Business law in Iceland
Business Law in Iceland
Iceland has a well-developed and business-friendly legal system that aligns with international standards, particularly those of the European Economic Area (EEA), since Iceland is not an EU member state but part of the EEA. Business law in Iceland regulates the formation, operation, and dissolution of businesses, and provides a legal framework for commercial contracts, taxation, labor relations, and intellectual property. Below is an overview of the key elements of business law in Iceland:
1. Legal System
Iceland follows a civil law system with strong influences from Scandinavian law. The legal framework is governed by written laws, statutes, and regulations, with primary sources being acts passed by the Icelandic Parliament (Althingi).
Key pieces of legislation include:
- The Companies Act (Act No. 2/1995): Governs the registration, management, and operation of businesses in Iceland.
- The Commercial Code (Act No. 13/1993): Deals with commercial contracts, bankruptcy, and business obligations.
- The Personal Data Protection Act: Aligns with the General Data Protection Regulation (GDPR) for privacy and data protection.
2. Types of Business Entities in Iceland
Iceland offers various legal structures for businesses, each suited to different needs based on ownership, liability, and size of the business.
a. Sole Proprietorship (Einkaeigandi)
- A sole proprietorship is an individual business run by one person.
- The owner has unlimited liability, meaning they are personally responsible for all debts and obligations of the business.
- This structure is typically used by freelancers or small businesses.
b. Private Limited Company (Einkahlutafélag - ehf.)
- Private limited companies (ehf.) are the most common business structure in Iceland for small and medium-sized businesses.
- The liability of the owners (shareholders) is limited to the amount of their contribution to the company's capital.
- Minimum capital requirement for an ehf. is ISK 500,000 (around EUR 3,500).
- This structure offers flexibility in terms of governance and liability protection.
c. Public Limited Company (Hlutafélag - hf.)
- A public limited company (hf.) is generally used by larger businesses or companies that want to raise capital by issuing shares on the stock market.
- The liability of shareholders is limited to the value of their shares in the company.
- The minimum capital requirement for an hf. is ISK 4 million (approximately EUR 28,000).
- Public limited companies are subject to stricter regulations and corporate governance requirements.
d. Partnership (Sameignarfélag)
- A partnership in Iceland is similar to that in many jurisdictions, where two or more individuals or entities come together to run a business.
- The partners are jointly and severally liable for the obligations of the business.
- There are no specific capital requirements for partnerships.
e. Branch of a Foreign Company
- A foreign company can establish a branch in Iceland. The branch is not a separate legal entity but an extension of the parent company.
- The parent company is liable for all debts and obligations of the branch.
- The branch must be registered with the Icelandic Register of Enterprises.
3. Company Registration Process
The registration process for businesses in Iceland is straightforward and can be done online via the Icelandic Business Register. To register a business, the following steps are typically required:
a. Name and Documentation
- The business must choose a unique name that complies with Icelandic naming rules.
- The company must file articles of association, which outline the rights and duties of the shareholders, management, and board of directors.
b. Business Registration
- The business must be registered with the Icelandic Company Register (Fyrirtækjaskrá), operated by the Directorate of Internal Revenue (Ríkisskattstjóri).
- After registration, the company receives a business registration number.
c. Tax Registration
- The company must also register for taxes, obtaining a Tax Identification Number (TIN) from the Directorate of Internal Revenue.
- Companies must also register for Value Added Tax (VAT) if their annual turnover exceeds a threshold set by the authorities (currently ISK 2 million or approx. EUR 14,000).
4. Taxation in Iceland
Iceland offers a competitive taxation regime with taxes levied on corporate income, personal income, and various business transactions.
a. Corporate Income Tax
- The corporate tax rate in Iceland is 20% on taxable profits, which is relatively low compared to many other European countries.
- Small businesses (those with profits under ISK 50 million per year) may qualify for a reduced tax rate or other tax incentives.
b. Value Added Tax (VAT)
- The standard VAT rate in Iceland is 24%.
- There are reduced rates for specific goods and services, such as a 11% rate for food and non-alcoholic beverages.
c. Personal Income Tax
- Personal income in Iceland is taxed at progressive rates ranging from 37.3% to 46.24% depending on the level of income.
- Employers are required to withhold taxes on behalf of their employees.
d. Social Security Contributions
- Employers and employees are required to make social security contributions, which cover pensions, healthcare, and unemployment insurance.
- The total social security contribution is approximately 6.7% for employees and 11.52% for employers.
e. Dividend Tax
- The dividend tax rate is 20% for both residents and non-residents.
f. Local Taxes
- There are no local business taxes in Iceland, but certain municipalities may charge fees for specific services.
5. Labor Law in Iceland
Icelandic labor laws protect the rights of employees while allowing flexibility for businesses. Key aspects of Icelandic labor law include:
a. Employment Contracts
- Every employee must have a written employment contract specifying the terms and conditions of employment, including job duties, salary, working hours, and notice period.
- Employers must comply with the Labor Code (Act No. 55/1980), which regulates working conditions, rest periods, and employee rights.
b. Minimum Wage
- Iceland does not have a statutory minimum wage. Instead, wages are determined by collective bargaining agreements between unions and employers in various sectors.
c. Working Hours and Leave
- The standard working week in Iceland is typically 40 hours (8 hours per day, 5 days a week), with overtime pay for work exceeding 40 hours.
- Employees are entitled to at least 24 days of paid vacation per year.
- Employees are also entitled to paid sick leave, parental leave, and other types of statutory leave.
d. Termination of Employment
- Employment may be terminated for cause, but employees are entitled to notice periods, which vary depending on the length of service.
- Employees are also entitled to severance pay in some cases, depending on the employment contract and the circumstances of termination.
6. Intellectual Property (IP) Protection
Iceland offers strong protections for intellectual property (IP), and it adheres to international treaties and agreements, including the European Economic Area (EEA) regulations and the World Intellectual Property Organization (WIPO) standards.
a. Trademarks
- Trademarks in Iceland can be registered with the Icelandic Patent Office. Registered trademarks are valid for 10 years and can be renewed indefinitely.
b. Patents
- Patents can be registered for inventions that are novel, industrially applicable, and involve an inventive step. Patents are granted for up to 20 years.
c. Copyright
- Copyright protection is automatic upon the creation of an original work. The duration of copyright protection in Iceland is the life of the author plus 70 years.
d. Designs
- Industrial designs can be registered with the Icelandic Patent Office for protection, providing exclusive rights for up to 25 years.
7. Foreign Investment and Trade
Iceland is generally open to foreign investment, and foreign businesses can operate in the country under the same legal conditions as Icelandic businesses. There are few restrictions on foreign ownership.
a. Investment Incentives
- Iceland offers various incentives for foreign investors, particularly in sectors like renewable energy, fishing, tourism, and technology.
b. Trade Agreements
- Iceland benefits from its membership in the European Economic Area (EEA), which allows it to access the EU's single market. Iceland is also a member of EFTA (European Free Trade Association), which gives it preferential trade agreements with several countries outside the EU.
8. Dispute Resolution
Iceland has a well-functioning judicial system for resolving business disputes. Key methods of dispute resolution include:
a. Litigation
- Commercial disputes in Iceland can be resolved through the Icelandic courts, with specialized courts for business and financial cases.
b. Arbitration and Mediation
- Iceland is a member of the New York Convention on international arbitration, and arbitration is a common method of dispute resolution in commercial contracts.
- Mediation is also encouraged as a cost-effective and time-saving means of resolving disputes outside the courts.
Conclusion
Iceland offers a stable and transparent business environment, with a competitive tax regime, modern business laws, and a high degree of protection for intellectual property and employee rights. The country's membership in the EEA provides access to the EU's single market, making it an attractive location for both local and international business operations. While the tax rates and business formation processes are straightforward, companies are encouraged to seek legal and accounting advice to ensure compliance with all relevant regulations.
RELATED Blog
0 comments