Iceland Country Facts

We provide comprehensive information regarding, Culture, Work life, Taxation, Visa’s & immigration, Labour Law, recruiting in Iceland and employment contracts.

Global Expansion Made Easy for You

Expanding into Iceland generally comes with challenges, however, partnering with us and using Employer of Record (EOR) eliminates the frustrations you could encounter.

Iceland is a modern European nation, ranked one of the safest places to live and offering everything found in other developed countries. English speakers are in demand in the health and social care, tourism, teaching, retail, and wholesale industries. As Iceland has an ageing population, immigrants with special skill sets or who can meet the requirements for ‘labour shortage’ positions are particularly welcome. Icelanders are enthusiastic and welcoming of expatriates and experts.

So, wanting to work in Iceland – how do you make it happen? Some countries’ nationals enjoy the freedom of movement to live and work there without the need for an entry visa or work permits, such as the European Free Trade Association (EFTA) and European Economic Area (EEA) citizens, as they are members of the Schengen area. Citizens of the Schengen area, upon the production of a Schengen ID card, are allowed unlimited stays to live and work in Iceland, while other countries on the visa-exemption list can stay for 90-days in any 180-day period without a visa. However, they require other documentation to work in Iceland. Those Third Country Nationals (TCNs) not visa-exempt also require an entry visa (C-Visa).

As of the end of 2022, a European Travel Information and Authorization System (ETIAS) visa waiver should be applied for, online, for those who are ‘visa-exempt’ at the present time, to monitor visitors travelling within the Schengen area. Border controls are taken very seriously, and mistakes should not be made by individuals or companies over immigration documentation and visa/permit compliance.

The different types of Visas and Work Permits for Iceland

The Icelandic authorities, such as the Directorate of Immigration and the Directorate of Labor, determine who requires documentation, and for what activities. They are also responsible for implementing and enforcing the rules as well as for processing and issuing work and residence permits.

The law covering foreign nationals is The Foreign Nationals’ Right to Work Act and it is up to each individual or company to make sure they follow official requirements to avoid fines or terms of imprisonment.  The first step is to check whether or not a visa or permit is required. This depends on the nationality, the purpose and the duration of stay.

What is an Entry Visa?

An Entry Visa is a stamp or a document required to be able to enter a country legally.

  1. European Free Trade Association (EFTA) and European Economic Area citizens do not require a visa (permission) to enter Iceland as it is part of the Schengen area. All they do require is a valid national ID card.
  2. Some countries are visa-exempt and can travel to Iceland for a maximum stay of 90-days within a 180-day period for holidays, family visits, business purposes, transit, and medical reasons – but not paid work, and need a valid passport. For longer stays, a D-Visa is required (granted once in a 12-month period).
  3. All other citizens have to apply for a C-Visa (Schengen) for 90 days in a 6-month period. Apply at a Visa Application Center (VFSGlobal) or issuing local Icelandic Embassy/Consulate. For a longer stay, a D-Visa is required but restrictions apply.

What is a Work Permit?

These are required to perform paid employment in Iceland and are closely associated with residence permits.

Members of the EFTA/EEA areas do not require a work permit to work or a residence permit to stay in Iceland, but they need to register with Registers Iceland for a National ID number.

Third Country Nationals (TCNs) need a work permit, residence permit and entry visa if not visa-exempt. Work permits come under the auspices of the Directorate of Immigration and are then passed on to the Directorate of Labour which processes and issues the work permit. It is the prospective employer who has to apply for permission to employ a non-EEA/EFTA citizen.

Generally, Temporary Work Permits are granted the first time of applying for short-term contracts, for specific work/projects and for specific employers.

Unlimited Work Permits can be applied for if foreign nationals have lived in Iceland for three successive years or have a Residence Permit under the Foreign Nationals’ Right to Work Act or have been granted a temporary work permit on a previous occasion.

Main Icelandic Work Permits of Interest to companies

  • Foreign Specialists with Expert Knowledge Permit: This was designed to fill gaps in the job marketplace for skilled workers. The work permit duration depends on the project or the employment contract. Companies need to prove that the TCNs they want to employ are essential for their business and have a degree or recognized training or professional experience (seven years) – provided no local/EEA/EFTA citizen can be found to fill the position.
  • Labour Shortages Permit: to cover growth in particular sectors and lasts as long as the employment contract – provided no local/EEA/EFTA citizen can be found to fill the position.

For Expert Knowledge Work and Residence Permit

  • The employment should not be a temporary position.
  • The employer has to show that these skills or ‘Expert Knowledge’ is necessary to the company.
  • A degree, technical expertise, or professional experience to qualify for this Permit (translated into English or Icelandic)
  • The Permit is valid for two years and takes 16 to 32 weeks to process. For the first Permit, it can take up to six months (extendable)

Labour Shortage Work and Residence Permit

  • Typically, in sectors such as Healthcare, Construction, Tourism, and IT
  • Employees have to be qualified for the job position
  • The Permit is valid for up to 1 year, and the process takes about 16 to 32 weeks and up to 6 months in some cases

How to apply for Visas and Work Permits for Iceland?

Applications for Work Permits and Residence Permits come under the auspices of the Directorate of Immigration, which checks the suitability of persons who wish to reside in Iceland and approves the Residence Permit. The application for the Work Permit is then passed on to the Directorate of Labour which satisfies themselves that all the documentation is correct and that the rules and regulations regarding The Foreign Nationals’ Right to Work Act have been followed. For instance, the employer has tried to find an employee in Iceland (or EEA/EFTA), and the relevant trade union has been sent a request for their opinion regarding the employment of a foreigner.

Contact the local embassy, consulate or authorized Visa Application Center for the correct process and complete list of documents. This is where the employee applies for the Residence Permit, or it can be posted directly to the Directorate of Immigration at Dalvegur 18, 201 Kopavogur, Iceland.

  • A job offer and work contract signed by both the employer and employee
  • The employer does a Labor Market Test through the Directorate of Labour Icelandic, offering positions to locals, EEA, and EFTA citizens
  • The employer applies for the Work Permit
  • The Residence Permit fee is paid for
  • The applicant has to go to the local Icelandic Embassy, Consulate (or Visa Centre) to apply for the Residence Permit, which allows employees to stay legally in Iceland
  • The Directorate of Immigration notifies the applicant of the approval
  • If not visa-exempt, employees need a visa to enter Iceland, which is sent to the relevant local consulate/Visa Center – when the residence permit has been approved
  • Then the Directorate of Immigration sends the work permit to the Directorate of Labor to be processed
  • When the applicant travels to Iceland, make an appointment with the Directorate of Immigration to have photographs and biometrics taken
  • A medical examination is needed in the first two weeks of being in the country
  • This allows applicants to collect their Residence Card (with an ID number), which also has details of their work permit

Applicants should check the following:

  • What documents should be translated or notarized
  • Whether originals are needed, or copies are accepted
  • Whether applications and documents are time sensitive before submitting
  • How documents should be signed – with ink or using an e-signature

Documents for Residence Permit and Work Permit:

  • Passport with six months validity and no more than ten years
  • Recent photographs complying with passport guidelines
  • Certificate of any criminal record, with translation, if not in Icelandic or English
  • Health Insurance covering the first six months in Iceland
  • Completed application form for Residence Permit
  • Payment receipt for relevant residence permit attached to the work permit
  • Application for relevant temporary work permit signed by both parties, including the ‘opinion statement’ from relevant trade union regarding terms of employment, is also part of the work permit application re: collective agreements.
  • Notification of Residency in Iceland: Place of residence should be included OR registered within two weeks of arriving in the country when photographs are taken
  • Employment contract signed by both parties, which includes details of job and position (title) plus which pension fund registered with. Generally, residence permits are for two years but no longer than the work permit.
  • Labour Market Test: Proof the position has been advertised to local, European Economic Area (EEA) and European Free Trade Association (EFTA) citizens
  • Employee’s curriculum vitae
  • Proof of professional experience, degrees, diplomas, and certificates proving the person is qualified for the position (and work permit applied for), which need to be in English or Icelandic – or translated
  • Confirmation that employers are liable for repatriation of employees should they become ill or have an accident, and the contract is cancelled through no fault of the employee.
  • Proof employee has funds to support his stay in Iceland (including the salary offered)

When the work permit and residence permit have been approved, applicants that require a visa to enter Iceland collect it from the relevant local consulate or embassy in their home country or appointed Visa Application Center. Employees must enter Iceland to be photographed, have their biometrics taken, and undergo a medical examination to receive their Residence Card.

Dealing with tax in Iceland while being overseas can be a tricky process and pose complications that would demand expert guidance. Iceland shows different categories of personal taxation applying both at state and municipal levels. With more than 20 years of experience in Global Expansion services, Bradford Jacobs ensures our clients comply with every variation of tax laws across the globe. Our ‘know-how’ is vital for international companies expanding into the North Atlantic island of the Republic of Iceland.

Bradford Jacobs’ dedicated specialists remove the burdens of worrying about tax complications while you focus on building your business in a new territory. From locating the brightest talent to running your payroll, our Professional Employer Organisation (PEO) and Employer of Record (EOR) specialists will guide you every step of the way.

Overview of Tax in Iceland

Personal Income Tax (PIT)

There are three categories: Category A (wages, salaries, benefits, pensions and social security payments, royalties etc.); Category B (income from businesses or independent or other economic operations); Category C (income from dividends, interest, and capital gains). Tax bands are 17.0%, 23.5% and 31.8% beginning on annual income of up to ISK 4,188,211 (€28,800, US$32,260). Municipal taxes of 14.45% are added to each band, giving a top rate of 46.25% for income over ISK 11,758,159 (€80,860, US$90,550).

Social Insurance Taxes

Employers and employees contribute to the social insurance system. Since January 2022, employers contribute 6.10% on salaries and all remuneration. Employers, at 8.0%, and employees, at 4.0%, also contribute to the pension fund.

Corporate Income (Tax)

Limited liability companies and partnerships are liable for CIT at 20%. Other types of entities are taxed at 37.6%.

Withholding Tax (WHT)

Rates are 22% on dividends paid to a resident company and 20% on dividends paid to a non-resident entity.

Value Added Tax (VAT)

The top rate is 24%, with a reduced 11% rate applying to such as hotel accommodations, transportation, radio and TV subscriptions, newspapers, and other categories. The zero rates mainly apply to exports and services provided abroad.

Capital Gains Tax (CGT)

Gains from the sale of shares are taxable at 22%.

Personal Income Tax in Iceland

Liability is based on residency, with individuals who stay in Iceland for more than 183 days in any 12 months considered tax residents who are taxed on their worldwide income. Non-residents, those who remain in Iceland for fewer than 183 days, are taxed on income sourced in Iceland. The tax year runs from January 1 until December 31, with returns due by the following March 10. Regional Tax Directors send collection and assessment notifications by the first week of June. Married couples and registered partnerships can apply to file joint returns.

Personal income tax comprises three different categories: Category A (wages, salaries, benefits, pensions and social security payments, royalties etc.); Category B (income from businesses or independent economic operations); Category C (income including dividends, interest, and capital gains).

Annual Gross Income | State Tax | Municipal Tax* | Total
Up to ISK 4,188,211 (EUR 28,800 – USD 32,260) | 17.00% | 14.45% | 31.45%
ISK 4,188,211 – ISK 7,569,948 (EUR 52,064 – USD 58,250) | 23.50% | 14.45% | 37.95%
Over ISK 11,758,159 (EUR 80,970 – USD 90,490) | 31.80% | 14.45% | 46.25%

*Municipal tax can vary from 12.44% to 14.52% on assessment and depending on location.

Individual Tax Rules in Iceland

  • The tax year is from January 1 until December 31
  • Individuals must file their returns by March 10 following the tax year, preferably electronically.
  • Regional Tax Directors give collection and assessment notifications in the first week of June.
  • Married couples and registered partners can apply to file joint returns.
  • Employees’ due taxes are withheld at source each month and remitted to the Directorate of Internal Revenue and Customs (Skatturinn).
  • Any differences between withheld and assessed taxes are subject to refunds plus 2.5% or the deficit plus 2.5%; these are collected on five dates each year from July to December.
  • Individuals staying in Iceland for more than 183 days during any 12 months are considered tax residents from when they arrive and taxed on their worldwide income. Liability ends when they leave the country.
  • Former domiciled residents remain liable for three years after leaving Iceland.
  • Non-residents are responsible for tax on income gained during their stay, including municipal taxes.
  • Persons are responsible for tax in three categories – A (generally wages and salaries, plus other sources); B – from business activity; C – capital income such as dividends.
  • There are three income tax bands of 17.0%, 23.5%, and 31.8%, plus 14.45% municipal tax for each band.

Employer’s Social Insurance and Statutory Contributions in Iceland

  • Social Insurance: All employers in Iceland must contribute to social insurance as part of their statutory costs. Employers contribute the equivalent of 8.00% of their employees’ taxable income to the state pension fund. Employers also contribute to social insurance, generally at a rate of 6.10%
  • Minimum Wages: Although there is no government-mandated national minimum wage in Iceland, employers face the statutory cost of complying with minimum wage levels set by Collective Bargaining Agreements (CBAs) and trade unions. For example, in 2021 one of the largest workers’ unions, Efling, dictated a minimum gross monthly wage for its full-time workers over 18 years old of ISK 351,000 (€2,410, US$ 2,720)

Foreign companies wanting to hire staff and run payroll in Iceland can open a subsidiary entity as a limited liability company, an Einkahlutafélag, or Ehf. However, this involves lengthy registration procedures under the Private Limited Companies Act. The subsidiary will be a separate legal entity independent of the parent company. It must be registered with the Iceland Directorate of Internal Revenue and Customs (Skatturinn), the Register of Limited Companies and Registers Iceland to receive the official 10-digit ‘System ID’ number (kennitala, or kt).

Expanding overseas is a significant 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 new territory, maybe thousands of miles overseas. The sensible alternative is to use a Professional Employment Organisation (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 an Icelandic Subsidiary?

Requirements include:

  • Choose a unique company name by researching the Business Register
  • The 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 require a minimum of one founder and one director.
  • In this case, one founder and director must be a resident 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 the company’s name and registered legal location, share capital and names of directors, business plan, and auditors.

Benefits of Setting Up an Icelandic Subsidiary

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. The parent company is not usually responsible for the subsidiary’s debts or liabilities. Generally, the subsidiary is responsible for its debts and liabilities, while shareholders are liable only to the limit of their share contributions.

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

Through its subsidiary, the parent company can explore 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 solid 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 are:

  • Easier to obtain regulatory approvals, loans and finance and enter into 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 broader 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.

However, there is a more straightforward option to the risks and costs of setting up a subsidiary in Iceland and working with Bradford Jacobs in IcelandUsing a global Professional Employment Organisation (PEO) such as Bradford Jacobs means staff can be sourced, placed in their roles, and be up and running within days rather than months. All the payroll, taxation and compliance difficulties are under control thanks to our Employer of Record (EOR) services.

Subsidiary Laws in Iceland

Subsidiaries opened by foreign companies in Iceland operate under the Labour Code and the Private Limited Companies Act. Other legislation may come into play, such as the Foreign Investment Act (restricting investment in fishing and aviation), the Act on Posted Workers and Obligations of Foreign Service Providers and the Foreign Nationals Right to Work Act. Companies must register with the Register of Limited Companies and Registers Iceland.

In the case of establishing a limited liability company as a subsidiary, known as an Einkahlutafélag, or Ehf, requirements include:

Registration and Documentation:

  • Register the unique company 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
  • 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
  • Proof of 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

Accounts and Taxation:

  • The minimum share capital of ISK 500,000 (€3,434, US$3,874) must have been deposited in a bank account before recording the name in the Register of Limited Companies
  • 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
  • Register for Corporate Income Tax (CIT), which is liable on worldwide taxable profits
  • The tax year is generally the calendar year, though companies can apply for a different fiscal year
  • Tax returns are due by May 31 of the year following the income year, with the final assessment completed by October 31
  • Corporate tax is paid in 10 monthly advance payments (excluding January and October), which are then deducted from the final assessment

Management:

  • 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 must fit this criterion.
  • The Memorandum of Association with a draft of the Articles of Association, including the company’s name and registered legal location, share capital and names of directors, business plan, and auditors.
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
Companies undertaking their Global Expansion into Iceland need a complete grasp of Icelandic employment contract laws. A successful business largely depends on its employees. By creating work contracts that include the right terms and benefits there will be no misconception and the perfect work-life balance can be created for your workforce.

Thanks to our PEO and EOR services, we can provide compliant labour contracts for your employees in Iceland, including local benefits. Our team keeps track of Icelandic laws and regulations daily to be duly aware of updates that can be implemented in working contracts and to ensure a smooth entry for your business into the Icelandic economy.

The different types of Icelandic Employment Contracts

Apart from specific terms, employees must be given their written contract or formal agreement within two months of starting work. The mandatory information required for all contracts includes identities and addresses of all parties, employment start date, place and type of work, working hours, annual leave, notice periods, type of contract and any trial period.

Oral agreements are valid but not advised. There is no legal requirement for contracts to be in Icelandic or any particular language; the terms should be in a language fully understood by all parties. The main types of employment contracts are:

Open-ended, Permanent, Indefinite Employment Contracts: This is the standard type of contract that can be terminated, under the rule of law, without giving a reason. Employees are hired without time limits, and the contract is terminated with a notice period, as stipulated by the law or collective agreement, in the same language as the contract.

Fixed-term Employment Contracts:  These are for a specific period and cannot exceed 24 months, including renewals, except for managerial personnel with no time limit.

Temporary Work Agency Employment Contracts:  These are permitted, but the worker cannot be hired out by a company they had worked for directly in the previous six months.

Probationary or Trial Periods: These cannot exceed three months. As there is no provision under labour law for trial periods, these are governed by business practice or collective agreements.

Collective Bargaining Agreements (CBAs):  It is estimated that collective agreements cover nearly 90% of Icelandic workers. Collective and trade union agreements add more detail to the employment terms of wage earners than basic legislation. Employer-employee negotiations that undercut collective contracts are invalid, although employees can negotiate for improved terms over the collective agreement.

The Confederation of Icelandic Employers negotiates on behalf of employers; the State Negotiating Committee confers with state employees, while the Municipal Wage Committee engages in talks with unions representing their members. The Icelandic Confederation of Labour is an umbrella organisation for employees in the general labour market.

Icelandic Employment Contracts Requirements

Internationally minded companies hiring employees in Iceland must operate within a legislation framework supplemented by collective and trade union agreements. Iceland is not a member of the European Union (EU) but has a strong relationship with the economic bloc through its membership in the European Economic Area (EEA). In some employment areas, EU directives influence as EU labour requirements is part of the EEA Agreement.

Most aspects of employment law in Iceland come under the Labour Code and the Directorate of Labour, but specific legislation also applies in many areas. Collective Bargaining Agreements (CBAs) and trade unions strongly influence in Iceland, where such arrangements cover around 90 per cent of the workforce.

These considerations come into play during the first stages of hiring, onboarding, and drawing up contracts with your new employees. General requirements applying to all contracts include:

  • Contracts are invalid if they offer inferior terms to those stipulated by law or collective agreements
  • Employers intending to hire an employee for more than one month and to work eight hours a day must provide a written contract or statement outlining the fundamentals of the role. Oral agreements are permitted under law but not advisable.
  • The contract must be given to the employee within two months of starting work.
  • The contract agreement should include names of all parties; start date and, in case of a fixed-term contract, the end date; any trial period; salary and benefits; working hours and breaks; vacation entitlement; termination and notice periods; applicable collective or trade union agreements.
  • Terms of the contract must comply with minimums set out by collective agreements.
  • Employers applying for work permits for foreign nationals must supply an employment contract with the application.
  • Contracts for non-EU or EEA citizens must include details of their valid work permits and visa.
  • The typical contract is open-ended; fixed-term contracts are allowed. Successive fixed-term contracts should not generally exceed a total of 24 months, although there is no limit for managerial personnel. Probation periods must not exceed three months.
  • There is no legal requirement for contracts to be drawn up in Icelandic.
Employee Benefits in Iceland are generally covered by the Labour Code and the Directorate of Labour, and administered by the Ministry of Social Affairs. Specific legislation also applies in many areas of employment. In addition, Collective Bargaining Agreements (CBAs) and trade unions have a strong influence in Iceland, representing close to 90% of the workforce. When expanding your company’s presence in a new country, you need to ensure compliance both in your employment contracts and benefit guarantees. Foreign companies hiring employees in Iceland must operate within this complex framework of legislation and collective agreements that provide safeguards and guarantees for the workforce.

The responsibilities of foreign companies reach further than simply complying with tax, social security, and payroll regulations. Failure to comply with specific regulations applying to benefits and entitlements runs the risk of fines and sanctions. It is vital that employers have a firm grasp of what is guaranteed for their employees, as this will affect the employer-employee relationship. This is where Bradford Jacobs steps in to point you in the right direction, drawing on over 20 years of experience as a Professional Employment Organisation (PEO) and Employer of Record (EOR).

What are the Compensation Laws in Iceland?

Apart from the Labour Code, specific legislation regarding employees’ compensation, benefits and entitlements include Acts covering: Working Time Terms and Pension Insurance Rights; Working Environment, Health and Safety; Gender Autonomy; Equal Treatment in the Labour Market; Equal Treatment Regarding Race and Ethnic Origin; Equal Rights and Status of Men and Women.

In Iceland, employers need to be up to speed with responsibilities to their staff over benefits, compensation, and minimum requirements. Do not take the risk of paying penalties for ignoring these responsibilities! Compensation, entitlements, and benefits can be improved by collective agreements but not diminished.

  • National Minimum Wage: With no government-mandated minimum wage, employees’ earnings are agreed upon contractually or set by Collective Bargaining Agreements (CBAs) and trade union negotiations. For example, in 2021, one of the largest workers’ unions, Efling, set a minimum gross monthly wage for its full-time workers over 18 years old of ISK 351,000 (€2,410, US$ 2,720). The average monthly salary in 2021 after tax was roughly ISK 410,000 (€2,815, US$3,175)
  • Sick Leave and Benefit: Employees earn two days paid sick for each month worked. Entitlement increases with length of employment: After one year – two months for every 12 months; up to five years – four months for every 12 years; after ten years – six months for every 12 months. Employers must continue paying wages during sick days for an agreed period, after which the employee may be entitled to payments from the Health Insurance Department (Sjúkratryggingar ĺslands). Full cash benefits per day are ISK 1,873 (€13, US$14.50)
  • Working Hours and Breaks: Normal working hours are 40 over a five-day week. The working day usually begins between 8.00 am and 10.00 am and includes 35 minutes of paid coffee breaks which are taken in two parts. Employees are entitled to 11 hours of continuous rest between workdays, considering time spent travelling to and from work. Sundays should always be free.
  • Overtime: Extra pay for extra hours worked is calculated as 0.875% of the monthly salary per hour for up to 162.5 hours of overtime during the month. The rate is 1.0385% of the monthly salary per hour overtime for hours above 162.5 a month.
  • Paid Vacations: Full-time employees are entitled to 24 days annual paid vacation, based on two days holiday for each month worked during the ‘holiday year’ that runs from May 1 till April 30. Employees are also entitled to a holiday allowance, based on a minimum of 10.17% of the monthly wages, although collective agreements can allow for higher amounts. The allowance is taxable. When an employee leaves, the employer pays the outstanding balance of the holiday allowance
  • Maternity / Paternity / Parental Leave and Benefit: Men and women have equal entitlement to 12 months of leave since January 2021, with one month transferrable between them. Maternity and paternity benefit is 80% of the average salary, capped at ISK 600,000 (€4,126, US$4,660) per month. The monthly maximum for those not employed is ISK 80,341 (€552, US$623). Apart from maternity and paternity leave, parents are entitled to one period of unpaid parental leave lasting 13 weeks until the child is eight years old
  • Termination and Severance: Employers and employees have an equal right to terminate their relationship. Notice of termination must be given in writing, with the termination/resignation period starting at the beginning of the following month. The employee has the right to request an interview with the employer regarding the reasons for dismissal. Employment cannot be terminated during maternity, paternity or parental leave without due cause and a written justification from the employer. There is no legal right to severance pay in Iceland, but this may be covered contractually or by collective or trade union agreements.
  • Notice Periods: Notice periods begin on the first day of the month after the employee or employer is notified in writing. Minimum standards under the legislation are up to one year of service – one month; up to three years – two months; over five years – three months. Collective and trade union agreements allow for increased periods of notice.

Guarantees and Restrictions on Employee Benefits in Iceland

Guaranteed Benefits:

Mandatory benefits guarantee minimum entitlements for the workforce in Iceland. They are based on the Labour Code, supplemented by individual pieces of legislation as well as collective and trade union agreements, which can enhance provisions. For example, minimum statutory requirements include the following:

  • Maternity / Paternity Leave:  Men and women have equal entitlement to 12 months’ leave since January 2021, with one month transferrable between them. Maternity and paternity benefit is 80% of the average salary capped at ISK 600,000 (€4,126, US$4,660) per month.
  • Sick Leave:  Employees accrue two days paid sick for each month worked. Entitlement increases with the length of employment. After one year – two months for each 12-month period; up to five years – four months for each 12-year period; after 10 years – six months for each 12-month period.
  • Working Hours: Normal working hours are 40 over a five-day week. The working day usually begins between 8.00 am and 10.00 am and includes 35 minutes of paid coffee breaks which are taken in two parts.
  • Paid Vacations: Full-time employees are entitled to 24 days annual paid vacation, based on two days holiday for each month worked during the ‘holiday year’ that runs from May 1 till April 30. Employees are also entitled to a holiday allowance, based on a minimum of 10.17% of the monthly wages.

Restrictions:

  • Maternity Benefit: Mothers must have been in the Icelandic labour market for six consecutive months prior to the birth date. Those not employed must have been residents of Iceland for 12 consecutive months before the due date.
  • Unemployment Benefit: Applicants must be unemployed and actively seeking work in cooperation with a job-seeker consultant; provide a job-search schedule and report to the Directorate of Labor once a month. Applicants must have worked in a full-time position for at least 25% of the preceding three months.

Social Security in Iceland

Icelandic Health Insurance (IHI) is available for everyone who has been in Iceland for six months, regardless of their nationality, as they will automatically be enrolled in the social insurance system. Citizens from the European Union and European Economic Area members can apply for the system membership from the day they register their legal residency.

Social security in Iceland is the public pension regime. All Icelanders are members of the system, administered by the State Social Security Institute, under the provisions of the Social Security Act. Employers and employees contribute taxes to the social insurance system.

All employers in Iceland must contribute to social insurance as part of their statutory costs. Employers must register with the State Social Insurance Institute (Tryggingastofnun) in order to remit their statutory contributions to the social security and insurance systems. Employers contribute the equivalent of 8.00% of their employees’ taxable income to the state pension fund. Employers also contribute to social insurance, at a rate of 6.10% of employees’ gross income since January 2022.

Finding and recruiting Top Talent in Iceland can bring potential tripwires for companies taking steps to build their international profile. The “Land of Ice and Fire” in the North Atlantic is as big as Denmark, Belgium, and the Netherlands combined. Iceland may be outside the world’s top 100 nations for Gross Domestic Product, but its citizens are the world’s sixth richest on per capita GDP.

Iceland is not part of the European Union but enjoys a strong relationship 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 – to benefit from freedom of movement for people, goods, services and capital.

This potential – and the challenges it brings – underlines why Bradford Jacobs’ global experience is indispensable for taking the smartest recruitment route into Iceland.

Recruiting in Iceland

Iceland has successfully left the economic collapse of 2008 far behind. It now has a thriving tourism sector, although with skills shortages in some sectors and one of the lowest unemployment rates in Europe. 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.

Encouragingly for incomers, Iceland is expected to need 2,000-plus foreign workers each year to join the workforce and balance the effects of an ageing population. Recruits offering the expertise to match the skills shortages will have an advantage. The recruitment process for individuals can hinge on finding companies that need those skills, then searching their job sites for vacancies and looking for contacts such as LinkedIn.

Upon arrival, recruits will find that Iceland’s Labour Code and a raft of supplementary legislation, plus collective and trade union agreements, safeguard the employment rights of employees. Recruitment is the first stage of making your company operational and competitive in Iceland. Once recruited, companies must consider the implications of handling payroll for their staff and deal with the tax and social insurance authorities. Foreign companies can establish a subsidiary to undertake these responsibilities, but strict registration procedures must be followed.

These include the following:

  • Obtaining the employee’s identification number (kennitala, kt), which is both the Personal ID and the System ID, which enables state and regional authorities to obtain information on individuals
  • Registering employees with the Directorate of Internal Revenue and Customs (Skatturinn)
  • Ensuring staff are covered by the provisions of Iceland’s State Social Security Institute (Tryggingastofnun) for pensions, health, and disability insurance
  • They are electronically submitting the employee’s Form, A-271, with all required documentation for registration on the National Registry and submitting Form A-272, confirming the employer’s agreement with the employee.
  • They assist foreign employees in attending the Registration Office on arrival with the correct documentation and ensuring employees staying longer than six months are legally domiciled with Registers Iceland. Different rules may apply to non-EEA citizens and Nordic nationals.
  • Ensuring non-EU/EEA citizens have the correct residence permit from the Directorate of Immigration and notify Registers Iceland so the individual can be entered on the Population Registry
  • Ensuring employees comply with Iceland’s multi-layered state personal tax system, which has three categories, plus municipal taxes
  • Remitting taxes to the Iceland Directorate of Revenue and Customs each month and collecting refunds or making extra payments on five dates each year
  • Filing returns by March 10 of the year following the calendar tax year, preferably electronically

Employees’ Legal Checks in Iceland

A variety of legislation protects employees in Iceland against discrimination both in the workplace, at the pre-hire interview stage and in how positions can be advertised. Apart from general rules under the Labour Code, specific legislation includes the Act on Gender Autonomy, the Act on Equal Treatment in the Labour Market, the Act on Equal Treatment Regarding Race and Ethnic Origin, and the Act on Equal Status and Equal Rights of Women and Men.

Employees’ background checks can include the following:

  • Criminal Records: Employers can ask the applicant’s permission to access records or ask the individual to supply them if relevant to the position, such as in finance or childcare, for example.
  • Medical History: It must be relevant to the demands of the job for the employer to ask about medical records; otherwise, it is specifically prohibited.
  • Credit History: Employers need the applicant’s permission to collect credit records if they are relevant to the type of job.
  • Drug Records/Tests: Permitted in strictly limited circumstances, where drugs could affect operational safety or the good name of the company.
  • Visas/Working Permits: It is required to ensure the applicants have the required and relevant permits to work in Iceland.

Basic Facts when Recruiting in Iceland

Companies hiring staff for International Expansion into Iceland must comply with a framework of employment and taxation regulations. Some are subject to mandatory state regulations, while collective and trade union agreements can improve on the basic statutory minimums.

  • Employers intending to engage an employee for more than one month and to work eight hours a day must provide a written contract or statement outlining the fundamentals of the job. Oral contracts are permitted under law but not advisable.
  • The contract/agreement must be given to the employee within two months of starting work.
  • The contract/agreement should include names of all parties; start date and, in case of a fixed-term contract, the end date; any trial period; salary and benefits; working hours and breaks; vacation entitlement; termination and notice periods; applicable collective or trade union agreements.
  • Terms of the contract must comply with minimums set out by collective agreements.
  • Employers applying for work permits for foreign nationals must supply an employment contract with the application.
  • The typical contract is open-ended; fixed-term contracts are allowed. Successive fixed-term contracts should not generally exceed a total of 24 months, although there is no limit for managerial personnel. Probation periods must not exceed three months.
  • Contracts for non-EU or EEA citizens must include valid work permits and visa details.
  • There is no legal requirement for contracts to be drawn up in Icelandic.
To succeed in your expansion into Iceland, it is vital for both employers and employees to have a strong understanding of the Icelandic work culture. As a global Professional Employment Organisation (PEO), it is our goal to be familiar and updated with the business culture in the country we work with and in. By sharing our knowledge about the Icelandic work culture, we want to support your Global Expansion plans.

The Basics of the Icelandic Work Culture

  • Language: The official language is Icelandic, but fluency in English is common, particularly in business. English and Danish are compulsory subjects at school.
  • Punctuality: Being on time is appreciated as being businesslike and courteous. Best to use the 24-hour clock when arranging meetings and appointments
  • Attitudes: Iceland is an essentially classless society. Workplaces and offices have an inclusive atmosphere regarding gender equality, workers’ rights and rejecting discriminatory behaviour. Unlike most Scandinavian neighbours, Icelanders can be spontaneous, flexible, and happy to change their plans.
  • Business Meetings: Unlike in some hierarchical business structures, don’t be surprised to see the decision-makers taking part in the meetings from day one. Icelanders do like a joke as a means of deflecting awkward moments … or deflating over-effusive visitors.
  • Greetings: Icelanders may use their first names in greeting, as original surnames are rare. Full names combine the first name, mother, or father’s first name with a suffix for ‘son’ or ‘daughter.’
  • Dress Code: Formal is safest for men and women, but as some companies may be more relaxed in this area, there is no harm in asking what is acceptable ahead of the meeting.
  • Gift-giving: Small, modest, and thoughtful gifts from the home country will be appreciated
  • Out of Hours: Icelanders are very happy to ‘oil the wheels’ at business dinners and lunches

Labour Law and Icelandic Work Culture

Icelandic Minimum Wage

Iceland does not have mandatory minimum wages set at the State level. Minimum pay is usually agreed contractually, by Collective Bargaining Agreements (CBAs) or trade union negotiations. For example, in 2021, one of the largest workers’ unions, Efling, dictated a minimum gross monthly wage for its full-time workers over 18 years old of ISK 351,000 (€2,410, US$ 2,720).

However, average wages are generally higher, vary between cities and regions and are among the highest in Europe. The monthly average wage in 2021 after tax was roughly ISK 410,000 (€2,815, US$3,175).

Probation Periods in Iceland

Trial or probationary periods cannot exceed three months. There is no provision under the Labour Code for probationary periods, so these are governed by business practice or collective agreements.

Working Hours in Iceland

Collective and trade union agreements generally set limits on working hours, which are normally 40 hours over a five-day week. The working day includes 35 minutes, split into two paid ‘coffee breaks’ making a total of 37 hours and five minutes per week. Working days generally begin between 8.00 and 10.00 am. Collective agreements can negotiate shorter meal and coffee breaks, enabling overtime to begin earlier.

Employees are entitled to 11 hours of continuous rest between workdays, considering time spent travelling to and from work. Sundays should always be free.

Overtime in Iceland

Extra pay for extra hours worked is calculated as 0.875% of the monthly salary per hour for up to 162.5 hours of overtime during the month. The rate is 1.0385% of the monthly salary per hour overtime for hours above 162.5 in a month.

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