Act No. 152/2009 on the Support for Innovation Enterprises provides that enterprises that carry out research and development projects that have been certified by the Icelandic Centre for Research (Rannís) can be provided with the right to tax credits against the assessed income tax amounting to 20% of the paid cost of the projects. See the website of the Icelandic Centre for research for further information on the support to projects (https://en.rannis.is/).

See above, Incentives.

Reimbursements are offered for film and TV production costs incurred in Iceland in accordance with Act No. 43/1999 and Regulation No. 622/2012 on Temporary Reimbursements in Respect of Film Making in Iceland. Producers can apply for reimbursements from the State Treasury of 25% of the costs incurred in the production of films and television programmes in Iceland. The reimbursement scheme does not cover production of commercials or music videos.

Production costs refer to all costs incurred in Iceland deductible from the revenues of enterprises under the provisions of the Act on Income Tax. When more than 80% of the total production cost is incurred in Iceland, the reimbursement is calculated based on the total production cost incurred within the EEA, the Faroe Islands and Greenland. Payments relating to employees and contractors can only be included in production costs if they are verified as taxable in Iceland.

The main business vehicles that are used in Iceland are two types of limited liability companies, public and private. They are regulated by Act No. 2/1995 on Public Limited Companies and Act No. 138/1994 on Private Limited Companies.

Establishing a branch of a foreign company or partnership is also common in Iceland, in addition to sole proprietorships (confined to self-employed individuals).

The most common form of business vehicle used by foreign companies in Iceland is a subsidiary in the form of a private limited liability company. Tax implications play a large role in choosing the type of business entity because the income tax rate for limited companies and their branches is now 20%, compared to 37.6% for partnerships. In addition, limited companies offer the benefit of limited liability, while partnerships entail full and unlimited liability for all partners.

New private limited companies must be registered with the Register of Enterprises (Fyrirtækjaskrá). The company must submit a copy of its memorandum (charter) and articles of association to the Register of Enterprises. A completed application to establish a private limited company is generally dealt with in seven to ten business days (provided that all the required information and documentation is submitted). The registration fee is ISK131,000 for a new private limited company, including an identity number for the company (excluding legal costs). The registration process can also be done electronically, by way of electronic ID, expediting the registration time to one to two business days. That way, all necessary data is collected through the registrant's electronic application.

Information on the beneficial owners of a registered company must be submitted to the Register of Enterprises in accordance with the Act of Beneficial Ownership Registration No. 82/2019.

A company must submit annual accounts to the Register of Annual Accounts (Ársreikningaskrá) and notify any change to the particulars (such as the registered office, directors or articles of association) to the Register of Enterprises. Each change to the particulars costs ISK3,500. A company must also file an annual income tax return to the Directorate of Internal Revenue (Ríkisskattstjóri).

A private limited company must have an initial capital of at least ISK500,000 which must be paid before registration. There is no maximum share capital.

Shares can be issued for non-cash consideration, but a valuation of the non-cash consideration must be carried out.

Restrictions on rights attaching to shares. Any restrictions on rights attached to shares must be set out in the company's articles of association, under the conditions provided in the Act on Private Limited Companies No. 138/1994.

Automatic rights attaching to shares. The following rights are relevant:

One or more persons can be the founder of a private limited company but at least one must reside in Iceland. The residence requirement does not apply to individuals or legal entities domiciled in an EEA, EFTA or Organisation for Economic Co-operation and Development (OECD) country, or in the Faroe Islands.

There are generally no restrictions on foreign shareholders, except in some specific sectors (see Question 4).

The board of directors must have at least one director and one reserve director. However, if there are five or more shareholders, the board of directors must have at least three directors. A company's board of directors can engage one or more managers (CEO) but there is no obligation for a company to have a manager.

If the company has more than 50 employees generally on an annual basis, the board of directors must consist of both male and female directors. When there are more than three directors on the board, the ratio between male and female directors must not be less than 40%. The same applies to ratios among reserve directors in the companies, but the ratios on the board and the reserve board must in total be as equal as possible. Therefore, attention must be paid to gender ratios when the hiring managers.

The manager(s) and at least half of the members of the board must reside in Iceland or be residents and citizens of any other EEA, EFTA or OECD country or the Faroe Islands. If there is only one person on the board of directors, they must fulfil the residence qualification. The relevant minister can grant an exemption from this restriction.

Directors are personally liable to the company for negligence in the performance of their duties. They are also liable to third parties for violations of the Act on Private Limited Companies or other applicable legislation and the company's articles of association.

In general, each group company is treated as a separate entity. However, in exceptional circumstances a parent company can be liable for the acts of its subsidiaries, for example in cases of fraudulent activities.

In accordance with the Public Health and Pollution Control Act No. 7/1998, all industrial activity that could result in pollution must have a valid operating licence. The Environment Agency issues operating licences for power-intensive and large-scale industries, while the Health Inspectorates of local authorities license other polluting industrial operations. The licence must state, among other things, refence limits for pollutants and pollution prevention, monitoring, measurement and research.

Act No 45/2007 on Posted Workers and Foreign Employers' Obligations regulates the employment relationship of workers posted in Iceland whose employers are established in the EU/EEA/EFTA. It transposes Directive 96/71/EC concerning the posting of workers (Posted Workers Directive) into law.

Iceland Revenue and Customs (Skatturinn) has compiled information on the taxation of posted workers and employees of temporary work agencies working in Iceland: (https://www.skatturinn.is/english/companies/foreign-service-providers/).

As of October 2020, individuals from countries outside the EU/EEA/EFTA can work remotely from Iceland for up to 180 days if income from remote working corresponds to ISK1,000,000 a month or ISK1,300,000 a month if the application is also for an accompanying spouse or cohabitating partner. Applicants are not allowed to work for Icelandic employers while in Iceland under the Remote Work Long-Term Visa, and are not considered tax residents of Iceland.

See the website of Directorate of Immigration for further information and conditions (https://utl.is/index.php/en/long-term-visa-for-remote-workers-and-their-family-members).

Workers outside the EU/EEA/EFTA must apply for a work permit to work in Iceland. The employment rights of foreigners in Iceland are governed by Act No 97/2002 and Regulation no. 339/2005. The right of foreigners to reside in the country is governed by Act No 80/2016 on Foreigners.

Act No 139/2005 on Temporary Work Agencies regulates the activities of these agencies based in Iceland.

For Icelandic employees posted within the EU/EEA, the Posted Workers Directive applies. Its purpose is to protect posted workers' rights and contains core employment conditions that must be applied to posted workers in the host country.

In addition, there are two more relevant Directives that apply but the legal transposition status may vary between EEA countries may vary:

There are many acts that regulate employment relationships and the most important are the:

Certain mandatory rules apply to the employment of employees, irrespective of a choice of law in the employment contract, including minimum wage and parental leave.

The acts above provide a framework of minimum rights for employees that are further outlined by collective bargaining agreements in each sector of work. Wages and other terms of employment concluded in the collective agreements are minimum terms by law and apply to all workers and employers operating within the occupational and/or geographical area covered by each collective agreement. This applies to both domestic and foreign undertakings operating on the Icelandic labour market.

For any employee that will be employed for one month or longer, their terms of employment must be confirmed no later than two months after the employment starts, either by a written contract of employment or in writing by the employer.

The employment contract or the written confirmation of employment must include the following main terms:

Oral employment agreements are considered binding, given that their existence is proven, in line with the fundamental principle that agreements must be kept. A judge may also consider implied terms to be part of an employment contract, corresponding to the conduct of the parties.

An employee is always entitled to the minimum wage and other terms of employment set by the trade union in the relevant profession in the geographic area covered by the collective agreement. Agreements between employees and employers on worse terms are considered invalid. This applies regardless of whether the employee has signed up for trade union or not.

Collective agreements are automatically binding on all workers and employers operating within the boundary of the applicable collective agreement. Collective agreements provide terms of employment including wages, working time arrangements, holiday, sick leave and various other employment rights for employees. Wages and other terms of employment concluded in the collective agreements are minimum terms by law.

Nationals of the member states of the EEA, EFTA and the Faroe Islands do not need a work permit in Iceland. Nationals from other countries need a work permit to work or operate a business in Iceland. Applications for work permits, including the necessary supporting documentation, must be submitted to the Directorate of Immigration (Útlendingastofnun) which forwards the application to the Directorate of Labour (Vinnumálastofnun) provided that the conditions for issuing a residence permit for the relevant foreign national are met. See the website of the Directorate of Labour for further information about work permits (https://vinnumalastofnun.is/en/foreign-workers/work-permits).

A foreign national from a country outside the EEA and/or EFTA who plans to stay in Iceland for more than three months must have a valid residence permit. Foreign nationals from EEA and EFTA states do not need a special residence permit to stay in Iceland for a period exceeding three months (or up to six months if seeking employment), but must register with Registers Iceland and fulfil certain conditions under Article 89 of Act No. 80/2016 on Foreigners. Citizens of the other Nordic countries (Denmark, Finland, Sweden and Norway) can stay in Iceland without a residence permit. See the website of the Directorate of Immigration for further information (www.utl.is/index.php/en/).

In October 2020, the Directorate of Immigration introduced a long-term visa for individuals from countries outside the EU/EEA/EFTA looking to work remotely from Iceland for up to 180 days. Applicants cannot work for Icelandic employers while in Iceland under the Remote Work Long-Term Visa and are not considered tax residents of Iceland. See the website of Directorate of Immigration for further information and conditions. (https://utl.is/index.php/en/long-term-visa-for-remote-workers-and-their-family-members).

An employee's right to management representation and/or information and consultation in relation to corporate transactions is provided for under the following acts (based on EU legislation):

Employers have greater flexibility to terminate employment in Iceland than in most other European countries. Dismissals can be with or without cause, and no specific reason is required. However, the employee has the right in accordance with collective agreements to request an interview about the reasons for the termination and that the reasons be put in writing. An interview must be requested within 96 hours from the employees' knowledge of the contract's termination. If the employer fails to fulfil the request, the employee is entitled to another interview with the employer in the presence of the employee's union representative, if the employee requests it.

Statutory minimum notice. A statutory minimum notice period is generally required by collective agreements. Notice periods range from 12 days to six months, depending on the applicable collective agreement and the length of employment. This is usually a three-month notice period for termination of permanent employment contracts (up to six months for senior positions).

Severance payment. Typically, there is no severance pay beyond ordinary pay throughout the notice period.

Dismissals can be with or without cause, and no specific reason is required. Employers can dismiss employees without notice, provided that there is a legitimate cause and the employee has received prior warning. The termination must be in writing and takes effect at the end of the month.

The following categories of workers enjoy special protection from dismissal and redundancy:

Discrimination on the grounds of sex is prohibited and special rules cover the transfer of undertakings and collective redundancies (see Question 15 and Question 17).

Redundancies and mass layoffs are regulated by the Act on Collective Redundancies No. 63/2000 and are treated as a dismissal without cause.

The Act is in line with EU legislation and implemented Directive 98/59/EC.

All employees that are considered to be resident in Iceland by the Icelandic tax authorities are subject to tax on their worldwide income. Individuals are considered resident in Iceland for tax purposes if they maintain a permanent residence in Iceland. However, double tax treaties can affect whether an employee is taxed in Iceland.

Permanent residence refers to the place where an individual is based, usually stays in their leisure time, has their household belongings and place of sleep when not temporarily absent due to studies, holidays, work trips, illness, or other similar events.

A non-resident coming for work for more than three months can register as a resident but must do so if they stay in Iceland for more than six months.

Individuals that stay for more than 183 days within a given 12-month period are considered tax resident in Iceland.

Individuals that are in Iceland for a temporary stay (183 days or less in any given 12-month period) are generally taxed on Iceland-source income only.

Tax resident employees must pay income tax on their gross income. Income tax is divided into state income tax and municipal income tax, which are withheld and paid monthly at the following progressive rates:

All individual taxpayers of 16 years of age and above are entitled to a personal tax allowance, deducted monthly by the employer against the calculated state and municipal income taxes. The current personal tax allowance is ISK50,792 per month.

Each year, all tax resident employees must file an annual income tax return to the Directorate of Internal Revenue. The tax year is the same as the calendar year.

Non-tax resident employees who derive income from employment during their stay in Iceland are subject to income tax on the income at the same rates as resident employees (see above, Tax Resident Employees). Non-tax resident employees are entitled to a personal tax credit in direct proportion to the days they spent in Iceland.

Contributions to pension funds must be paid by both employees (at a minimum rate of 4%) and employers (at a rate of 8%). Most collective wage agreements in Iceland state that employers pay an additional contribution of 3.5%. Therefore, their total contribution amounts to 11.5%.

The employee's pension fund contribution is deductible from their tax base and must be withheld and returned by the employer. Employers must return all wage related taxes before the 15th of the next month and most other wage-related contributions, such as pension contribution, before the end of the following month.

According to Icelandic collective wage agreements, employees have the option of payments to a personal pension fund. If an employee chooses to pay a monthly contribution to a personal pension fund, their employer must pay a complementary contribution and make sure both contributions are returned to the pension fund in question.

Companies are considered tax resident in Iceland if they are either incorporated in Iceland, have their statutory seat in Iceland or their place of effective management in Iceland. Tax resident companies are generally subject to tax in Iceland on their worldwide income.

Business vehicles can also be subject to tax in Iceland due to physical presence in the form of a permanent establishment. Non-tax resident companies are generally subject to tax on the income attributable to a permanent establishment in Iceland (if any). The definition of a permanent establishment is similar to the OECD model tax convention, as amended by BEPS (base erosion and profit shifting) Action 6. The attributed income is taxed at the same general rates that apply to resident companies (see Question 21, Corporate Income Tax). Double taxation treaties can apply.

Permanent establishments are taxed in conformity with the rules applicable to tax resident companies with regard to dividends, royalties, income derived from business activities, capital gains from the disposal of Icelandic assets (including real estate) or shares and bonds.

Tax resident businesses are taxed on their worldwide income. Taxable income and deductible costs are defined by tax law. In practice, taxable profits are determined based on the financial accounts of companies, after any adjustments required by tax law. All taxes are paid in the assessment year (the year following the year of operations).

Each business entity is taxed separately. However, a parent company with a subsidiary can apply for tax consolidation if one company owns at least 90% of shares in another company.

The rate of income tax for limited liability companies is 20%. The rate for partnerships (in Iceland they are legal persons and taxable as such) registered for tax purposes is 37.6%.

VAT is charged on goods and services supplied in Iceland by businesses against the consideration paid and on imported goods. The standard rate is 24%. A reduced rate of 11% applies to certain goods, such as hotel rooms, newspapers, books and food for human consumption (with the exception of alcohol). Financial services are exempt.

The export of goods and services is generally zero-rated although exceptions can apply for services.

Capital gains are added to other taxable income and taxed at 22%. However, limited companies enjoy tax-exempt capital gains when selling shareholdings in other limited companies, if they:

Correspondingly, losses on shareholdings in limited companies are not deductible either.

Real estate taxes are paid locally by businesses, along with local service charges and can be up to 1.32% of the value of the real estate.

Non-tax resident companies are subject to 20% withholding tax on Icelandic sourced dividends, subject to any applicable tax treaty. In the absence of tax treaties, the domestic tax rules apply. However, limited companies residing within the EEA, in an EFTA state or in the Faroe Islands enjoy a statutory right to file a tax return in the following year and get a full refund of the tax withheld.

Domestic individuals are subject to 22% income tax on dividends received from foreign companies. Corporations in the form of limited companies are effectively exempt from tax on dividends received if the paying companies:

If these requirements are not met by dividends received by limited companies, they are subject to 20% tax.

Withholding taxes paid on dividends at source are credited against any dividend taxes due in Iceland, either on the basis of an applicable double taxation treaty or due to unilateral double taxation relief provided for by the Act on Income Tax.

Interest payments to non-tax resident companies are subject to 12% withholding tax, subject to applicable tax treaties. In the autumn of 2016, new rules on thin capitalisation were passed by parliament (see Question 2). Under the rules, deductions on interest paid cross-border to related parties is capped at 30% of earnings before interest, taxes, depreciation and (EBITDA) profits.

Royalty payments to non-tax resident companies are subject to 22% withholding tax, subject to any applicable tax treaty.

The deductibility of interest payments to related parties is capped at 30% of the EBITDA profits.

If an Icelandic tax resident owns (directly or indirectly) a controlling interest in a business entity that is located in a low tax jurisdiction (as defined in Act No. 90/2003 on Income Tax), the income of the entity can be imputed to the Icelandic tax resident, subject to certain conditions. Under these circumstances, Icelandic tax residents are taxed on the foreign profit, regardless of the distribution of the profit and the tax base calculated according to Icelandic rules on taxable income and deductible expenses.

There are two main exemptions from the controlled foreign company rules:

Act No. 90/2003 on Income Tax includes a general transfer pricing provision, stipulating that if prices and/or terms of a business transaction between related entities are not comparable with a similar transaction between unrelated entities, the tax authorities can assess and correct the terms of the transaction.

Businesses that either own assets exceeding ISK1 billion or have a yearly turnover exceeding ISK1 billion are required to document any transactions with related parties and provide the basis of the determination of an arms-length price for each transaction. Detailed provisions of the documentation requirements are provided by Regulation No. 1180/2014 on Transfer Pricing Documentation.

In general, import duties (customs, excise duties, VAT and various other charges) are levied on imported goods. Recent changes have removed various customs duties. Therefore, on import it is necessary to check the type goods at issue to see if, and to what extent, customs and excise duties apply, while VAT is generally levied on all imports. The basis for the levy is the cost of goods including shipping and any other costs. In general, no duties are levied on exports.

Iceland has tax treaties with 45 countries already in force as of January 2021, including one that is a multilateral treaty between the Nordic countries, to which Iceland, Sweden, Norway, Finland, Denmark and the Faroe Islands are party. The Ministry of Finance and Economic Affairs aims to build a more extensive treaty network and is therefore negotiating with new treaty partners.

The Competition Act No. 44/2005 (based on the EEA Agreement and secondary EU legislation) regulates:

Icelandic competition law applies to any kind of business activity (regardless of whether conducted by individuals, companies, public entities or others) and applies to agreements, terms and activities having, or intended to have, an effect in Iceland.

Unilateral conduct is regulated by the Competition Act. According to the Act, any abuse by one or more undertakings of a dominant position is prohibited.

The Competition Authority (Samkeppniseftirlitið) imposes administrative fines on undertakings or groups of undertakings that violate the provisions of the Competition Act. Violations of the Act can be subject to fines or imprisonment for up to six years for a serious offence.

Unfair business practices are regulated by Act No. 57/2005 on the Supervision of Business Practice and Marketing that is monitored and enforced by the Icelandic Consumer Agency (Neytendastofa). Violations of the Act can be subject to fines or imprisonment for up to six months for a serious offence.

Mergers and acquisitions are subject to merger control under the Competition Act.

Mergers must be reported to the Competition Authority if both of the following conditions are satisfied that:

Foreign-to-foreign acquisitions are subject to merger control if they have effect or are intended to have effect in Iceland.

There are no specific foreign exemptions in place.

Under the Foreign Investment Act No 34/1991, investment in the fisheries, energy and airline sectors is subject to certain restrictions, limiting the possibility of mergers and acquisitions with foreign companies (see Foreign Investment).

Bribery is punishable in Iceland under the General Penal Code No. 19/1940.

Under Article 109, any person who gives, promises or offers a public official a gift or other undue gain for the official himself or other persons, to persuade them to act or refrain from acting in connection with their official duties, can be imprisoned for up to five years or fined if there are extenuating circumstances. This punishment also applies to the same conduct with a foreign public official. Anyone who confirms that they can exert improper influence on the decision-making of any person listed in Article 109 with the intention of doing so, is subject to the same punishment.

Public officials or foreign officials who demand or accept the promise of a gift or undue gain for themselves or others in connection with the execution of their work can be imprisoned for up to six years or be subject to a fine under Article 128.

Bribery in business operations is also punishable under Article 264a of the General Penal Code. Any person who gives, promises or offers a person who directs a domestic or foreign enterprise in business operations, or works on its behalf, a gift or other gain to which that person is not entitled to will be imprisoned for up to five years or fined if there are extenuating circumstances. The same punishment applies to directors of domestic and foreign enterprises in business operations.

Definition and legal requirements. A patent can only be granted for inventions (that is, a practical solution to a problem, where the solution is of a technical nature and is reproducible). For an invention to be patentable, it must:

Patents can be granted for products, methods, apparatus and applications. The following (among others) are excluded from patent protection (Patent Act No. 17/1991):

The invention must not have been made known to others before the patent application was filed.

Protection. Protection is obtained by filing a patent application with the Icelandic Intellectual Property Office (ISIPO). The appointment of an agent residing in a member state of the EEA, EFTA or the Faroe Islands is requested if the applicant is not resident in Iceland. Icelandic patents only enjoy protection in Iceland.

Enforcement. The exclusive rights established by patent legislation entitle the proprietor to prohibit others from manufacturing, importing and selling an invention protected by a patent. The patent owner can file for an injunction to protect the patent against violation of its rights and subsequently bring proceedings in the courts of Iceland where the patent owner can make a claim for damages. The remedies available for intentional infringement of a patent include fines and, under aggravated circumstances, up to three months' imprisonment enforced by relevant authorities.

Length of protection. Protection lasts for up to 20 years provided that the annual fee is paid. After the expiration of the patent, the invention can be used universally. It is possible to extend patent protection up to 25 years by obtaining supplementary protection certificates which are available for pharmaceutical products and agrochemicals.

Definition and legal requirements. Trade marks can be any type of visible sign, words, logos or a combination of both, used to differentiate the goods or services of one party from the goods or services of other parties. Trade marks are often used as company names and domain names. To be registered, trade marks cannot be general in nature or merely descriptive of the goods or services to which they relate. They must not be identical to, or closely resemble, trade marks that have already been registered for similar goods or services.

Protection. Protection is obtained by registration or by use. Trade mark applications are filed with the ISIPO and must fulfil certain conditions under the Trade Mark Act No. 45/1997. The appointment of an agent residing in a member state of the EEA, EFTA or the Faroe Islands is requested if the applicant is not domiciled in Iceland. A trade mark registered in Iceland only enjoys protection in Iceland.

Enforcement. The exclusive rights established by trade mark legislation entitle the proprietor to prohibit others from using, for commercial purposes, marks that are identical or similar to its own trade mark. The trade mark owner can file for an injunction to protect the trade mark against violation of its rights and subsequently bring proceedings to the courts of Iceland where the trade mark owner can make a claim for damages. The remedies available for intentional infringement of a trade mark include fines and up to three months' imprisonment enforced by relevant authorities.

Length of protection. Protection lasts for ten years at a time and is renewable for successive ten-year periods for as long as the trade mark owner wishes. If the trade mark has not been used for a period of five years, the registration is susceptible to cancellation proceedings by a third party before a court.

Definition. Designs are defined by the visible appearance of products. A design right does not cover design features that are dictated by a product's technical function or quality, only the appearance is protected. Products that can enjoy design protection include furniture, clothing, packaging, machinery, tools, foods and jewellery, and can be both handmade and mass-produced. Designs must be new and have individual character to enjoy protection in accordance with design legislation. The design right holder has exclusive exploitation rights, provided the rights are registered.

Registration. Protection is obtained by registration with the ISIPO (Design Protection Act No. 46/2001 and Regulation on Registration of Design No. 706/2001). The appointment of an agent residing in a member state of the EEA, EFTA or the Faroe Islands is requested if the applicant is not domiciled in Iceland.

Enforcement and remedies. A registered design can be invalidated by the ISIPO or the court. The registration of a design grants its proprietor exclusive rights to prohibit others from utilising the design. The design owner can file for an injunction to protect the design from violation of its rights and can subsequently bring proceedings to the courts of Iceland where the design owner can make a claim for damages. The remedies available for intentional infringement of a design include fines and up to one year imprisonment enforced by relevant authorities.

Length of protection. Protection lasts for five years from the date of filing, renewable for successive five-year periods (up to a maximum term of 25 years).

Unregistered designs are protected under copyright law (see below, Copyright).

Definition and legal requirements. Copyright protection applies to any work in the field of literature and art created through intellectual effort and originality (Copyright Act No. 73/1972). Copyright protection is available for a non-exhaustive list of works, including in all kinds of writings, oral lectures, stage performance works, musical works, paintings, drawings, sculptures, architectural designs and buildings, maps, cinematographic work, photographic works, models and software programmes.

Neighbouring rights (such as those of performers, film-and phonogram producers and broadcasting companies) are more limited in their protection and duration than the copyright protection of literary and artistic works.

Protection. Protection exists automatically as soon as the work is created. No registration system is available.

Enforcement and remedies. This is the same as for patents (see above, Patents). Intentional infringement of copyright can result in fines and up to two years' imprisonment enforced by relevant authorities.

Length of protection. Protection of copyright lasts for the lifetime of the author, plus 70 years. It is not renewable.

Nature of right. The use of confidential information is protected under Act No. 57/2005.

Protection. Protection can be obtained by written agreement between the parties. Breach of this agreement (breach of confidence) constitutes a breach of contract.

Enforcement. The damaged party must file for an injunction and/or bring a claim for damages arising out of a breach of contract in the courts of Iceland.

Length of protection. Protection is typically between two to five years, depending on the term of the contract.

Act No. 103/1992 on Commission Sales Transactions, which transposes Directive 86/653/EEC on self-employed commercial agents into Icelandic law, contains a number of mandatory provisions that protect agents that the parties cannot waive before the expiry of the agreement. However, the agent will only be able to benefit from legal protection in Iceland if the agency agreement is in writing. Mandatory provisions include a right to reasonable commission and termination notices and indemnities.

There are no specific laws on distribution in Iceland. General principles on the supply of goods apply, in addition to EU and local competition law.

There are no specific laws on franchising in Iceland. General principles on the supply of goods apply, in addition to EU and local competition law.

The Act on Electronic Identification and Trust Services for Electronic Commerce No. 55/2019 and the Act on Electronic Commerce and other Electronic Services No. 30/2002 regulate e-commerce, including electronic signatures and distance selling. The acts are generally in accordance with corresponding EU legislation.

Iceland follows European e-commerce regulations. To sell online, businesses must comply with legislation to ensure customer personal data is kept secure, goods and services meet quality and suitability standards. Storing of information about customers, suppliers or potential suppliers must comply with EU Regulation 2016/679 on General Data Protection Regulation (GDPR).

Advertising is regulated by Act No. 57/2005 on Supervision of Business Practice and Marketing. Various regulations have been implemented under the Act to outline the legal environment. The Consumer Agency is the competent authority responsible for the surveillance of unlawful advertising in Iceland.

The Act on Consumer Contracts No 16/2016 ensures consumer protection when purchasing goods and services outside a seller's permanent establishment, for example, by phone, over the internet, or through door-to-door sales. The Act places a strict obligation on the seller to provide information. The Act cannot be derogated from, therefore, the seller cannot provide for worse terms than stipulated under it. The Consumer Agency is responsible for the surveillance of these practices.

Sales promotions are regulated by Act No. 57/2005 on the Supervision of Business Practice and Marketing that is monitored and enforced by the Icelandic Consumer Agency (Neytendastofa). Violations of the Act can be subject to fines or imprisonment for up to six months for a serious offence.

In July 2018, the Act on Data Protection and the Processing of Personal Data, No. 90/2018, was passed, transposing EU Regulation 2016/679 on General Data Protection Regulation (GDPR) into Icelandic law and replacing Act No. 77/2000 on the Protection of Privacy as regards the Processing of Personal Data.

A fundamental change on data protection was implemented, placing greater and stricter obligations on those handling personal data. The Data Protection Authority (Persónuvernd) is the competent authority responsible for the surveillance of enforcement of the Act.

Additionally, Act No 75/2019 on the Processing of Personal Data for Law Enforcement Purposes aims to facilitate the necessary sharing of personal data between government authorities and others.

The scope of Act No 90/2018 covers consumer privacy.

Under the Act on Product Liability No. 25/1991, producers and distributors can be liable for the personal injury, damage to property or loss of a provider (an individual that provides for others, such as a spouse or a parent) caused by a defect in a finished product that was produced or distributed in Iceland.

The Act on Product Safety and Official Market Control No. 134/1995 provides additional protection to private consumers in relation to defective products.

Main activities. The Iceland Competition Authority (ICA) is an independent agency with an independent Board of Directors which reports to the Minister of Commerce and investigates possible violations of Icelandic Competition Act No. 44/2005. The agency has an overview of ten core markets in Iceland which cover all sectors of the economy.

Cases for the ICA are undertaken either on the initiative of the agency itself or on the basis of complaints received by it. Anyone can submit a notification or a tip to the ICA and the agency decides which cases to investigate. Anyone approaching the ICA with a tip or a complaint is not automatically entitled to have their case accepted, nor are they automatically party to the case. Only those who can demonstrate their own legally protected interests can be party to cases accepted for investigation by the Competition Authority.

Main activities. The Environment Agency (EAI) operates under the direction of the Ministry for the Environment and Natural Resources. Its role is to promote the protection as well as sustainable use of Iceland's natural resources, as well as public welfare by helping to ensure a healthy environment, and safe consumer goods.

The EAI advises the public, businesses and regulatory authorities and monitors enviromental quality, evaluates environmental impact assessments and developments plans. The agency also supervises and inspects operations that could lead to pollution and issues operating licences for power-intensive and large-scale industries.

Main activities. Financial supervision is now part of The Central Bank of Iceland. The Central Bank is responsible for the tasks entrusted by law and Governmental directives to the Financial Supervisory Authority and monitors supervised entities to ensure that their activities are in compliance with the law and with Governmental directives and consistent with sound and appropriate business practices.

The Financial Supervisory Authority regulates entities engaging in financial activities which are subject to licence. Regulated entities include commercial banks, savings banks, credit institutions, securities firms, insurance companies, pension funds, UCITS and UCITS management companies.

The principal provisions concerning the regulatory functions of the Financial Supervisory Authority are laid down in Chapter III of Act No. 87/1998 on the official supervision of financial operations.

Main activities. The Icelandic Consumer Agency is one of the governmental agencies in Iceland which is entrusted with market surveillance of business operators and transparency of the markets in respect to safety and consumers legal rights. The agency operates under the direction of the Ministry of the Interior and ensures that legislation for protection of consumers rights is enforced.

The Consumer Agency works on administrative projects in the field of consumer affairs, product safety affairs, official market control, metrology and electricity security affairs as further stipulated in the Act on the Consumer Agency and Consumer Spokesman No. 62/2005.

W www.neytendastofa.is/English

The government has taken various measures to mitigate the economic effects of the Covid-19 pandemic. Economic response packages may impact companies doing business in Iceland, especially those suffering losses. Information can be found at: Government of Iceland | Covid-19 information.