Iceland Subsidiary Entity Set Up

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Iceland Entity Set Up

Launching a subsidiary overseas takes time and eats up funds – and the venture has no guarantee of success.

Foreign companies wanting to hire staff and run payroll in Iceland have the option of opening a subsidiary as a limited liability company, known as an Einkahlutafélag, or Ehf. However, this involves protracted registration procedures under the Private Limited Companies Act.

Iceland encourages international expansion into the economy. Foreign Direct Investment (FDI) grew by 140 million US dollars in the third quarter of 2021. Although Iceland ranks outside of the world’s top 100 for Gross Domestic Product (GDP) at US$23.5 billion, the nation is sixth globally for GDP per capita in 2021 at US$68,844. Iceland’s economy was predicted to grow by 5.2% in 2022 and 4.0% in 2023.

Even so, expanding overseas is a major step, especially for companies opening a legal entity in their new territory. If the move fails, companies face the extra expenditure and stress of closing the business, selling property, and paying off employees. It is easy to stumble while chasing two objectives – advancing your company at home while crossing the world into a new territory, maybe thousands of miles overseas.

The sensible alternative is to use a Professional Employer Organization (PEO) and Employer of Record (EOR) such as Bradford Jacobs to locate the finest local talent and administer your payroll in Iceland – speedily and risk free. Your company will be up-and-running in days rather than weeks or even months.

How to set up a Iceland Subsidiary

Setting up a subsidiary in Iceland? International companies planning to hire staff and run payroll have the option of opening a legal entity. The typical choice is to establish a private limited liability company as a subsidiary, known as an Einkahlutafélag, or Ehf. Requirements include:

  • Choose a unique company name by researching the Business Register
  • Minimum share capital of ISK 500,000 (€3,434, US$3,874) must be deposited in a bank account before recording the name in the Register of Limited Companies
  • Register the name with the Register of Limited Companies; if it is a limited liability company the name does not display the suffix Ehf in its title or brand
  • Inform the Register of Limited Companies of the number of shareholders – fewer than four requires only a minimum of one founder and one director
  • In the case of one founder and director they must be residents of Iceland or 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 expecting to provide goods or services each year above a value 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
  • Articles of Association must include company’s name and registered legal location; share capital and names of directors; business plan; auditors

Benefits of setting up a Subsidiary in Iceland

Specific advantages for a foreign company opening a private limited liability company in Iceland include that the subsidiary has an independent identity under Iceland’s Private Limited Companies Act. Generally, the subsidiary is responsible for its own debts and liabilities, while shareholders are liable only to the limit of their contribution in shares. The parent company does not normally have responsibility for the subsidiary’s debts or liabilities.

The subsidiary, as a resident local company, is liable for tax on its worldwide profits and must register for Corporate Income Tax (CIT). Limited liability companies are liable for CIT at 20%, although other types of entities are liable for tax at 37.6%. Businesses trading in taxable goods and services must register for VAT. The threshold is an annual turnover of ISK 2,000,000 (€14,040, US$16,074) and they must register within eight days of exceeding the threshold and appoint a local VAT representative to undertake filings to the revenue directorate.

Through its subsidiary, the parent company has the advantage of exploring the Icelandic market and further afield among other Nordic nations and into the European mainland. Although Iceland is not a member of the EU, it has a strong and binding relationship with the economic bloc through its membership of the European Free Trade Association and as a signatory to the European Economic Area Agreement of 1994. All signatories benefit from freedom of movement for people, goods, services, and capital.

Other benefits for a subsidiary: 

  • Easier to obtain regulatory approvals, loans and finance and enter contracts with other Icelandic and European companies 
  • More impact with clients and suppliers, as subsidiaries imply more permanency than branches 
  • Employees feel there is more stability and job security than from being with a branch 

In the wider commercial sense, opening a subsidiary makes a statement of a company’s commitment to expanding into foreign markets, in this case the opportunities offered by the European and Scandinavian economies.