Doing Business In: Iceland
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THE BUSINESS ENVIRONMENT
The Icelandic business environment can be described as a modern western environment. Iceland is a member of the EEA Agreement and as such enjoys the benefits of the European Single Market. In a recent survey Iceland was ranked 12th in Europe in a country ranking measuring the ease of doing business. Furthermore, Iceland ranked 12th in the world on labour market efficiency.
Traditionally, Iceland´s main and most important export has been fishing and fishing products. Iceland is rich of natural green energy harvesting both hydro power and geothermal resources. Energy extensive industries such as, aluminium smelters and ferrosilicon production have benefitted from those rich energy resources as well as data centres benefitting from the natural cooling the Icelandic weather provides.
In recent years tourism has become one of Iceland’s most important industries and more recently aquaculture has caught the eye of many foreign players in that industry, investing heavily in many of the remote parts of the country.
Iceland has a well-educated and innovation driven workforce. Information and communication technology and engineering are the most popular subjects in Icelandic universities.
Iceland’s economy is an open high-income economy combining a free market economy with a welfare state which is sometimes referred to as the Nordic model. It is the smallest economy within the OECD, with last year’s annual gross domestic production (GDP) of USD 21.7 billion (ISK 2.888 billion). The size of the Icelandic economy is approximately 0.65% of the German economy and 0.12% of the United States economy. Although the size of the Icelandic economy is comparatively small, with only around 376 thousand inhabitants, the aforementioned domestic production places Iceland among the top ranked countries in GDP per capita, 58.890 USD (PPP). Iceland, which in the first half of the 20th century was one of the least affluent countries in Western Europe, has over the last few decades consistently ranked among countries with the highest standard of living worldwide. Iceland GDP per capita rank fell in the aftermath of the financial crisis in 2008 but has climbed above its pre-crisis position ranking. In terms of GDP per capita, Iceland currently sits in 8th place globally.
Iceland’s success in building a prosperous and globally competitive economy can be attributed to factors such as a strong institutional framework, skilled workforce, high degree of economic freedom, sound democracy and low levels of corruption. Various competitive indices reflect these qualities. Iceland ranks number one in terms of gender equality and peace. Female labour force participation is at 75%, which is significantly higher than elsewhere in Europe. High labour force participation rate, the country’s openness and the economy’s flexibility are key strong-points of the Icelandic economy. For the peace index, Iceland has held its place as the most peaceful country in the world since 2008.
Small open economies are by nature often more volatile than larger economies. This is mainly caused by a lack of diversification and relatively large external influences. This has caused significant business cycle fluctuations. In the years leading up to the Covid-pandemic the Icelandic economy had experienced a robust economic growth, greater than neighbouring countries, as well as other high-income OECD countries. In fact, 2016 GDP growth in Iceland was highest among OECD countries and seventh highest globally. The export sector, particularly the fast-growing tourist industry, had been the main growth driver , along with strong contributions from business investment and private consumption. After a deep contraction following the Covid-19 pandemic the economy is recovering on the back of robust export growth. Following a 6.6% contraction in 2020, the economy is expected to grow by 2.8% in 2021 and 4.5% in 2022 driven by a rebound of tourism, a successful vaccination programme and the lifting of restrictions.
The unemployment rate, which had been declining since the peak in 2010 rose significantly during the pandemic, being at it heights in 2021, but is expected to edge down to around 7% in 2022.
In 2020, government debt was approximately 80% of GDP, increasing rapidly due to the Covid-19 pandemic. In the years leading up to the pandemic the GDP had significantly improved from the peak of 2011 when it amounted to approximately 95% of GDP. The budget deficit widened to 7.3% of GDP in 2020. Parliament suspended the fiscal rule and the rolling five-year fiscal plan it approved in late 2020 as well as the one it endorsed in Spring 2021 with the aim to support the economy in the short term and to reach a positive primary balance by 2025, when gross public debt according to the National Accounts is set to stabilize at 100% of GDP.
High inflation has long been a concern in Iceland. In March 2001, the CBI converted from an exchange rate targeting monetary policy and adopted an inflation-targeting policy with a 2.5% inflation target. Since the adoption of the policy, inflation has exceeded this target, averaging 5%, but after 2014 inflation has been close to or below its target. One of the characteristics of the Icelandic economy is the small and volatile currency, the Icelandic Króna, and the large impact of exchange rate fluctuations on inflation. Currently, imported goods account for roughly 30% of the consumer price index (CPI). Furthermore, the housing component, which includes housing prices, contributes 25% to the index. Inflation is expected to be over 5% in 2022, the rise in house prices weighs heavily but other domestic cost items have also risen. In addition, global oil and commodity prices are increasing. The Central Bank lowered interest rates incrementally, from early 2019 from 6.25% to November 2020 to 2,5%. In May 2021 interested rates were increased again, and are now in March 2022 at 4,5%.
The small size of the domestic economy makes Iceland highly dependent on international trade. Since various goods and services are not produced domestically, they need to be imported. To fund these imports, a strong export sector is required. Thus, international trade plays an important role when examining Iceland’s economic performance. Iceland’s balance of trade has seen drastic changes this century. Historically, Iceland had a significant trade deficit with a corresponding current account deficit, which contributed to a build-up of record high levels of external debt. That has turned around over the last decade, with Iceland running a consistent current account surplus, largely due to a strong trade surplus. This shift is largely explained by the Króna exchange rate. The Króna depreciated fast at the onset of the crisis in 2008 as investors pulled out of Iceland, reducing imports and boosting exports. Iceland’s economic recovery, led by export growth (particularly in tourism), helped the Króna to retain its value. Since late 2016, Iceland’s real exchange rate was back at similar levels as in the years before the financial crisis. After a good period of running a trade surplus, instead of large deficits, the country ran a trade deficit in the last quarter of 2021. In 2017, exports of goods and services amounted to around 47% of Iceland’s GDP and the trade surplus was 4.1%. The accumulated trade surplus in the past seven years following the financial crisis is equivalent to 49% of 2017 GDP, which is almost unprecedented in the country’s economic history. This large trade surplus has contributed to a current account surplus, although not as significant as the trade surplus. The underlying current account surplus has averaged about 5.6% of GDP since the crisis. Recent economical indicators however indicate that the period of trade surplus has halted and a trade deficit can be expected in the near future.
A key challenge for Iceland is to increase its exports and maintain a healthy current account to support an ongoing and sustainable growth. Two decades ago the country was heavily dependent on fisheries with more than half of exports originating from the fishing industry. Since then, fish-related exports have remained relatively stable, as the industry is limited by the quantity it can harvest, to preserve the size and sustainability of the fishing stock. In the past couple of decades, three additional export foundations have emerged: the aluminium industry, tourism and the international sector. Around the new millennium, the international sector grew rapidly. The sector engages in international competition but is not reliant on natural resources. Between 2005 and 2008, exports of aluminum took off following the construction of one new aluminium smelter and the expansion of another. In the years pre Covid-19 pandemic, Iceland did witness a rapid growth in the tourism industry, although the industry was hit hard on account of the pandemic. In 2022 the tourism is expected to rebound. Overall, Iceland’s exports of goods and services have grown rapidly and become more diversified over the last two decades. Intellectual property services now account for around 15% of service exports. Data processing and storage are growing rapidly, attracted by low energy prices and a cool and windy climate.
Current opportunities & future prospects
As the world is entering out of the uncertainty associated with the covid pandemic another uncertainty has arrived with the war in Ukraine. The end of the covid period will be welcomed by the tourism industry. During the covid period substantial restructuring has taken place and the growing pains the industry was dealing with prior to the covid period have to a large extend been dealt with and the country is better prepared to deal with the large influx of visitors. Plans have been put in place for significant investment in infrastructure and consolidation in the industry along with foreign investment is expected to have a very positive impact. The uncertainty associated to the war in Ukraine however is expected to have significant effect on the cost side, with increasing oil prices and other raw materials. At this time, it is difficult to assess what effect this will have on the tourism in Iceland in the near future.
Although the supply of electricity for new ventures is not as favourable as it has been in the past and major power companies in Iceland have kind of pulled back from the strategy of providing power to non-green industries. Furthermore, it is uncertain if the power companies will be able to support the data centre industry and new investment opportunities.
Even though there has been some political and judicial unrest associated with the aquaculture industry there has been a significant growth there, fish farming production has increased eightfold in the last decade. The amount produced in 2020 was 40.6 thousand tonnes. The most growth has been in salmon farming where the yield has gone from 1,068 tonnes in 2010 to 34,000 tonnes in 2020. , The export value of farmed salmon was 22.6 billion ISK in 2020 which was a 22% increase from 2019. The export of trout fish, arctic char and rainbow trout has been around 3-5 thousand tonnes in recent years and on average 70% of the production has been exported. The export value of trout in 2020 was 5.5 billion ISK, 9.6% increase from the previous year. In recent years foreign industry players have invested heavily in the Icelandic aquaculture, and it would not be surprising if further investments in this area would materialize.
One of the positive effects of the financial crisis that swept the world in 2008, is the vibrant start-up environment it created. Iceland was no different, and for the first time in this young country’s history it can be said that Iceland has an attractive start-up community. In recent years global investor have acquired tech companies such as the Black Desert Online developer Pearl Abyss acquisition of CCP Games, the creators of popular spaceship MMORPG EVE Online and the Fortune 500 company NetApp acquisition of Greenqloud. Several other smaller acquisitions have taken place in the technology sector in recent years, and that trend is expected to continue.
More effective support for business R&D would unlock private investment and improve the ability of smaller firms to innovate. Encouraging firms to adopt digital technologies would help Iceland to make the most of innovation niches, with productivity gains. The public sector too could become more digitalised with positive societal impact. Skills for the digital era and strong knowledge exchange through closer business-research collaboration on innovation and international cooperation in research are essential for stronger innovation.
Despite the Covid-19 pandemic hitting the Icelandic economy hard, it is recovering. The government has set up a five-year programme to invest in infrastructure, digitalisation and research and innovation accounting for 0.5% of GDP per year. The long-term outlook is of positive note. Iceland is rich of natural resources and Iceland is known for running them in a very sustainable manner as our fishery resources are a good example of.
A new court level was introduced in Iceland on 1 January 2018, replacing the former two tiers with a three-tier system. The new court is called the Court of Appeal (Icel. Landsréttur) and is a court of second instance, situated between the District Courts and the Supreme Court. The introduction of the Court of Appeal is part of a major restructuring of the Icelandic justice system.
All court actions in Iceland commence in the District Courts (Icel. Héraðsdómstólar), which are eight in number and located around the country. The conclusion of a District Court can be appealed to the Court of Appeal, provided specific conditions for appeal are satisfied. In special cases, and after receiving the permission of the Supreme Court, it will be possible to refer the conclusion of the Court of Appeal to the Supreme Court, which will continue to be the country’s court of highest instance. In most instances, the judgement of the Court of Appeal will be the final resolution in the case. These changes to the judicial system will reinforce the role of the Supreme Court of Iceland in setting precedents in jurisprudence. There is a total of 64 judges in Iceland, 42 of whom preside over the eight District Courts. The Court of Appeal has fifteen judges and the Supreme Court has seven.
Iceland has a civil law legal system and thus Icelandic law is characterized by written law. Major sources of law in Iceland include the Constitution, statutory legislation, and regulatory statutes. Other legal resources are precedent, customary law and tradition of culture.
The Constitutional Act no. 33/1944 represents the highest national legal authority and is composed of seven Chapters and 79 provisions. Fundamental changes were made to the human rights chapter with Constitutional Act No. 97/1995. The bill accompanying the Act made several references to the European Convention on Human Rights as well as to other Council of Europe and United Nations human rights instruments to which Iceland is a party.
Statutory and Regulatory Law
Except with respect to constitutional issues, legislation enjoys primacy as a source of law. The area of private law is dominated by a range of individual statutory acts and the area of general criminal law is governed by the General Penal Code No. 19, February 12, 1940. In the last few years, numerous pieces of legislation have been adopted in certain fields of law, such as in banking, communications and corporations.
Frequently, statutory acts give the administration the authority to issue regulations. As sources of law, statutory acts prevail over regulations.
Precedents, Customary Law and Tradition of Culture
Court practice in Iceland does not have the same authoritative role as in Common Law countries. However, in matters of legal uncertainty, the decisions of the Supreme Court have considerable authority for the disposition of future cases. In certain areas of law, the decisions of the Supreme Court are a source of law of central importance, e.g. tort law.
In Iceland, a custom can become a source of law. For instance, customary law has been an important source of law in Constitutional matters.
Tradition of culture refers to considerations of fairness, justice and feasibility. Iceland courts have in some cases relied on Tradition of Culture when other sources of law have not been able to establish a rule of law.
Statements and Decisions by Administrative Authorities
Statements by an administrative organ can carry considerable authority in some areas. For instance, in the area of administrative law, the statements of the parliament´s Ombudsman carry considerable authority. Similarly, in the area of tax law, the decisions of the Internal Revenue Board can carry considerable weight.
The EEA and its Effect on Icelandic Legislation
Iceland is a member of the European Economic Area (EEA). The Agreement on the EEA, which came into force in 1994, extends the Single Market of the European Union (EU) to Iceland, Norway and Liechtenstein.
Membership of the EEA has affected Icelandic legislation considerably. To achieve homogeneity between the EEA and EU, the agreement incorporates hundreds of acts, largely identical to the relevant parts of the EC legislation, and these acts are made part of the internal legal order of the contracting parties. Each month a number of pieces of EC legislation, relevant for the EEA, are incorporated in the agreement by decision of EEA Joint Committee.
With respect to the relation between municipal law and international law, Iceland adheres to the principle of dualism. Therefore, ratified international treaties do not assume the force of domestic law, but rather are only binding according to international law. The Supreme Court of Iceland has sought to interpret Icelandic law, as far as possible, in conformity with Iceland’s international obligations.
The European Convention on Human Rights was incorporated into Icelandic law by Act No. 62/1994. Following its incorporation, its provisions can be directly invoked in court as domestic legislation.
Foreign investment restriction
In principle, foreign parties are permitted to invest in Iceland within the limitations imposed by law. The limitations are mostly laid out in Act. No. 34/1991, which addresses investments by non-residents in business enterprises, and in specific legislation. The limitations mostly stipulate that certain conditions must be met or that a specific license has to be obtained.
Because Iceland is a part of the European Economic Area, investment in Iceland by EEA residents is in principle unrestricted. All residents and entities within the European Union and EFTA, enjoy in most cases the same rights to invest as Icelanders do. However, there are some sector-based restrictions that apply to all non-residents, including EEA residents, and some requirements are made regarding investments of residents outside the EEA. These sector-based restrictions were mostly negotiated as they were considered to be of national political importance. The main sectors where restrictions apply in are in the field of real estate ownership, in the fishing industry and in the field of energy affairs. However, in the foreign exchange sector there have been major changes recently and a lot of restrictions have been abolished.
Foreign exchange transactions were subject to restrictions following the collapse of the banks in 2008. In October 2016 a major step was taken to amend the restrictions on financial transactions with legislation and on 14 March 2017 capital controls were almost entirely abolished with new rules on foreign currency matters. With the new rules, most restrictions on cross-border movement of domestic and foreign currency were lifted.
When it comes to ownership of real estate in Iceland, all Icelandic citizens and foreign citizens domiciled in Iceland are permitted to own real estate. The right to own real estate in Iceland is provided for in Act. no. 19/1966 on Ownership Rights and Utilization Rights. Special rules apply to those who enjoy rights based on the EEA agreement, EFTA agreement and Hoyvík Agreement between Iceland and the Faroe Islands. They are not required to apply for a special permission from the Minister of Justice to own property in Iceland. However, parties outside the EEA are required to have permission from the Minister. Large scale investment projects are generally exempt from the restrictions via a standard clause in an investment agreement with the Ministry of Industries and Innovation. The Minister of Justice can also grant exemptions to those that are permitted to run a business in Iceland when the property is to be used as business premises or a permanent residence, or when other reasons apply.
In the Icelandic fishing industry only those who fulfil certain requirements and conditions are allowed to conduct fishing operations within the Icelandic fisheries jurisdiction or own or run enterprises engaged in fish processing. Those requirements and conditions are laid out in Article 4 in Act. no. 34/1991. In short, the party must be an Icelandic citizen or an Icelandic entity. Icelandic legal entities must be wholly owned by Icelandic persons or Icelandic legal entities, and fulfil the following conditions: i) be controlled by Icelandic entities, ii) not under more than 25% ownership of foreign entities, 33% in certain circumstances, and iii) be in other respects under the ownership of Icelandic citizens or Icelandic legal entities controlled by Icelandic entities.
Lastly, when it comes to ownership of energy exploitation rights relating to waterfalls and geothermal energy for other than domestic use, only Icelandic citizens and other Icelandic entities, as well as individuals and legal entities domiciled in another member state of the EEA, are permitted to own such rights. The same applies to enterprises which produce and distribute energy.