Republic of Iceland is an island situated in Northern Europe, between the Greenland Sea and the North Atlantic Ocean. It covers the area of 103,000 sq. km and has a population of 280,798 (July 2003 est.). The capital city is Reykjavik with a population of about 170,000 people. The official language is Icelandic, but English, Nordic languages and German are also widely spoken. Iceland has a literacy factor of 99.9%.
Iceland was first settled by Norwegian and Celtic (Scottish and Irish) immigrants during the late 9th and 10th centuries A.D. Independent for over 300 years, Iceland was subsequently ruled by Norway and Denmark. Fallout from the Askja volcano of 1875 devastated the Icelandic economy and caused widespread famine. As a result over the next quarter century 20% of the island's population emigrated, mostly to Canada and the US. Iceland attained complete independence in 1944. Literacy, longevity, income, and social cohesion are first-rate by world standards.
The political system of Iceland is parliamentary democracy. The Head of State is the President of Iceland; Head of Government is the Prime Minister. The executive arm of the Government is the Cabinet appointed by the Prime Minister and approved by the Parliament. Legislative power is vested in the unicameral Parliament or Althing (63 seats; members are elected by popular vote to serve four-year terms). The judicial power is represented by the Supreme Court or Haestirettur (justices are appointed for life by the Minister of Justice) and eight district courts (justices are appointed for life by the Minister of Justice).
Iceland's Scandinavian-type economy is basically capitalistic, yet with an extensive welfare system, low unemployment, and remarkably even distribution of income. The economy depends heavily on the fishing industry, which provides 70% of export earnings and employs 12% of the work force. Iceland's economy has been diversifying into manufacturing and service industries in the last decade, and new developments in software production, biotechnology, and financial services are taking place. Currency of Iceland is Icelandic krona (ISK).
Iceland legal system is based on civil law system based on Danish law. The country has not accepted compulsory ICJ jurisdiction. Principal corporate laws are the Act no. 138/1994 on Private Liability Companies, Act no. 2/1995 on Public Limited Liability Companies, Act no. 31/1999 on International Trading Companies. Iceland has tax treaties with a number of countries including the recently signed Convention with Russia. Iceland is a member of the EEA, EFTA, OECD, GATT and NATO.
There are various types of companies operating in Iceland. The most common ones are Private Limited Companies and Public Limited Companies. The type of company for international trade and investment is an International Trading Company, which may be incorporated either as a Private Limited Company or as a Public Limited Company pursuant to the Act no. 31/1999 on International Trading Companies. The International Trading Companies Act is in essence an addendum to the Act on Limited Companies where companies may choose to operate within a certain framework in order to be eligible for a lower tax rate of 5%.
There are certain limitations on the activities conducted by the International Trading Companies (ITC), and namely such companies are not allowed to:
- be engaged in trade in their own name with parties in Iceland
- trade in goods covered by the Agreement on the European Economic Area and originating in Iceland
- hold shares in Icelandic enterprises
The above conditions make ITCs useful only for a number of specific task which include:
- trading in seafood and some agricultural products
- owning shares in foreign enterprises
- owning and leasing aircraft and vessels
- owning and investing in intangible properties such as Trademarks, Patents, Design rights and Publishing rights.
ITCs can therefore be used as regular holding companies or for other special holding purposes, such as owning intangible properties, they can own foreign registered trademarks and patents. ITCs must maintain a registered office in Iceland.
Public Limited Companies are mainly for many shareholders where the aim is to seek capital from the public, for instance on the stock market.
Limited companies in Iceland are registered with the Register of Limited Companies operated by the Statistics Iceland. The first step in formation of an ITC is to apply for approval of its name. The name of the company can be expressed in any language using the Latin alphabet. The registrar may request an Icelandic translation to ensure that the proposed name does not contravene name restrictions. The name of an ITC cannot be similar or identical to any existing company name. The following names require consent or a licence: Bank, savings, loans, insurance, assurance, reinsurance, fund management, investment fund, trust, trustees, chamber of commerce, municipal or their foreign language equivalents. Suffixes to denote limited liability are ehf. (private limited company) and hf. (public limited company).
The next step of the incorporation procedure is to file the company’s statutory documents signed by the founder with the Register of Companies. As soon as the registration of the company is effected, the Register of Companies issues a Certificate of incorporation which specifies the name of the company, the date on which it was incorporated, and its reference number. Government registration fees amount to USD 1,100.
Before commencing its operations an ITC needs to apply for an operating license. This licence is issued by the Operating License Committee, which is a special five member committee appointed by the Minister of Commerce. The application must be accompanied by the following documents and information:
- Articles of Association of the ITC, confirmation of the state registration, ITC share register;
- Copies of passports, addresses, police clearance certificates and declarations of legal and financial independence and good standing for all beneficial owners, founders, directors and officers
- Business plan containing:
- description of the activities contemplated and countries expected to be involved
- information on the company's assets
- size of operation and estimated staff
- information about holdings in other companies
- three-year development plan, setting out the scope of operations, collaboration planned with other parties and whether, and if so how, trading is to involve Iceland.
If the Operating License Committee is satisfied with the submitted documents, it will issue the relevant license and the company may start its operations. Annual license fee for Private Limited Companies is USD 1,400.
Authorised share capital of an ITC must be equal or more than ISK 500,000 which equals approximately USD 6,200. The share capital must be paid up in full prior to the company’s registration. The funds can be placed with an account set up specifically for this purpose in Iceland or can be transferred to the account of the legal firm assisting in the company’s registration. ITCs can issue ordinary shares, preference shares, deferred shares, redeemable shares, shares with or without voting rights. Bearer shares are not permitted.
ITCs may have one or more shareholders, individuals or corporations, and at least one of them must be resident either in Iceland or in any of the OECD countries. Founders from other countries must get special permission from the Ministry of Commerce. Shareholders’ details appear on the public file. However any subsequent changes to shareholders of the Company are not available to the public. Information about beneficial owner is not made public, but may be disclosed upon a request by the Registrar or any authorized body.
Share certificates are not issued in Private Limited Companies, but certificates from the share register concerning ownership and certificates of shareholdings can be issued, while these two are not negotiable instruments as are share certificates in Public Limited Companies in general.
The minimum share capital of Public Limited Companies is ISK 4.000.000; there must be at least two shareholders.
The day to day management of an ITC is undertaken by directors. The minimum number of directors is one, if shareholders are fewer than three. If shareholders are four or more, three directors are minimum. Directors must be natural persons and majority of them must be residents either of Iceland or an OECD country. Director’s details appear on the public file.
Each year the company registered in Iceland must prepare and submit its annual financial reports to the tax authorities. This requirement is obligatory irrespective of whether the company had any dealings or not. In such case, dormant audited accounts must be prepared. Annual reports must include a report by the board of directors, the auditor’s report, an income statement, a balance sheet, a cash flow statement or a statement showing application of funds, and explanatory notes.
Financial statements should be presented together with the auditor’s report at the annual general meeting, which is normally held within three to five months after the balance sheet date and no later than eight months after that date according to the company law requirements. A certified copy of the annual accounts, including reports signed by the board of directors and the auditor, must be submitted to the Register of Limited Companies within one month after its approval or no later than eight months after the balance sheet date.
Shareholders’ annual meetings must be held each year in Iceland. Directors’ meetings are also required, but there are no restrictions concerning the place of meeting, however for international tax purposes it is often recommended to hold meetings in Iceland.
Current income tax rate for limited companies is 18%. Companies specially registered as International Trading Companies in Iceland are liable for 5% income tax and do not pay net wealth tax. They are also exempt from stamp duty on their activities.
Iceland levies a value-added tax on the supply of goods and services and excise duty on certain manufactured goods, both domestic and imported. Exported goods and services are exempt from both VAT and excise duty. VAT rate is 24.5% (for some categories of goods – 14 %)
Dividends paid by resident companies to resident and non-resident shareholders are subject to withholding tax. The rate is 10 % to all the individuals and resident companies. The rate for non-resident corporate shareholders is 20 %. However, this rate can be decreased according to the Icelandic double taxation treaties.
Income tax is payable in ten instalments at the beginning of each month with the exception of January and July. As the assessment of taxes takes place in July each year, February to June payments are proportions of the previous year's assessment, whereas the balance is paid up in the months from August to December.
It should be noted that ITCs might be abolished in the nearest future. Proposed legislation on this allows those companies registered before the end of 2003 to enjoy favourable tax regime up to January 2008. After that date the companies will be liquidated. More details on this will be available as soon as the relevant Act is passed in Iceland.