The population of Iceland is barely 400,000, yet they are among the world’s richest, with Gross Domestic Product per capita in 2021 at US$68,844, ranking them sixth globally. Iceland’s economy is predicted to grow by 5.2% in 2022 and 4.0% in 2023. Iceland is encouraging International Expansion into the economy. Foreign Direct Investment (FDI) increased by 140 million US dollars in the third quarter of 2021.

Besides tourism, leading sectors include medical and pharmaceutical products, geothermal and hydropower, and traditional and hugely important aluminium smelting, fishing, and fish processing. Iceland aims to boost skills, innovation, and diversification in the economy and workforce.

Iceland is not a member of the European Union but has a strong relationship with the EU through the European Economic Area Agreement of 1994, which brought together the EU states and the four members of the European Free Trade Association (EFTA) – Iceland, Liechtenstein, Switzerland, and Norway. The EEA Agreement created freedom of movement for persons, goods, services, and capital across Europe’s single market.

These factors give Iceland the potential to punch above its weight in the global economy. But incoming companies tempted to set up a subsidiary will find adjustments need to be made – and quickly. The employment market is framed by strictly applied laws and regulations, and they cannot be ignored or side-stepped.

Starting a business in Iceland

International companies starting a business in Iceland to hire staff and run payroll have the option of establishing a legal entity as a subsidiary. The most common route into Iceland’s economy is to open a private limited liability company, known as an Einkahlutafélag, or Ehf. Subsidiaries opened by foreign companies in Iceland operate under the Labor Code and the Private Limited Companies Act and must register with the Register of Limited Companies as well as Registers Iceland. Requirements and provisions include:

  • Choose a unique company name by researching the Business Register
  • Before recording the name in the Register of Limited Companies, the minimum share capital of ISK 500,000 (€3,434, US$3,874) must be deposited in a bank account
  • Register the name with the Register of Limited Companies and inform them of the number of shareholders – fewer than four requires only a minimum of one founder and one director
  • In the case of only one founder and one director, they must be residents of Iceland or citizens of a member nation of the Organization for Economic Cooperation and Development (OECD) or the European Economic Area (EEA). If there is more than one founder or director at least one of each must fit this criterion
  • Payment of registration fee of ISK 130,500 (€895, US$1,010), which also covers the cost of the ID number and publication in the Legal Gazette
  • Register with the Iceland Directorate of Internal Revenue and Customs (Skatturinn) and the Register of Enterprises Division (RSK)
  • Companies providing goods or services each year above a value of ISK of ISK 2,000,000 (€14,040, US$16,074) must register for Value Added Tax with the Directorate using form RSK 5.02
  • The Directorate of Internal Revenue and Customs must be informed as soon as staff are employed
  • Provide the Memorandum of Association including a draft of the Articles of Association, which detail the company’s name and registered legal location; share capital and names of directors; business plan; auditors

Expanding your business into Iceland

Opening a business in any overseas territory brings issues. Moving staff across the world means lengthy processes to obtain visas and work permits. When employees are in place, who will handle payroll? How will your company deal with regulations on taxation, entitlements and benefits, termination, and severance Drawing up an expansion blueprint is not enough. Your business plan will have to answer all these questions.

Iceland is increasingly welcoming foreign investment. However, the employment market is complicated by its mix of legislation and collective agreements affecting employee benefits and entitlements. There are other questions too: where will you find distributors, manufacturers, and offices?

There is a simple alternative. By partnering with a Professional Employer Organisation (PEO) and Employer of Record (EOR) such as Bradford Jacobs, companies can plot a time-efficient and cost-effective path to locating and employing staff in Iceland. 

Some Icelandic Facts

  • Capital – Reykjavik
  • Population – Around 390,000 at the end of 2021
  • Regions – Capital region; Southern Peninsula; Western region; Westfjords; Northwestern region; Northeastern region; Eastern region; Southern region
  • Official language – Icelandic
  • Economy – GDP US$23.5 billion. GDP per capita in 2021 at US$68,844, sixth globally
  • Leading sectors by GDP – Service 66%, industry 20%, and agriculture 4.4% end of 2020 including tourism; aluminum smelting; fishing and forestry; construction
  • Primary exports include – Fish and fish products; unwrought aluminium and products; grains, meals, and animal feed; iron and steel.
  • Leading imports include – Artificial aluminium oxides and hydroxides; motor vehicles and cars; petroleum and crude oils, carbon and graphite products, and data processing machinery.
  • Main trading partners – Netherlands, UK, Germany, Norway, China, US
  • Government – Unitary state, parliamentary republic
  • Currency – Iceland Krona (ISK)

Advantages and Challenges when entering the Icelandic Market

Some advantages when entering the Icelandic market include:

  • Location: North Atlantic, positioned between Europe and North America
  • Logistics: Daily global flights from the capital Reykjavik. Shipping lines link with ports in North America, the Baltic nations, Scandinavia, and Europe
  • Taxation: A Corporate Tax rate of 20% applies to private limited companies and is one of the lowest among members of the Organization for Economic Cooperation and Development (OECD)
  • Workforce: Young, talented, flexible, and multi-lingual, well paid and enjoying a rich cultural scene
  • Communications: Iceland is connected to the North American and European markets by a series of undersea fibre-optic systems
  • Business Environment: Innovative and open to technological advances, especially in the green energy sector
  • Starting Up: The World Bank’s most recent “ease of doing business” report ranked Iceland 26th out of 190 nations, and 64th for the “ease of starting a business”
  • Lifestyle: Politically and socially stable society, known as one of the happiest in the world, with a high-quality standard of living for one of Europe’s best-paid workforces
  • World Trade: In addition to tariff-free trade with European Union member nations, Iceland has a free trade agreement with China

Some challenges when entering the Icelandic market include:

  • Consumers: Despite a high-earning workforce, the domestic market is small with a population of around 400,000
  • Workforce: Companies must operate within an employment market largely dominated by collective and trade union agreements, reckoned to cover around 90% of employees
  • Finance: Potential imbalance between increased wages and productivity, according to a 2019 OECD report


For more information, download our free guide or get in touch with our consultants here