Yosuke Jin
OECD Economic Surveys: Iceland 2025
Abstract
The business environment in Iceland is good overall, with low business taxation and a skilled labour force. However, there is scope to improve regulatory frameworks that relate to the whole business life cycle. Some domestic legislation and practices may overprotect incumbent companies at the expense of young and potential new firms. In particular, business and occupational licences should be reviewed and administrative procedures to obtain them simplified. Such reforms should be accompanied by ensuring a level playing field, including access to key infrastructure in some network sectors. Moreover, barriers to foreign direct investment and services trade, which are markedly high in some respects, should be alleviated while promoting trade facilitation measures, to help increase market size and exposure to competition from abroad. Turning to exit mechanisms, insolvency regimes should be revisited notably to facilitate early debt resolution. Such reforms would improve market selection and discipline, boosting business dynamism and productivity.
Despite a more pronounced slowdown, productivity growth in Iceland outpaced the OECD average over the period 2013-23 (Chapter 1). A new study conducted for this Survey (Mosiashvili et al., 2025) confirms this observation for Iceland using firm-level data. Past OECD studies suggest that very stringent regulations adversely affect productivity developments at the macroeconomic, sector, and firm levels (e.g. Andrews, Criscuolo and Gal, 2019). At an aggregate level, they distort resource allocation, which in turn also lowers productivity (Arnold, Nicoletti and Scarpetta, 2011; Andrews and Cingano, 2014). According to the OECD framework of quantitative assessment of structural reforms (Égert and Gal, 2017), such stringent regulations are among the most important impediments to productivity development in the long run. Based on this framework, the implementation of the regulatory reforms recommended in this chapter would raise per capita GDP by around 6.5% over a 10-year horizon (Box 1.5, Chapter 1).
Overall, the business environment is very good in Iceland, as reported for instance in the Global Competitiveness Report by the World Economic Forum (WEF). Business taxation is low, with the employer social security contribution rate, at 6.35%, being one of the lowest across OECD countries and far below the 16.4% OECD average. The quality of institutions is high, as reflected for instance in good intellectual property protection. The quality of utility infrastructure such as electricity and water is also high. Notably, ICT adoption as measured by the number of fixed-broadband internet subscriptions and internet users is among the most advanced and skills of the workforce, in particular digital skills, are among the highest in the world. Moreover, the labour market is flexible, which is reflected in business-friendly hiring and firing practices. However, the WEF report indicates relatively stringent product market regulations in Iceland.
This chapter discusses regulatory frameworks, focusing on the influence of regulation on business dynamism and productivity. Although regulation is essentially aimed at improving the functioning of market economies, it may become too intrusive and hold back productivity growth. Overall, market regulation in Iceland is aligned with EU legislation. As a member of the European Economic Area (EEA), Iceland implements all EU legislation and directives except in a limited number of areas. The government sometimes goes even beyond the minimum requirements set out in the EEA agreements upon transposition (“gold plating”) without necessarily specifying the rationale, for example in the case of waste management, hygiene and pollution prevention (Ministry of the Environment, Energy and Climate, 2024). However, many regulations and practices are not subject to EU legislation and these are overall relatively restrictive. For instance, the OECD Competition Assessment of regulations in the tourism and building sectors in Iceland (OECD, 2020a) identified 438 specific restrictions to competition in these sectors. Progress has been made in implementing the policy reforms recommended in the Competition Assessment, as well as in past OECD Economic Surveys, notably in the tourism sector (Table 4.1).
This chapter investigates regulatory frameworks more broadly across sectors, drawing on a series of OECD indicators, to propose further regulatory reforms that can be implemented by extending recent efforts made by the authorities. These indicators include, among others, the OECD Product Market Regulation (PMR) indicators, which make it possible to gauge the extent to which regulatory frameworks are stringent by international comparison among similar countries. These indicators suggest that regulatory frameworks in Iceland are overall more stringent than in many other OECD countries.
4.1.1. The Icelandic economy is small and relatively remote
Iceland is a rich but small economy (Table 4.2). For a small economy, trade and foreign direct investment (FDI) are relatively limited (Figure 4.1; Figure 4.2). Exports remain concentrated in a few sectors, namely, fisheries, aluminium and tourism, which can be characterised as dependent on natural resources, although some other industries such as high-value services and medical products have increased their exports in recent years (Chapter 1). The value-added share of tourism averaged 5.9% over the past decade, exceeding the 3.4% OECD average. The overall low share of trade and FDI is at least partly due to its small size and relative remoteness, which raises unit transportation costs. The GDP share of industrial production, which is more tradable, is low, while that of construction and in-person services is high (Figure 4.3).
GDP and population, 2023
Source: UNCTAD.
Average of exports and imports as a % of GDP, 2023
Source: OECD National Accounts database.
FDI positions, 2022
Source: OECD FDI statistics.
Industry share in total value added, 2023 or latest available year
Note: Using data for previous years when the 2023 data are unavailable and excluding a few countries for which data are not available at sufficiently detailed levels (e.g. Israel). The sectors are arranged by their tradability, from left (more tradable) to right (less tradable). Tradability in the chart is defined by export ratios derived from the supply-use tables for 72 countries, as calculated in Inklaar et al. (2023), “Sectoral Productivity Differences across Countries”, the Groningen Growth and Development Centre.
Source: OECD National Accounts database.
4.1.2. Business dynamism can be strengthened further
Average firm size is very small in Iceland (Figure 4.4), mainly due to the limited expansion of firms (Figure 4.5, Panel A). The average small size of firms can be associated with the small market size. However, this does not fully explain the large variation in the difference in the expansion of firms across sectors compared with other countries (Panel B). The limited expansion of firms can also be explained by the large share of non-tradable sectors with fewer growth opportunities due to the lack of export markets (Conway and Zheng, 2014). This is reflected in generally low firm growth in in-person services sectors in Iceland. Beyond these explanations, more generally, regulatory issues affect firm expansion, which can be seen in the limited firm growth rate in such sectors as transportation, communication and professional services, which are generally more tradable than in-person services (see below).
The average number of persons employed per firm, 2022
Note: The chart shows the number of persons in employment divided by the number of firms for the industry, construction and market services sectors, excluding public administration and defence, compulsory social security, and activities of membership organisations.
Source: Eurostat Business Demography.
Cumulative growth in employment by 2022, 1 to 5 years after entry, in %
Note: The charts show the employment growth rate by firm age: the number of persons employed in the enterprises that have survived to the latest year for which data are available, i.e. 2022, among the cohort of enterprises newly born in the reference year divided by the number of persons employed in the year of birth by the same enterprises. The reference years are 2017, 2018, 2019, 2020 and 2021. Therefore, for instance, the employment growth rate at a 5-year horizon refers to the 5-year old firms born in 2017 that had survived in the market by 2022.
Source: Eurostat Business Demography.
The firm entry rate in Iceland is relatively high, but differs across types of legal entities. The entry rate for all firms including all legal forms is somewhat higher than in the European Union, but the entry rate for limited liability companies, excluding sole proprietorship, is slightly lower (Figure 4.6). In theory, markets tend to be more concentrated in a small economy due to the lack of scale and scope (Rutz, 2013). This seems to be the case in Iceland, especially in sectors such as electricity and transportation where the fixed costs of entry are high (Figure 4.7). More generally, stringent market regulations reduce firm entry, which could explain the relatively low entry rate for limited liability companies for which administrative and regulatory burdens are heavier than in many other OECD countries. In particular, the effects of market regulation are visible in transportation and communication where sector-specific regulations are stringent (see below).
Number of new enterprises as a share of the total number of active firms, 2022
Note: The chart shows the data for the industry, construction and market services, excluding public administration and defence, compulsory social security, and activities of membership organisations.
Source: Eurostat Business Demography.
The firm entry rate by sector, limited liability enterprises, 2022
Note: The chart shows the data for the industry, construction and market services, excluding public administration and defence; compulsory social security; activities of membership organisations. For Iceland, the entry rate in the mining sector is 0 for 2022. Data for the financial and insurance activities sector are not available for Iceland. The 2021 data are used for water and transportation for the European Union as the figures for 2022 in these sectors are removed from the dataset for confidentiality reasons.
Source: Eurostat Business Demography.
The exit rate was higher in Iceland than in the European Union over the period 2021-22 (Figure 4.8). In general, a high exit rate can reflect a high share of non-viable firms in a dynamic product market where firm turnover is frequent or an efficient exit mechanism for a given share of non-viable firms. The share of low-productivity firms is relatively high in Iceland (Figure 4.9). This could be due to limited substitution between suppliers because of geographical isolation, hence weaker competition, which allows such firms to stay in the market (Syverson, 2004).
Number of enterprise deaths as a share of the total number of active firms, all legal forms, 2021-22 average
Note: The chart shows the data for the industry, construction and market services, excluding public administration and defence, compulsory social security, and activities of membership organisations. It shows a two-year average to smooth out cross-country differences in the timing and extent of temporary pandemic-related measures affecting exit rates.
Source: Eurostat Business Demography.
Kernel density estimate of labour productivity, 2022
Note: Labour productivity is measured as value added per person employed. The analysis covers 2-digit industries NACE Rev.2 10 to 82 (excluding 64 to 66).
Source: OECD calculations based on ORBIS data.
4.1.3. Market concentration is relatively high
Market concentration is high in Iceland. The Herfindahl–Hirschman Index (HHI), a measure of market concentration, was 0.12 at the economy-wide level in Iceland in 2022, according to the World Bank World Integrated Trade Solution database, as against a median of 0.08 for high-income countries. In comparison, the average HHI for the three Baltic countries, which are small European countries highly integrated into the EU market, was 0.07, while New Zealand, a less small but more remote economy, had a HHI of 0.14, which may imply that the effective market size matters. However, the HHI simply measures the share of leading firms in an industry or an economy, but not in specific markets for directly competitive products, and competition authorities often define markets based on expert judgments (Bajgar et al., 2019). The Icelandic Competition Authority has identified high market concentration in various sectors, including transportation, communication and retail trade (see below).
Prices are high in Iceland, reflecting the country’s high income levels and possibly also resulting from market concentration. The overall price level is higher than in the European Union, especially in the services sector (Figure 4.10). Over the past two decades, the costs of transport services and communication have risen and are markedly higher than in EU countries. These elevated costs translate into high business expenses in downstream industries.
Price levels EU27=100, selected items, 2003 and 2023
Source: Eurostat, Purchasing power parities (PPPs), price level indices and real expenditures.
The issue of market concentration is well recognised by the authorities. Market concentration becomes an issue if it creates barriers to entry. Like many other competition authorities, the Icelandic Competition Authority has the power to sanction the abuse of dominance by large firms, which may include strategic behaviours that those firms undertake to create or increase barriers to entry. Its sanctioning powers include divestment obligations or fines. Indeed, the key challenge for competition policy is to prevent barriers to entry or lack of foreign competition from allowing incumbents to abuse their market dominance, rather than to prevent market dominance per se (OECD, 2005).
4.1.4. Reforming regulatory frameworks would spur productivity growth
Aggregate productivity is shaped by various forces, including those related to policy frameworks. First, competitive pressure, or market discipline, induces technology diffusion and innovation, as firms are incentivised to thrive in the market, which is an essential driver of productivity within firms. Second, market selection mechanisms ensure an efficient allocation of resources across firms, such that more productive firms attract more resources including through firm entry and exit. The findings above suggest both market discipline and market selection mechanisms could be strengthened further in Iceland.
Reforming regulatory frameworks could help strengthen both market discipline and market selection mechanisms. Reforming very stringent regulations in the product market and on FDI and trade would enhance market selection mechanisms, while inducing stronger market discipline via the entry and expansion of prospective firms. Reforming insolvency regimes would improve market selection mechanisms while directly affecting the reallocation of resources, which in turn contributes to enhancing market discipline. Moreover, reforming regulations on FDI and trade would help Iceland overcome disadvantages related to smallness and remoteness by expanding the effective market size while encouraging local firms to stay more closely in touch with global frontier technologies.
Excessively stringent product market regulations, which discriminate against specific entities such as new entrants, weaken business dynamism. They distort market selection mechanisms, weaken market discipline, and keep business costs high. The OECD Product Market Regulation (PMR) indicators measure unnecessarily restrictive regulatory barriers to the entry and expansion of firms as well as government interference with market mechanisms, such as price controls or involvement in business operations, in areas where there are no obvious reasons for such interference.
The OECD PMR indicators are the most extensive quantitative measure of the state of regulation in the markets for goods and services currently available (OECD, 2022). According to the latest vintage of the OECD PMR indicators, barriers to domestic and foreign entry are particularly stringent compared with other OECD countries (Figure 4.11). In contrast, Iceland is broadly in line with the OECD average regarding distortions induced by state involvement (Figure 4.11). Some of the barriers to domestic and foreign entry stand out by international comparison, notably the administrative requirements for business start-ups, communication and simplification of administrative and regulatory burden, and barriers to FDI (Figure 4.11).
The impact of reforming stringent product market regulations can be significant, and there is ample room to improve regulations for limited liability companies. This is particularly the case for reducing entry barriers, which facilitates more effective learning from the global frontier, given the comparative advantage of young firms in adopting and commercialising new technologies. For instance, using the OECD PMR indicators, Saia, Andrews and Albrizio (2015) show that the impact of reducing the administrative and regulatory burden for firm entry on multi-factor productivity growth is particularly strong in countries where such burden is initially very high. Based on their results, the impact on the level of GDP of implementing the policy reforms to reduce obstacles to startups discussed below is estimated to be around 1% over a 10-year horizon (Box 1.5, Chapter 1).
The overall PMR indicator and its components, gap with the OECD average, 2023
Note: In the OECD PMR indicators, the score ranges from 0 (least restrictive) to 6 (most restrictive) and the chart shows the difference between the score for Iceland and the OECD average for each category. The chart shows the headline indicator, the two high-level components and the six low-level components in the category of “barriers to domestic and foreign entry”. “LLC” stands for limited liability companies. “POE” stands for personally-owned enterprises.
Source: OECD Product Market Regulation indicators.
4.2.1. Administrative requirements for start-ups should be reduced
The low-level PMR indicator “administrative requirements for limited liability companies and personally-owned enterprises” measures the complexity of administrative requirements to set up new enterprises. It reflects the number of administrative procedures that must be undertaken, the number of private and public bodies that need to be contacted directly and the costs of completing all the required procedures. Over the past five years, some progress has been made in Iceland. For instance, registration with the tax authorities can now be done online. Also, there is no longer an obligation to pay stamp duty. Although these reforms improved the PMR score somewhat, Iceland continues to score poorly on this PMR indicator in international comparison (Figure 4.11).
In Iceland, there are five main legal forms of business, each with different registration requirements: sole proprietorships, partnerships, cooperative societies, private limited companies, and public limited companies. The minimum share capital required for private limited companies is ISK 500 000 (or 4.4% of per capita GDP), which is relatively high compared to many other countries that do not require any minimum paid-up capital. The registration cost is ISK 140 500, which is also comparatively high. To set up a limited liability company, a legal statement signed by all shareholders, along with written rules about running the company agreed upon by the shareholders and directors, must be submitted. In contrast, there is no share capital requirement for sole proprietors, but their liability is unlimited, as in other countries. The registration cost for sole proprietor companies is ISK 73 500. Sole proprietors can even register with their own ID number without setting up a separate legal entity, and in this case there is no registration fee.
Overall, the number of procedures to start a limited liability company remains higher than in many other OECD countries and some could be streamlined. Among the existing procedures in Iceland, the creation of a certified e-mail, which was introduced recently, could be integrated with other procedures, as in Norway. Moreover, the creation of a digital certificate that allows the owner to sign electronic documents, which is not required in most Nordic countries, could also be integrated with other procedures. These two specific procedures are not required to start up a sole proprietorship in Iceland. Accordingly, there is scope to simplify the completion of all procedures to start a limited liability company by ensuring that more of them are done jointly.
Apart from their complexity, the time needed to complete all procedures also matters for entrepreneurs. In Iceland, the laws or regulations concerning the process of starting a limited liability company do not indicate the maximum time within which the required procedures must be completed by the relevant authorities. Most other Nordic countries impose such a binding time limit at least for some procedures, which helps speed up administrative tasks and increase certainty in starting business operations for entrepreneurs.
4.2.2. Procedures for business licencing should be streamlined
The low-level PMR indicator “communication and simplification of administrative and regulatory burden” measures the complexity of regulatory procedures to obtain business licences as well as the government’s efforts to reduce and simplify the related administrative burden on entrepreneurs. Over the past five years, there has been some progress in this field. It includes, among others, the introduction of the requirement to use 'plain language' in the drafting of new primary laws and subordinate regulations. Even so, Iceland’s poor score on this PMR indicator reflects the fact that the business licence system is among the most complex across OECD countries (Figure 4.12). This means that, on top of the general administrative requirements (see above), entrepreneurs starting a business in some specific industries face further obstacles. The procedures to obtain business licences are complex and not easily understood by many businesses (Generis Global, 2024). According to business associations, the problem is particularly acute when multiple public bodies need to be contacted (Confederation of Icelandic Employers, 2025). Such procedures can take several months, and the authorities’ decisions are sometimes inconsistent.
PMR score for licences and permits, 2023
Note: The chart summarises the scores for all the items related to licences and permits under the category “communication and simplification of administrative and regulatory burden” in the OECD PMR indicators. The score ranges from 0 (least restrictive) to 6 (most restrictive).
Source: OECD calculation based on the OECD Product Market Regulation indicators.
The business licence system is complex, while the licences are regulated by many different public bodies. These include notably:
The Administration of Occupational Safety and Health (e.g. for heavy machinery operation);
The Department of Health (e.g. for production or distribution of food – including grocery stores and restaurants – and pollution prevention – including gas stations and fish processing plants);
The District Commissioners (e.g. for restaurants, alcohol sales, accommodation); and
The Icelandic Environment and Energy Agency (e.g. for pollution prevention, including power-intensive and large-scale industries).
The government keeps an up-to-date inventory of the licences required for businesses, but this is done by various bodies. In many OECD countries, including Finland and Sweden, a single body keeps such an inventory. If all the relevant information is pooled in one place, it is easier for businesses to find which licences they need and how to obtain them and for the government to assess the administrative burden on businesses and take initiatives to reduce it. The government set up the Ísland.is portal in 2020, which provides information on various business licences. While the portal provides detailed information on business licences, it is organised by licence type rather than by economic activity. Consequently, many new businesses lack access to comprehensive information that clearly outlines the necessary documentation and regulatory standards (Generis Global, 2024; Confederation of Icelandic Employers, 2025).
The licence application process is sometimes very long and cumbersome. As described in the OECD Competition Assessment (OECD, 2020a), those operating heavy machinery should apply for a licence at the Administration of Occupational Safety and Health, which requires highly detailed information on, for instance, the type of operations and the equipment used. In some cases, they also have to apply for other licences at the Environmental Agency or the Department of Health. Then, the operating licence granted by the Administration of Occupational Safety and Health does not take effect until the applicant has acquired all the other licences needed.
In some cases, the complexity of the licence application process leads to inconsistent decisions made by the authorities. As described in the OECD Competition Assessment (OECD, 2020a), the food and accommodation sector is regulated at the central government level and the District Commissioners in each of Iceland’s nine districts issue the licence. The District Commissioners gather comments from different authorities before issuing the licence, including the Department of Health in municipalities and the district hygiene committee. The geographical jurisdiction for the District Commissioners and hygiene committees is not aligned. Therefore, the applications filed with the same District Commissioner may face different outcomes if district hygiene committees do not implement the regulations in the same way. Such inconsistent decisions create regulatory uncertainty and undermine entrepreneurship.
As the OECD Competition Assessment (OECD, 2020a) recommended, better coordination within the public administration would be needed. To achieve this, government bodies should enhance the digitalisation of licensing and permitting processes. This would improve the flow of information across agencies, which would also help reduce overlapping and duplication of procedures. Decision-making and risk assessment can be improved through faster data sharing and the use of digital formats that facilitate the processing of large datasets (OECD, 2024a). Building on these efforts, the government should establish a single point of contact to enable businesses to obtain all relevant licences in one place, like those that exist in many European countries (Box 4.1).
ePortugal is the Point of Single Contact under the EU Services Directive and the Single Digital Gateway to access electronic public services, which has been in place since 2019. It promotes the digitisation and simplification of services, as well as bringing the public administration closer to citizens, businesses, and society at large. ePortugal was developed under the SIMPLEX+ programme, a simplification and modernisation programme in Portugal, by aggregating three main digital portals, namely, “Citizen Portal”, “Citizen Map” and “Entrepreneur’s Desk” under a single domain.
ePortugal operates at the level of both the central government and the municipalities, and is the starting point for over 1 000 essential government services, providing information, guidance and services for citizens and businesses. The services are provided by 590 central government, local government and private entities.
The section “Entrepreneur’s Desk” (Balcão do Empreendedor) in ePortugal provides services for businesses including licences. As a point of single contact, it provides information on the licensing requirements of all economic activities and allows the entrepreneur to initiate licensing procedures with the relevant government agencies.
The Administrative Modernisation Agency (AMA) is the sole entity responsible for the management and coordination of ePortugal with the responsibility to obtain, update and upload the content of services provided by the public administration. At the operational level, the AMA coordinates the collection of information from the different entities and publishes the content on the available services. ePortugal acts continuously as a central piece of government co-ordination between different entities, regarding the aggregation and cataloguing of information about public services.
Source: Adapted from OECD (2020b), One-Stop Shops for Citizens and Business; OECD (2023a) The Impact of Regulation on International Investment in Portugal.
Business associations in Iceland also have long advocated such a single point of contact. First, all procedures should be done electronically and then, these procedures should be integrated into a single portal, which would significantly save time and costs while improving access to data and traceability (VSÓ Consulting, 2020). The government intends to further develop the Ísland.is portal to become a single point of contact, but no details are given at this stage. Efforts in this area should be stepped up, while making the most of digital solutions.
The licence application process can also be improved by introducing good practices. These include, among others, the so-called ‘silence is consent principle’ whereby legislation deems an authorisation to be granted if no formal decision is made by the licensing authority and notified to the entrepreneur within the specified time period. This principle increases certainty and enforces a degree of accountability in the use of regulatory discretion (OECD, 2002). This principle applies to all or most licences in most other Nordic countries. Furthermore, currently there is no requirement for public bodies to adhere to the ‘once-only principle’ whereby they are required not to ask businesses for the same information more than once. The application of this principle would reduce compliance costs for businesses (OECD, 2009).
Finally, the administrative burden can be reduced by increasing the quality of licences, notably by ensuring the proportionality of licensing requirements. Currently there is no requirement that any new licence has to be risk-proportionate in Iceland, whereas such a requirement exists for all or most licences in most other Nordic countries. Indeed, some requirements do not seem to be proportionate to the identified risks related to business operations. For example, in the process to obtain a licence for heavy machinery operation from the Administration of Occupational Safety and Health, all machines, machine parts, and other equipment have to be inspected and then registered (OECD, 2020a). While these requirements seem adequate for businesses using dangerous and/or contaminating substances, they appear excessive and unnecessary for the vast majority of businesses.
The OECD Competition Assessment (OECD, 2020a) recommended that the government undertake a broad review of the current regulatory requirements. It argued that, at least in some cases, the policy objectives motivating specific restrictions may be difficult to identify or outdated. In Iceland, there is no requirement to regularly review the existing licences and assess whether such licences are still required or should be removed. The government undertook a review (Government of Iceland, 2016) to assess whether the regulations introduced during the 2013-15 legislature term increased or reduced burdens for businesses. Such a review should be undertaken regularly, expanding its coverage to investigate whether the regulations are proportional to the identified risks.
4.2.3. Requirements for occupational licences should be alleviated
According to the OECD PMR indicators, regulation in services is overall more stringent than the OECD average and typically more so relative to other Nordic countries, but with differences across sectors (Figure 4.13). The PMR sector indicators assess six professional services sectors, namely, lawyers, notaries, accountants, architects, civil engineers, and real estate agents. Among these professional services, excluding the notarial sector that does not exist in Iceland, regulation is very stringent in the legal service sector, but not much more than OECD-wide, whereas regulation in the real estate service sector is less stringent but much more restrictive than OECD-wide (Figure 4.13). The relative stringency of regulations in these sectors in Iceland mostly stems from qualification requirements, as also highlighted by the OECD Competition Assessment (OECD, 2020a).
Stringent entry regulation can unduly limit the availability of professional services. It takes the form of, among others, the exclusive rights to exercise specific professional services, which are reserved for those entitled to legally practice them. In Iceland, in the five service sectors being examined except for accountants, the number of exclusive rights is generally larger than in other Nordic countries. At the same time, there is only one pathway to qualify for all four professions in Iceland, whereas other Nordic countries offer multiple pathways (e.g. practical experience and project-based learning other than formal university curricula) for each of specific profession, except for lawyers. The requirements to exercise these specific professional services are more stringent in Iceland, which becomes particularly restrictive when the number of exclusive rights reserved for each of these professional services is large, according to the OECD PMR indicators.
Conduct regulation is generally far less restrictive than entry regulation in Iceland. According to the PMR indicators, the restrictions related to business operations exist only in the legal service sector. In this profession, there are restrictions on inter-professional business co-operation between lawyers and other professionals (e.g. partnerships, joint ventures, etc.), which can limit the variety of services that can be offered to customers.
PMR sectoral indicators: selected service sectors, 2023
Note: The OECD PMR sector indicators measure the regulatory barriers to firm entry and competition at the level of individual sectors. The score ranges from 0 (least restrictive) to 6 (most restrictive). For Iceland, the score for accountants is 0.
Source: OECD PMR Sector Indicators.
The OECD occupational entry regulation indicators provide additional information for nine personal services sectors (von Rueden and Bambalaite, 2020) (Figure 4.14). These nine occupations are aesthetician, baker, butcher, driving instructor, electrician, hairdresser, painter-decorator, plumber, and taxi driver. In Iceland, all nine occupations considered in these indicators are regulated, which is not always the case in other countries, apart from typically regulated sectors such as taxi drivers. In particular, in all nine occupations under consideration, a licence is required and exclusive rights are reserved for those who are licensed. Additionally, there is only one pathway to obtain authorisation in most of the nine occupations, which is relatively restrictive.
Occupational entry regulation indicators: regulation of personal services, index
Note: The OECD occupational entry regulation indicators assess entry regulation in the following 9 occupations: aesthetician, baker, butcher, driving instructor, electrician, hairdresser, painter-decorator, plumber, and taxi driver. The score ranges from 0 (least restrictive) to 6 (most restrictive). The chart shows the average score across the 9 occupations. Regulations for Canada and the United States represent the unweighted average of province/state level regulations.
Source: von Rueden et al. (2020), “Measuring occupational entry regulations: a new OECD approach”.
On top of these regulations, there exists a specific layer of regulation for tradespeople in the professions specified by Law on Industry 42/1978, which are mostly related to skilled craft work. According to this specific regulation for tradespeople, only master tradespersons can administer a company, employ other tradespersons and take on apprentices, and the work undertaken by licensed manual tradespeople must always be under the direction of a master tradesperson (OECD, 2020a). The title of “master” is protected by law and only those who have completed the required formal education can refer to themselves as master tradespersons. This is highly restrictive and prevents entry into many of these professions, leading to high prices and potentially degrading the quality of services provided, as discussed in detail in the OECD Competition Assessment (OECD, 2020a). Among those specified in the above-mentioned law, the government liberalised 16 trade professions in 2023, which can possibly be extended to other trade professions.
The government should review the regulatory requirements for occupational licences (OECD, 2020a). At least for some, the underlying policy objectives may be difficult to identify or outdated. Also, these requirements may be disproportionately restrictive with respect to the policy objectives motivating them. The government recently eliminated job title protection for some professions including bookkeepers and used car dealers (Act no. 27/2021). Until then, only those who fulfilled the conditions could refer to themselves as certified bookkeepers. These conditions included being domiciled in Iceland or an EEA/EFTA country and in possession of their own estate, and having passed an examination to be certified as a bookkeeper. These requirements for bookkeepers existed even though the accounting professions, where the risk of market failure could be higher, were not regulated, implying some regulatory inconsistency. The government should consider assessing the existing requirements for occupational qualifications and eliminating all those that are not clearly justified.
Iceland also has somewhat stringent regulations in the retail sector (Figure 4.13). In general, the number of products that can be sold only in brick-and-mortar shops and that cannot be sold online is larger than in many OECD countries, according to the OECD PMR indicators. Also, apart from registering in a general commercial or trade registry, there are additional requirements for business licences and authorisation to establish a retail outlet for selling food and beverages and these requirements are stringent (see above).
The Icelandic Competition Authority has identified the existence of so-called “common ownership” in various sectors, including retail sales. A few large pension funds own sizeable holdings in a number of different companies within the retail trade sector (“intra-industry common ownership”). These institutional investors may have incentives to discourage competition, which could damage their portfolio value. However, the degree to which common ownership represents a significant competition problem and the feasibility of addressing it via competition policy remains uncertain (OECD, 2017a). Furthermore, the anti-competitive effects of intra-industry common ownership are likely to be country-specific and context-dependent (Bas et al., 2023). According to the Icelandic Competition Authority, given the high degree of common ownership, which exceeds that of many other countries, potential adverse effects are likely more pronounced in Iceland. The Competition Authority should investigate this issue further and take appropriate actions.
4.2.4. Firm entry should be facilitated in some network sectors
The stringency of regulations in network sectors is close overall to the OECD average according to the OECD PMR indicators, but somewhat higher than in other Nordic countries (Figure 4.15). The OECD PMR sector indicators assess three network sectors: energy (electricity and natural gas), transport (air, rail, road, and water transport), and e-communication (fixed and mobile markets). The difference with respect to the OECD average is largest in the electricity sector (Chapter 3). The impact of reforming regulations in upstream sectors such as network sectors is particularly important as its effects spill over to downstream sectors that use their products. Bourlès et al. (2013) show a negative association between anti-competitive upstream regulations and downstream productivity growth. As an illustration, they show that if upstream regulations are aligned with the most pro-competitive ones in the OECD, productivity growth in downstream sectors would be almost one percentage point higher on impact, with such effects diminishing over time, on average across 15 OECD countries.
PMR sectoral indicators: network sectors, 2023
Note: The OECD PMR sector indicators measure the regulatory barriers to firm entry and competition at the level of individual sectors. The score ranges from 0 (least restrictive) to 6 (most restrictive).
Source: OECD PMR Sector Indicators.
e-communication
Regulation in the e-communication sector is somewhat more stringent than the OECD average (Figure 4.15). The market is open to competition (i.e. no restriction on the number of competing firms permitted to operate a business) both in the fixed-line and mobile markets. There is an operator that has significant market power in most segments of each of the markets, but in these cases the prices of their products are regulated and they are required to publish a reference offer and regularly update it. The e-communication sector made some progress in recent years. For instance, secondary trading of the spectrum was permitted in 2022. Nonetheless, prices in the e-communication sector in Iceland were 66% higher than in the European Union in 2023 (Figure 4.10). They appear to be excessively high, even when accounting for the high quality of services in Iceland such as data transmission speed and the relatively high costs to build and maintain e-communication infrastructure due to the country’s remote location and sparse population density.
Some barriers related to e-communications infrastructure exist, which hamper competition. The Icelandic Competition Authority highlights the importance of promoting competition and developing infrastructure in the e-communication sector (OECD, 2023b). The Electronic Communications Office of Iceland (ECOI) has been developing an electronic platform that compiles information on both passive infrastructure (e.g. buildings, sites, and masts) and active infrastructure (e.g. antennas, transceivers, base stations) across fixed and mobile networks, including fibre cables. However, this system is currently used only internally within the ECOI, for instance, for market analysis and decision-making, and it is not publicly available. Similar electronic platforms exist in other Nordic countries and the publication of such information is mandatory in Finland and Norway. The government should consider making the electronic platform publicly available, which would help further infrastructure investment by reducing search costs by operators.
Infrastructure sharing is one way to promote competition in telecommunication markets, particularly where markets are characterised by a dominant player (OECD, 2019). Although operators are allowed to share passive and active mobile infrastructure, the regulator has not published guidelines or specific rules on how operators can share passive and active mobile infrastructure. The government should consider introducing such guidelines, including information on pricing methodologies and indicating how charges should be set, in order to ensure transparency and prevent collusive behaviour among operators.
Air transport
Regulation in the air transport sector is more stringent than the Nordic average (Figure 4.15). This is essentially owing to the operation of airports, while the market for air carriers is open. In Iceland all national airports are owned by the state and managed by Isavia, a government-owned company. The ownership structure is broadly speaking identical across Nordic countries, except for Denmark that uses a public-private partnership model. Isavia determines the fees charged for the provision of aeronautical services (i.e. related to the operation of aircraft) in all Icelandic airports. According to the Airport Benchmarking Report, Isavia is the least cost-competitive airport group in Europe. The OECD Competition Assessment (OECD, 2020a) argues that Isavia has few incentives to keep costs low while passing on costs to consumers. This is due to a lack of oversight according to the OECD Competition Assessment, as airport tariffs in Iceland are not subject to any form of formal regulation or supervision by an independent regulator, unlike in Denmark and Finland. Airports should be subject to some form of regulatory supervision on their charges by an independent public body, as noted in the OECD Competition Assessment and by the Icelandic Competition Authority (2022).
Although the market for air carriers is open, some operational obstacles exist. There is no restriction on the number of competing firms in the provision of air transport services and air carriers are free to choose the routes they wish to serve and the frequency of the flights they offer on each route. However, these choices are subject to the availability of slots, which is restricted. Air carriers are allowed to retain already allocated slots from one season to the next, while an auction scheme is adopted in very limited cases. These restrictions are, however, relatively common. The Icelandic Competition Authority (2022) rather focuses on the allocation of handling time for airlines (i.e. the time that airlines are allocated to land and use the airport’s flight handling and services and take off again) at Keflavik Airport, which is severely restricted. The competition authority identifies this as a significant competition barrier, as air carriers cannot compete in the interest of the public, and has urged the Icelandic Transport Authority and the Minister of Interior to make the allocation of handling time more flexible.
The availability of flight handling services (e.g. passenger handling, baggage handling, flight catering and aircraft maintenance) can affect competition in air transport. Isavia, managing all airports, provides the facilities needed for flight handling services, and possibly discriminated against small operators by terminating their lease agreements for premises and requesting the revocation of their flight handling licence. Following these actions, these operators withdrew from flight handling activity at Keflavik Airport. Thereafter, in the market for passenger aircraft handling, only two companies were left including Icelandair, a dominant company. According to the competition authority, competition in flight handling is a prerequisite for air carriers to begin competition with Icelandair in scheduled flights. The competition authority recommends that Isavia refrain from discriminating against small competitors in the field of flight handling (Icelandic Competition Authority, 2022).
Water and land transport
Entry regulation is more stringent than the Nordic average in the water and land transport sectors (Figure 4.15). In these sectors, the market is open to competition but the establishment of a business is subject to obtaining a licence in passenger water transport, freight road transport services and long-distance domestic passenger transport services by coach. However, such a requirement is quite common across OECD countries (though notification to the relevant authorities suffices in the case of passenger water transport in Finland and Sweden). In the freight road transportation sector, the licence is limited in duration, contrary to the rule in some other OECD countries. In the freight water transport sector, notification to the relevant authorities suffices in Iceland as in many other OECD countries.
Enforcement of competition law is key to ensuring a level playing field in a market where dominant incumbents possibly abuse their dominant position. Such enforcement is especially relevant in the freight transport sector in Iceland. In this sector, two large companies dominate the market. According to the Icelandic Competition Authority (2023), they engaged in collusion, dividing markets in sea and land freight transport, to avoid competing for each other’s large customers. The Competition Authority’s investigation resulted in a settlement with one of these companies, including a fine and commitment to specific actions to prevent further violations. The Competition Authority published a decision in 2023 imposing a fine and similar actions on the other firm. The decision was appealed by the firm to the Competition Appeals Committee, which however confirmed the collusion in March 2025 (Icelandic Competition Authority, 2025).
Potential competitors in the water transport sector face barriers in terms of access to key infrastructure, such as port facilities. These are currently used predominantly by the two companies in Icelandic ports. The availability of additional port facilities is limited, as for instance the plots at Sundahöfn, the most important freight port, are generally leased for 25 years with the right to extend the lease period by another 25 years. In addition, some operations, such as unloading and loading at Sundahöfn, have been exclusively provided by the two incumbents. The Icelandic Competition Authority (2023), while endorsing the port authorities’ intention to further develop port facilities, recommends that the port authorities guarantee the use of port facilities for new competitors when deciding on the issuance of new agreements as well as the renewal, extension and termination of the existing agreements.
Stringent regulation of foreign direct investment (FDI) and international trade also weighs on business dynamism and limits growth opportunities. Trade openness leads to stronger product market competition, which in turn promotes productivity-enhancing reallocation via the expansion of the most productive firms into foreign markets and the exit of low-productivity firms (Melitz, 2003; Melitz and Ottaviano, 2008). Moreover, trade and FDI enhance knowledge flows from global customers and suppliers (Crespi, Criscuolo and Haskel, 2008) and from the activities of multinational firms (Criscuolo, Haskel and Slaughter, 2010).
4.3.1. FDI regulation should be made less restrictive
The OECD FDI Regulatory Restrictiveness Index serves to quantify the stringency of FDI regulation. The discriminatory nature of a measure (i.e. when it applies to foreign investors only, or when a measure is particularly more burdensome to foreign investors) is the central criterion for scoring a measure.
According to the OECD FDI Index, Iceland’s FDI regulation is among the most stringent across OECD countries (Figure 4.16). This is attributed to very strict restrictions on foreign ownership in a limited number of sectors and a few cross-sectional regulations. As discussed in past Economic Surveys (OECD, 2005; OECD, 2015), restrictions on foreign ownership are particularly strict in the fisheries, electricity (Chapter 3) and air transport sectors.
OECD FDI Regulatory Restrictiveness Index, 2023
Note: The OECD FDI Regulatory Restrictiveness Index measures statutory restrictions on foreign direct investment across 22 economic sectors. The score ranges from 0 (open) to 1 (closed). Data reflect regulation in force as of end-December 2023.
Source: OECD FDI Regulatory Restrictiveness Index.
The impact of reforming FDI regulation could be considerable. Indeed, Mistura and Roulet (2019) show that easing FDI restrictions simulated by a 10% reduction in the FDI index would increase bilateral FDI in stocks by 2.1% on average across countries covered by the FDI index and that the effects are greater in the services sectors. On that basis, the implementation of the recommendations to reduce FDI restrictions in this Survey would raise the FDI stock in Iceland by just over 8%.
Lowering foreign equity limits
Investment in Iceland by European Economic Area (EEA) residents is unrestricted, except for the fishing and primary fish processing industries. These industries were excluded as they are considered to be of national importance. As a principle, only Icelandic citizens and entities can conduct fishing operations within the Icelandic fisheries jurisdiction or own businesses in primary fish processing. Foreign investment is possible only indirectly through investment in Icelandic legal persons. In this case, the ownership of foreigners should not exceed 25% of total shareholding. This limit can be increased to 33% if the market share of Icelandic legal persons is no more than 5% in fishing operations within the Icelandic fisheries jurisdiction or primary fish processing.
Such nationality requirements exist in some cases across OECD countries. These requirements are found mostly in professional services (in particular lawyers), transportation (in particular, water and air transport), real estate, and cultural activities. As regards the fisheries industry, similar restrictions on foreign ownership exist in Denmark, Ireland, New Zealand and the United States. In the case of Denmark and Ireland, nationals from an EEA country are exempted (if they meet certain conditions in Denmark). In Denmark and New Zealand, foreign residents are also exempted.
In all the other sectors there are no such nationality requirements, and foreign investment is possible in Iceland with the exception of electricity (Chapter 3), air transport and real estate. As far as limited liability companies outside the EEA or OECD area are concerned, foreign investment in Iceland is possible provided that it is permitted in an international treaty to which Iceland is a party or if permission is granted by the Minister of Industries.
In the air transport sector, foreign investment in Icelandic companies is limited to 49% of share capital. Individuals and legal entities resident in an EEA country are exempted from this restriction. Such restrictions on foreign ownership in the air transport sector are relatively common in other OECD countries. For instance, Iceland ratified Regulation 1008/2008 on the operation of air services (Regulation (EC) No. 1008/2008), and basically the same restriction applies across EU countries where the regulation is in force.
Individuals and legal persons from outside the EEA are subject to restrictions on the purchase of land and real estate in Iceland. Individuals from outside the EEA may purchase land and real estate if they have their residence in Iceland. In the case of limited liability companies from outside the EEA, to purchase land and real estate, they must be domiciled and have their headquarters or principal activity in Iceland subject to more specific conditions. These conditions include: the members of the board and directors must be Icelandic citizens or have been domiciled in Iceland for at least five years, and 80% of the share capital must be owned by Icelandic citizens and Icelandic citizens must exercise a majority of the votes at shareholder meetings.
These restrictions relate to the purchase of land and real estate for non-business purposes, thus the OECD FDI Index identifies them as obstacles to real estate investment. The score for Iceland in foreign ownership in real estate investment stands out, along with Switzerland. Such restrictions exist also in some other OECD countries, but they tend to be partial, relating only to either land or residential buildings. Also, a higher share of foreign investment is allowed, which is typically between 33% and 50%. In countries like Australia and Israel, foreign enterprises face restrictions on the purchase of land and real estate for business purposes, but these are considered as general business restrictions related to obtaining business premises, and thus not limited to real estate.
Reducing the use of FDI screening
The OECD FDI Index identifies discriminatory screening policies against FDI undertakings by foreign companies. Such policies are defined as mechanisms explicitly involving some form of economic assessment by the authorities. In Iceland, Article 12 of the Act on Investment by Non-residents in Business Enterprises (34/1991) stipulates that “if the Minister considers that a particular foreign investment threatens national security, public order, public safety or public health or it causes economic, social or environmental difficulties in particular economic sectors or areas durably, such an investment can be suspended”. This leaves ample room for discretion and creates uncertainty for foreign investors undertaking FDI in Iceland. Against this background, this legislative provision is considered an effective barrier to FDI in the OECD FDI Index (Figure 4.17). The Chamber of Commerce and business associations also raise concerns as to the negative effects that can arise from the ambiguity of this legislative provision.
OECD FDI Regulatory Restrictiveness Index: screening and approval, 2023
Note: The OECD FDI Regulatory Restrictiveness Index measures statutory restrictions on foreign direct investment across 22 economic sectors. The score ranges from 0 (open) to 1 (closed). Data reflect regulation in force as of end-December 2023. The category “Screening and approval” is one of the 4 categories in the OECD FDI Regulatory Restrictiveness Index, along with “Foreign equity limits”, “Restrictions on key foreign personnel” and “Other restrictions”.
Source: OECD FDI Regulatory Restrictiveness Index.
FDI screening on economic interest grounds, which can apply across sectors, also exists in a few other OECD countries, notably, Australia, Canada, Mexico and New Zealand. In the OECD FDI Index, the score for Iceland is somewhat lower than for these four countries as Iceland exempts EEA investors from FDI screening. However, in the other four countries, screening mechanisms primarily apply to foreign acquisitions although they may also extend to certain new investments, particularly when exceeding specified thresholds or involving designated sectors. Also, these countries have adopted more specific screening conditions, which may provide greater clarity for investors (Box 4.2). The Icelandic authorities should consider refining the provision on FDI screening by either clarifying the economic interest criteria or reassessing their necessity, in line with international best practices.
Australia
Under the Foreign Acquisitions and Takeovers Act 1975, certain 'significant actions' can be prohibited by the Treasury if considered to be contrary to the 'national interest'. These include actions to acquire businesses that have a connection to Australia. In general, a change in control and meeting a monetary threshold test are required for an action to be significant. The national interest, and what would be contrary to it, is not defined in the Act or the Foreign Acquisitions and Takeovers Regulation 2015. Assessments are made on a case-by-case basis. However, a Foreign Investment Policy document states that the Government typically considers the following factors when assessing foreign investment proposals: national security; competition; other Australian government policies, including tax; impact on the economy and the community, and the character of the investor.
Canada
A review requirement under the Investment Canada Act applies to acquisitions of large Canadian businesses by foreign investors. The review threshold is CAD 1.386 billion in enterprise value for 2025 for private investors from a WTO member country. Implementing a reviewable foreign investment is prohibited unless the investment has been reviewed and the Minister finds that the investment is likely to be of net benefit to Canada. In the assessment, the following factors are taken into account: (a) the effect of the investment on the level and nature of economic activity in Canada, including the effect on employment, resource processing, the utilisation of parts, components and services produced in Canada, and on exports from Canada; (b) the degree and significance of participation by Canadians in the Canadian business; (c) the effect of the investment on productivity, industrial efficiency, technological development, product innovation and product variety in Canada; (d) the effect of the investment on competition within any industry or industries in Canada; (e) the compatibility of the investment with national industrial, economic and cultural policies; and (f) the contribution of the investment to Canada’s ability to compete in world markets.
Mexico
Under the Foreign Investment Law, an authorisation from the Foreign Investment Commission is needed for foreign investors to participate in more than 49% of the equity capital of companies in several specific sectors of the economy (e.g. port services, high-seas maritime transportation, airport operation, education services, legal services and rail transport services). A prior resolution from the Foreign Investment Commission is also required for foreign investors to acquire more than 49% of the equity capital of Mexican companies when the value of their assets at the time of the application exceeds MXN 22.6 billion (around USD 1.10 billion). The criteria for authorisation by the Foreign Investment Commission include the impact on employment and the training of employees, the technological contribution, compliance with environmental regulations, and the general contribution to improve the competitiveness of the Mexican industry.
New Zealand
Foreign acquisitions and greenfield investments exceeding certain thresholds are subject to prior authorisation. Namely, screening applies to the acquisition or control of more than 25% of shares or voting power in a New Zealand enterprise where the purchase price or the total assets of the business being acquired exceeds NZD 100 million, and the establishment of a new business where the total expenditure to be incurred exceeds NZD 100 million. Additionally, the amendments made in 2020 to the Overseas Investment Act 2005 allow the government to decline certain transactions if they are considered contrary to New Zealand's national interest. In 2021, a new “investor test” for overseas investors was introduced, as part of measures adopted in the Overseas Investment (Urgent Measures) Amendment Act 2020. This test seeks to determine whether investors are suitable to own or control any “sensitive” New Zealand assets, focusing on the character and capability of investors, which is made up of 12 factors that include assessing criminal convictions, penalties for tax evasion, corporate fines, and civil penalties.
Note: For further information about the current OECD FDI Regulatory Restrictiveness Index (FDI RRI), the full list of measures covered and scores, refer to the FDIRRI – Regulatory Database and Scores Database.
Source: elaboration based on the OECD FDI Regulatory Restrictiveness Index Regulatory Database.
In recent years, FDI regulation on national security grounds has been reinforced or introduced across OECD countries. The recent uptake in screening measures intended to safeguard essential security interests has considerably reshaped the regulatory landscape for foreign investors across many jurisdictions (OECD, 2021). These measures remain somewhat different in nature from the traditional investment restrictions designed primarily to shield domestic investors from foreign competition. However, the scope of national security concerns has changed to such an extent that the distinction between economic and national security rationales has become blurred (OECD, 2021). Therefore, although reviews of foreign investment based exclusively on national security grounds are excluded from the scores in the OECD FDI Index, these are specified in a memorandum item to ensure transparency. This exclusion followed from the treatment of these measures under the OECD’s investment-related instruments, which provide for exceptions or exclusions for actions taken to protect security-related interests in line with various international agreements.
The EU FDI Regulation has been in force since October 2020, which aims to identify, assess and mitigate potential risks to security or public order. Over the past five years, the Nordic EU countries, namely Denmark, Finland and Sweden, have introduced new legislation on FDI screening to safeguard national security and public order. These laws define sensitive sectors and activities. For instance, Danish legislation identifies the defence sector, IT security, dual-use items, critical technologies and critical infrastructure as sensitive areas. Norway is not an EU country, but it introduced a similar new investment screening mechanism in 2019. The European Commission proposed a new regulation in 2024 to strengthen the existing framework. The proposal would require all EU Member States to establish and maintain a screening mechanism and to define a minimum sectoral scope for screening foreign investments. The proposed regulation also outlines key requirements for screening mechanisms, including transparency of rules and procedures as well as non-discrimination among foreign investors.
The Icelandic authorities are preparing new legislation on FDI screening to be submitted to Parliament in autumn 2025. This new legislation is intended to replace the above-mentioned Act No 34/1991 and establish streamlined and systematic FDI screening proceedings on national interest grounds, as has been done in other EEA countries. The draft law aims to establish sound, transparent, and clear legal procedures for screening FDI in specific sensitive sectors in Iceland, and to give the authorities necessary legal tools to react to FDI undertakings considered as a threat to national security, which is not clearly specified in Act No 34/1991. The specification of criteria for FDI screening is a welcome development. At the same time, the authorities should ensure that national security justifications are not applied too broadly to many products and sectors (Millot and Rawdanowicz, 2024).
4.3.2. Effective barriers to service trade should be reduced
While tariff barriers in Iceland are among the lowest in the OECD, some restrictions harm services trade indirectly. Services are increasingly traded across borders, including by selling through digital means, setting up local affiliates abroad such as subsidiaries and branches (corresponding to the definition of services trade according to the WTO General Agreement on Trade in Services, which focuses on nationality rather than residency as in the balance of payments statistics), or travelling to the country of the customer to provide tailor-made services. Some regulations can disproportionately increase the cost of services trade. The effects of such regulations measured in terms of ad valorem trade cost equivalents are found to be substantial (Nordås and Rouzet, 2015; Benz, 2017), and generally stronger in small countries (OECD, 2017b) and for smaller firms (Rouzet, Benz and Spinelli, 2017).
The OECD Services Trade Restrictiveness Index (STRI) provides an up-to-date snapshot of regulations affecting services trade. It covers 51 countries and 22 sectors and is updated annually. According to the STRI, restrictions on services trade are the strongest across OECD countries in Iceland (Figure 4.18), with around two-thirds of the measures falling into the category of market access and national treatment and one-third being domestic regulations affecting services trade (OECD, 2024b). The score for Iceland largely reflects horizontal regulations that affect all sectors in the economy (OECD, 2024b). The impact of reducing barriers to services trade as measured by the STRI could be considerable. Benz et al. (2023) show that a policy reform corresponding to a decrease in the OECD STRI by 0.05 is associated with a nearly 10% increase in cross-border services trade in the short term, on average, across countries covered by the STRI. This implies potential gains on the order of 17% in services trade for Iceland from reducing the STRI by implementing the recommendations in this Survey.
OECD Services Trade Restrictiveness Index, 2024
Note: The OECD Services Trade Restrictiveness Index identifies regulations currently in place that restrict services trade. It ranges from 0 (least restrictive) and 1 (most restrictive).
Source: OECD Services Trade Restrictiveness Index.
Reducing restrictions related to foreign affiliates
The category “restrictions on foreign entry” in the OECD STRI assesses regulations largely related to the commercial presence of foreign firms, which is the most important mode of services trade. It assesses regulations related to foreign equity limitations and foreign investment screening, which in some cases overlaps with the OECD FDI Index. The OECD STRI assesses additional aspects such as other restrictions than foreign equity limits in cross-border mergers and acquisitions (M&As), restrictions on the establishment of foreign branches, and nationality or residence requirements for management and board members, all of which would hinder setting up foreign affiliates.
Such additional restrictions on cross-border M&As exist in Iceland and apply across all sectors. For a cross-border merger, the statement addressed to the relevant authorities shall also contain information on the merger's effect on the company's activities, shareholders, creditors and personnel. In other OECD countries, restrictions on M&As other than outright foreign equity limits exist in all sectors only in Italy where this is based on reciprocity, and individuals and legal persons from the EEA countries are exempted. In many other OECD countries, additional restrictions on cross-border M&As exist only in a few sectors, for instance, broadcasting, legal services and financial services. These additional restrictions on M&As are not only burdensome but can also obscure the clarity of the decisions made by the authorities. The authorities should consider removing the obligation for foreign companies undertaking a merger in Iceland to provide their impact assessment.
There is a specific restriction on the establishment of branches of foreign companies across all sectors in Iceland. Branches of foreign companies from non-EEA or non-OECD countries must be authorised by the Minister of Industries or permitted under an international treaty to which Iceland is a party. In other OECD countries, similar restrictions exist in all sectors only in Finland and Sweden. In Finland, under the new act in force since mid-2023, the Patent and Registration Office must approve the foreign branch if the pre-defined conditions are met and the head of the branch must be resident in the country. In Sweden, the head of the branch should be resident in the country and the branch must have separate accounts from the parent company. The restriction in Iceland is broader than in Finland and Sweden. In some other countries, restrictions exist only in some sectors, mostly freight rail transport, broadcasting and legal services. The government should consider removing the across-the-board restriction on the establishment of foreign branches or at a minimum alleviating it to something similar to the restrictions in Finland and Sweden.
In Iceland, company board members and directors are subject to residence requirements, which limits foreign firm entry. A limited liability company must have a board of directors consisting of at least three persons and appoint at least one managing director, with some exceptions for small private limited liability companies. The managing director(s) and at least half of the members of the board must be domiciled in Iceland or any other EEA or OECD country. No other OECD countries have such restrictions across all sectors except for Belgium, Norway and Sweden, though such restrictions do exist in a few sectors in a number of countries. According to the government, these residence requirements exist to facilitate law enforcement when managers and directors need to be held responsible for any harm their companies cause if they are residents in Iceland or any other EEA or OECD country. However, these residence requirements seem to be disproportionately restrictive with respect to the policy objective, and the authorities may consider removing them.
Lowering restrictions on the movement of people
The OECD STRI assesses regulations related to the movement of natural persons providing services trade. The movement of people travelling to the country of the customer to provide services may not directly account for a large share of services trade, but it is still essential for international business operations. This is particularly so for trade in business services, which in turn is an important channel for knowledge transfer, particularly in knowledge-intensive sectors (OECD, 2017b). As a matter of fact, many firms with a commercial presence abroad actually export via a combination of different modes, including the movement of natural persons.
In Iceland, economic needs tests are systematically conducted for foreign workers although there is no quota. These economic tests are conducted for all types of workers under consideration in the OECD STRI, namely intra-corporate transferees, contractual services suppliers and independent services suppliers, across all sectors. This is also the case for around half of the OECD countries and the other Nordic countries (except for independent services suppliers in Sweden), while only Spain does not implement either quota or economic needs tests for any of the three types of workers. In Iceland, the entry of contractual services suppliers is allowed only for teaching and research purposes. Such a restriction to limit the entry of contractual services suppliers to specific purposes is uncommon across OECD countries. The government should assess whether the restriction on the entry of contractual services suppliers is strictly necessary.
The duration of stay is limited in Iceland compared with many other OECD countries. The way the duration of stay is regulated differs greatly across countries, but generally the duration of stay for intra-corporate transferees is longer than for other categories. The duration of stay for intra-corporate transferees is 12 months in Iceland, which compares with the OECD average of 32.2 months and is much shorter than in other Nordic countries. The government should consider increasing the duration of stay for intra-corporate transferees. The duration of stay for independent services suppliers is in general 24 months, which is only slightly shorter than the OECD average of 26.1 months and is comparable with other Nordic countries.
There are additional restrictions regarding foreign professionals in the legal services, accounting and real estate sectors. Such restrictions are relatively common across OECD countries, as more than half of countries require taking a local examination and some countries impose nationality or citizenship requirements to obtain a licence in the case of legal services. In Iceland, additional restrictions on foreign workers stand out in the legal services and real estate sectors. There is a nationality requirement in the real estate sector, with the exception of foreign professionals from an EEA country. A clear and transparent process for recognising qualifications gained abroad is in place in both sectors, though only for those from an EEA country in the legal services sector. In both sectors, foreign professionals are required to take a local examination anyway. Finally, a temporary licensing system (i.e. temporary licensing of professionals for specific tasks or shorter time periods) is not in place in the legal sectors, while this system exists in all other Nordic countries.
4.3.3. The scope to develop trade facilitation measures is large
Although tariff barriers in Iceland are among the lowest in the OECD, there is scope to develop trade facilitation measures. Trade facilitation stands for expediting the movement, release, and clearance of goods at the border, by streamlining and simplifying the technical and legal procedures for intermediate or final products to be traded internationally. Trade facilitation measures have been developed across countries in the context of the entry into force of the WTO Trade Facilitation Agreement in 2017.
The OECD Trade Facilitation Indicators (TFIs) are designed to match the WTO Trade Facilitation Agreement, and exist for 163 economies. They provide a means to monitor its implementation. The 11 indicators each comprise several specific, precise, and fact-based variables related to existing administrative processes at the border and their implementation in practice.
Iceland ranks low across OECD countries in terms of trade facilitation according to the OECD TFIs (Figure 4.19). This is mainly due to a lack of effective measures in such areas as: transparency and predictability; streamlining customs procedures; and internal and external cooperation. To illustrate the benefits of trade facilitation measures, multifactor productivity would be higher by 1.2% in 10 years on average across OECD countries, if the average score of the 11 indicators is improved by 0.1 point, according to (Égert and Gal, 2017).
OECD Trade Facilitation Indicators, average across 11 policy measures, 2024
Note: The OECD Trade Facilitation Indicators measure policies that streamline and simplify technical and legal procedures for products at the border, and consist of 11 policy categories. The score for each policy category ranges from 0 (worst) to 2 (best). The chart shows the average score across the 11 policy categories.
Source: OECD Trade Facilitation Indicators.
Concerning transparency and predictability, advance rulings are not used effectively in Iceland. An advance ruling is a written decision to an applicant prior to importing or exporting a good, setting forth the treatment that shall be provided to the good. It covers the origin of the good, tariff classification, valuation method, quota, and applicable fees and charges. The number of advance ruling requests in Iceland is markedly lower than in other countries. Indeed, in Iceland, importers can request an advance ruling on the origin of the good and tariff classification but not on the valuation methods (WTO, 2024), which reduces the merits of advance rulings.
In terms of streamlining customs procedures, pre-arrival processing is not as frequently used in Iceland as elsewhere. Pre-arrival processing aims to expedite the release of imported goods upon arrival, improving the efficiency of the customs clearance process. In this system the authorities require traders to submit import documentation and other required information to the relevant border agencies for examination prior to the arrival of goods. Pre-arrival processing reduces delays at border crossings and entry points for the release of goods. It can save time on customs clearance and release and minimise costs by lowering storage and insurance fees (International Trade Centre, 2020).
In addition, separation of release from clearance whereby goods are released prior to final clearance and the payment of customs duties, taxes, fees and charges is not very common in Iceland. Separation of release from clearance also aims to expedite the release of goods, improving the efficiency of the customs clearance process. In this system the authorities may require the payment of customs duties, taxes, fees, and charges determined prior to or upon arrival of goods and/or a guarantee for any amount not yet determined in the form of a surety, a deposit, or another appropriate instrument. This practice allows traders to reduce costs resulting from storage charges, demurrage, or decay of perishable goods.
Moreover, post-clearance audits, whereby the authorities conduct their controls after importation, are less frequently carried out in Iceland than elsewhere. Post-clearance audits allow for the immediate release of goods at the border by reducing the need for extensive checks during the clearance process, which speeds up the movement of goods and reduces delays (USAID, 2011). By auditing transactions after goods have been cleared as a general rule, the authorities can focus on high-risk areas, which helps in identifying and addressing non-compliance more effectively (World Bank, 2013). This system is often part of a comprehensive package including automation, pre-arrival processing, and separation of release from clearance of goods.
Finally, the so-called “single window” does not exist in Iceland. The single window is defined as a facility that allows traders to lodge standardised documentation and data at a single entry point to fulfil all import, export and transit-related regulatory requirements. It can deliver immediate benefits to the business community by easing the burden of compliance, in particular, reducing the time and cost of clearance and release processes. Single windows are quite common across OECD countries.
The government has launched a project to set up a single window. Iceland Customs, in charge of enforcing customs regulations and collecting duties, has developed a single web portal adding relevant online services. The authority plans to work closely with other agencies on the borders to simplify overall procedures and to increase electronic data exchange and collaboration (WTO, 2024). The other agencies include the Icelandic Food and Veterinary Authority, which enforces regulations related to agricultural products, and the Ministry of Foreign Affairs, which oversees export controls, especially for dual-use items. The project to set up a single window has experienced delays, however, likely reflecting a lack of coordination among border agencies. Both the establishment of a single window and enhanced coordination would facilitate the development of the streamlining procedures discussed above. The government should step up efforts to roll out a single window as soon as possible.
The automation of customs procedures is not sufficiently developed in Iceland. Both import and export procedures are processed electronically less frequently than in other countries, while a substantially higher share of goods undergo physical inspections. The WTO agreement requires the authorities to set up a mechanism for pre-arrival processing in an electronic format, which is planned but not yet operational, possibly explaining why pre-arrival processing is not used as frequently as it should be. Similarly, the WTO agreement requires the authorities to use information technology to support the establishment and maintenance of a single window, which is also in the process of implementation. In this case, the lack of a single window itself is an issue, not technological support. Currently, while nearly all government services have been available online since 2020, on the Ísland.is portal, these services are not yet linked to the customs IT systems used for submitting import and export declarations (WTO, 2024).
Internal cooperation among domestic agencies involved in the management of cross-border trade is relatively weak in Iceland. In particular, infrastructure and equipment are not shared and used in a coordinated way among border agencies. Also, data are exchanged and transmitted between the different systems in these agencies on a regular basis, but not on a real-time basis, contrary to many other countries. The institutionalised mechanism to support inter-agency coordination is weak, in that there is no inter-agency coordination body with a permanent technical secretariat and provisions for financing, which is common in many other countries. The development of such coordination needs to progress in parallel with the development of other trade facilitation measures, including the single window, among others.
Rigid insolvency regimes hamper efficient restructuring of firms facing temporary difficulties and exit of non-viable firms. Preserving unproductive firms and hampering efficient reallocation of resources from failed enterprises to productive firms reduce aggregate productivity growth (Caballero, Hoshi and Kashyap, 2008; Adalet McGowan, Andrews and Millot, 2017a). Finally, insolvency regimes that disproportionately penalise failed entrepreneurs discourage risk-taking behaviour (Bartelsman, Perotti and Scarpetta, 2008), thus weighing on the entry and expansion of prospective firms (Calvino, Criscuolo and Menon, 2016).
In Iceland, forbearance measures (i.e. granting a temporary or permanent concession or agreed change to loan terms) to distressed firms have been extended relatively frequently. The forbearance ratio for loans stood at 2.2% in the fourth quarter of 2024, which compares with 1.4% for the European Union and is much higher than in other Nordic countries. Forbearance is effective for viable firms facing short-term liquidity problems but is not a durable solution for non-viable firms. Such inefficient forbearance can reduce the access to finance for high-performing companies and slow the exit of poor-performing ones, reducing the efficiency of resource allocation (Andrews and Petroulakis, 2017).
If distressed firms cannot fulfil their debt repayment obligations, creditors can resort to debt enforcement. In Iceland, there is a foreclosure system that allows secured creditors to repossess the collateral assets of the debtor who fails to make repayments. Creditors can use this system as an alternative to formal insolvency proceedings, but other creditors can block a foreclosure through the initiation of formal insolvency proceedings.
Meanwhile, distressed firms or creditors can turn to insolvency proceedings. In 2023, 3 076 cases were filed for insolvency, up from 1 500 in 2022 (Icelandic Courts, 2024). At the same time, 1 354 bankruptcy orders were issued for legal entities, up from 383 in 2022 (Icelandic Courts, 2024). The increase in the number of bankrupt firms in 2023 is at least partly explained by the fact that many so-called “dormant companies” (i.e. those without any meaningful activity measured in terms of sales, employment and investment) were forced to be wound down. According to Statistics Iceland, the total number of firms that exited the market due to insolvency was 857 in 2024, representing 1.1% of firms that existed at the end of the previous year. Among the 857 firms that exited the market due to insolvency, only 339 were active in the previous year, suggesting that the resolution of dormant companies continued to be significant in 2024.
In Iceland, insolvency proceedings appear to be working relatively well in practice. The recovery rate – how much secured creditors recover from an insolvent firm at the end of insolvency proceedings – is relatively high and the average duration of insolvency proceedings is also relatively short according to the latest figures available from the World Bank (Figure 4.20). This can at least partially reflect the small size of firms on average, which makes insolvency proceedings simpler all else equal. For example, the number of creditors claiming their rights can be smaller, thus making coordination among creditors easier. However, these figures are based on expert assessment on the basis of a specific case study. In reality, insolvency proceedings can become more complex than the latter case study suggests, which requires robust insolvency regimes. In this respect, there is scope to reform insolvency regimes to move closer to OECD best practices in legislative terms.
Note: Values for the recovery rate and time to resolution are extracted from the World Bank Doing Business database in the category “Resolving insolvency” and based on expert assessment.
Source: World Bank Doing Business 2020.
While several policy domains are related to firm exit, insolvency regimes are crucial for the private sector to expedite the exit of non-viable firms in an orderly manner. Insolvency regimes need to address a number of market imperfections, notably:
Information asymmetries, as the debtor and creditors assign different values to the firm (Smith and Strömberg, 2005);
Incomplete contracts, as it is difficult to write a complete contract ensuring an optimal outcome ex ante (Hart, 2000); and
Coordination problems, as the interest of individual creditors can conflict with those of the creditors as a collective (Marinč and Vlahu, 2012).
The OECD insolvency indicator summarises the most relevant features of insolvency frameworks (Adalet McGowan and Andrews, 2018). It covers three policy areas, namely firm restructuring tools, treatment of failed entrepreneurs, and prevention and streamlining measures, consisting of 13 policy indicators in total. The indicator was last updated in 2022 and the country coverage has been expanded to 45 countries, including the EU non-OECD members.
According to the OECD insolvency indicator, Iceland ranks poorly among OECD countries (Figure 4.21). Iceland has scope to improve across all broad categories assessed by this indicator, which likely explains the existence of many less productive firms in the market (Figure 4.9). Adalet McGowan, Andrews and Millot (2017b) empirically investigate the effects of reforming insolvency regimes to reduce barriers to corporate restructuring and the personal cost associated with entrepreneurial failure. Using a sample of 14 selected OECD countries, they show that such reforms reduce the share of capital sunk in non-viable firms and increase investment in highly productive firms, with stronger effects in industries where the business churn rate is higher and therefore insolvency regimes matter more.
OECD insolvency indicator, average across 3 policy categories, 2022
Note: The chart shows the overall score from the OECD insolvency indicator. The score ranges from 0 (most effective) to 3 (least effective).
Source: André and Demmou (2022), “Enhancing insolvency frameworks to support economic renewal”.
In Iceland, temporary amendments to the insolvency rules were made during the COVID-19 pandemic as in other OECD countries. Act No. 57/2020 was thus designed for all the companies affected by COVID-19. It featured a moratorium on insolvency proceedings, protecting debtors from all enforcement procedures, as was the case in some other OECD countries. This temporary legislation also made it possible to change repayment plans without the consent of creditors under certain conditions. The temporary decline in the number of insolvency cases is at least partly due to this legislation, although the number of beneficiary firms was limited, along with more general support measures to firms. The temporary legislation was wound down after the economy had recovered from the COVID-19 crisis. Nonetheless, some features of this temporary legislation, notably facilitating decision-making to change repayment plans, could be considered in future reforms.
4.4.1. Firm restructuring tools should be strengthened
Starting insolvency proceedings early is crucially important as it increases the possibility of successfully restructuring viable firms and the liquidation value of failing firms (Adalet McGowan and Andrews, 2016). However, insolvency regimes in Iceland lack relevant measures to ensure the timely initiation of proceedings (Figure 4.22). Debtors tend to delay the commencement of proceedings, as they may hide or often cannot recognise the true financial state of their firm. Both the debtor and creditors can file for liquidation, but creditors cannot do so for restructuring proceedings. In the vast majority of OECD countries, including all the other Nordic countries, creditors can initiate both liquidation and restructuring proceedings. The government should consider allowing creditors too to start restructuring proceedings in Iceland.
OECD insolvency indicator: restructuring tools, 2022
Note: The chart shows the score for “Restructuring tools”, one of the 3 categories along with “Treatment of failed entrepreneurs” and “Prevention and streamlining” in the OECD insolvency indicator. The score ranges from 0 (most effective) to 3 (least effective). The chart also shows the contribution of 3 items in the category “Restructuring tools” that are directly or closely related to incentives to start insolvency proceedings early.
Source: André and Demmou (2022), “Enhancing insolvency frameworks to support economic renewal”.
Once the proceedings are started, it is key to determine who will manage the debtor’s assets. Allowing incumbent managers to stay in charge of day-to-day operations (“debtor-in-possession” model) has some conflicting effects (Adalet McGowan and Andrews, 2016). Managers may have weak incentives to avoid insolvency if they know they will continue to manage distressed firms, thereby reducing ex ante efficiency. In contrast, if they expect to be removed when companies are in distress, they may be incentivised to hide the true financial state of the firm, thus reducing ex ante efficiency. Once the insolvency proceedings begin, allowing incumbent managers to stay in charge tends to raise the chance of a successful restructuring since they have specialised skills and expertise regarding the firm, thus raising ex post efficiency. On balance, automatically dismissing the incumbent manager is not efficient from a practical point of view (Adalet McGowan and Andrews, 2018).
In Iceland, incumbent management is automatically dismissed during insolvency proceedings. Thereafter an insolvency practitioner appointed by the court gets control of day-to-day operations. In almost all cases, a lawyer is appointed by the court and there are strict rules such as avoiding conflict of interest. The insolvency practitioner is required to operate the firm in the interest of creditors. According to the authorities, although creditors can appeal to the court if they disagree with the insolvency practitioner’s decisions, this rarely happens. Nonetheless, the automatic dismissal of incumbent managers can still discourage the timely initiation of proceedings. The government may consider introducing the debtor-in-possession model in formal insolvency proceedings that is common across OECD countries. Alternatively, the debtor-in-possession model can be introduced in pre-insolvency proceedings aimed at voluntary debt resolutions among parties, as discussed below.
Continuous operations in the debtor company during the proceedings increase the chance of a successful restructuring (“stay on assets”). In the absence of a stay on assets, firms' operations can be disrupted by creditors by claiming productive assets, thus reducing the value of having firms remain in business. On the other hand, restrictions on creditors’ claims can adversely affect credit supply (Armour and Cumming, 2008). Thus, the stay on assets should be time-limited and used strictly to facilitate a restructuring plan (Adalet McGowan and Andrews, 2016). As the best practice, which balances the interests of the debtor and creditors, the length of a stay on assets should range between two and four months (Carcea et al., 2015). In Iceland, a stay on assets is possible but there is no time limit. In many OECD countries including Denmark and Sweden, a stay on assets is possible but limited in time. The government may consider following such examples.
It is crucial that the debtor is allowed to obtain new credit after the proceedings for restructuring start. However, post-commencement financing should not have priority over existing creditors, which would harm legal certainty and affect credit supply adversely as banks’ perceived risks rise (Adalet McGowan and Andrews, 2016). According to best practice, post-commencement credit should take priority only over ordinary unsecured creditors and not over secured creditors (Adalet McGowan and Andrews, 2016). In Iceland, consistent with this best practice, the debtor can obtain new credit to finance its ongoing needs during the proceedings and the credit has a priority only over unsecured creditors.
Timely and efficient decision-making is essential in restructuring proceedings. In this respect, the possibility to approve a restructuring plan by only a requisite majority of creditors instead of requiring a unanimous vote (“cram-down”) is key. However, the restriction on some creditors' rights can adversely affect credit supply. Therefore, creditors in the same class should be treated equally, and dissenting creditors should receive at least as much under the restructuring plan as they would receive under liquidation (Carcea et al., 2015). In Iceland, cram-down is possible and the necessary majority is variable but usually requires the approval of a significant share of creditors. The framework does not provide a safeguard which would ensure that dissenting creditors in a restructuring plan receive at least as much as what they would obtain in liquidation. The government should consider introducing such a safeguard for dissenting creditors as in many OECD countries.
In Iceland, as a matter of fact, the insolvency practitioner makes a decision, reflecting the votes made by creditors. There are strict rules the insolvency practitioner must follow, taking into account the interest of creditors, such as the feasibility of vote decisions made by creditors. According to the authorities, in practice, creditors all agree with the insolvency practitioner’s decision in most cases. In fact, the creditors are not divided into classes to vote on the restructuring plan, and each class does not vote separately. There are even some classes of creditors that are excluded from voting in restructuring decisions, including secured creditors. According to the authorities, the rights of secured creditors are guaranteed by the priority rule to distribute the debtor’s assets. Such priority rules, however, apply only in the case of liquidation, not in restructuring proceedings. The government should consider strengthening the voting system for restructuring by including all creditors including secured creditors, while classifying them according to priority and allowing them to vote separately.
4.4.2. The bankruptcy regime can be eased
Personal insolvency regimes are often more important for entrepreneurs and small businesses than corporate insolvency regimes (Armour and Cumming, 2008). Entrepreneurs typically use personal finances prior to incorporating and receive only limited liability protection (Berkowitz and White, 2004). Furthermore, as small businesses are often owned and operated by families who have pledged their personal assets for loans, business insolvency may lead to personal insolvency once a business fails, even where the business is run by a separate legal entity (Bergthaler et al., 2015). According to the authorities, personal bankruptcy is so punitive that it has rarely been imposed, with only around 100 cases in history.
The exemption of future earnings from obligations to repay pre-bankruptcy debts – the so-called "availability of discharge" – reduces the burden of the debtor. In Iceland's personal bankruptcy regime, the time to discharge is two years, similar to many OECD countries. Exempting the assets of the owner of a bankrupt firm that are not directly linked to the business also matters. In Iceland's personal bankruptcy regime, exemptions to pre-bankruptcy assets from the bankrupt estate are limited to modest personal items such as assets or income required to cover the debtor’s subsistence and working equipment, like in most OECD countries. According to the Ministry of Justice, the exemptions made to pre-bankruptcy assets are reasonable in practice, for example, including homestead. However, the homestead exemptions are not legislated and are made at the judge’s discretion.
The new law enacted in 2022 prohibits managers of bankrupt firms from running a new business for three years when certain conditions are met. This provision was introduced as some managers of bankrupt firms have abused insolvency proceedings in which personal liabilities are exempted. It is meant to help distinguish fraudulent debtors from honest ones.
4.4.3. Prevention and streamlining measures should be developed further
Over recent years, the policy debate has focussed on enhancing bankruptcy prevention and developing pre-insolvency and simplified insolvency procedures for SMEs (André and Demmou, 2022). While many countries have implemented reforms in insolvency regimes over the past decade, such reforms have tended to focus on early warnings and pre-insolvency procedures to help businesses restructure in a timely manner. Progress on simplifying insolvency frameworks for SMEs appears to have been more limited, but many countries are planning reforms in this area (André and Demmou, 2022). The OECD insolvency indicator suggests reform is much needed in this area in Iceland (Figure 4.23).
Early warning tools facilitate early resolution of debt distress, increasing the possibility of successfully restructuring viable firms. These tools include an online self-test and training enabling firms to assess their financial position as well as financial and debt counselling for companies in financial difficulties. Early warning tools exist in many OECD countries, including the Nordic countries except for Iceland and Norway. The introduction of early warning tools can improve the pace and timely use of appropriate insolvency mechanisms, assisting the debtor in the assessment of the extent of risks involved. Denmark has an efficient early warning system (“Early Warning Denmark”), which provides confidential and free assistance to businesses heading towards insolvency and was a model for other countries, especially in Southern Europe (Møller and Mukherjee, 2019).
OECD insolvency indicator: prevention and streamlining, 2022
Note: The chart shows the score for “prevention and streamlining”, one of the 3 categories along with “restructuring tools” and “treatment of failed entrepreneurs” in the OECD insolvency indicator. The score ranges from 0 (most effective) to 3 (least effective).
Source: André and Demmou (2022), “Enhancing insolvency frameworks to support economic renewal”.
Pre-insolvency frameworks help to ensure early resolution of debt distress. Such frameworks allow the debtor and creditors to intervene early and, if needed, negotiate informally before formal insolvency proceedings start (Bricongne et al., 2016). Pre-insolvency frameworks exist in most OECD countries, including the Nordic countries except for Iceland and Sweden. In times of high uncertainty in which sorting out viable from non-viable firms is particularly challenging, well-designed pre-insolvency frameworks are essential (Demmou et al., 2021).
Two features in pre-insolvency frameworks are essential, according to André and Demmou (2022). First, management must be able to remain in control of the company (“debtor-in-possession” model). This is because incentives for early filing are weak if filing for insolvency implies the automatic dismissal of the incumbent management, as is the case for formal restructuring procedures in Iceland. Second, specific pre-insolvency procedures must be in place. Depending on the court’s involvement, pre-insolvency frameworks can be qualified as pure out-of-court agreements leading to voluntary contractual changes or hybrid informal agreements based on decisions by a majority of creditors according to the modalities that are generally set in law (Garrido, 2012). Bricongne et al. (2016) specify such modalities in detail, which are in line with best practices for formal restructuring proceedings, such as the possibility of approving a restructuring plan by only a requisite majority of creditors.
The government should consider introducing such pre-insolvency frameworks. These frameworks exist in 33 OECD countries, including nine that have introduced them over the past decade. In Iceland, voluntary agreements are occasionally reached in practice, typically initiated by creditors. However, these out-of-court settlements could be formalised though the establishment of pre-insolvency frameworks with predefined modalities. In such frameworks, the debtor-in-possession model can be used before starting formal insolvency proceedings. The incentive effects would be particularly important in Iceland because, in formal insolvency proceedings, incumbent management would be immediately replaced by an insolvency practitioner. Some of the best practices in restructuring proceedings, such as strengthening the voting system to approve a restructuring plan by a requisite majority of creditors, can be included in such pre-insolvency frameworks and experimented with. In France for example, the pre-insolvency framework introduced in 2006 (“sauvegarde” proceedings) significantly increased the probability of firms’ survival, compared to formal restructuring proceedings (Box 4.3).
In 2006, France introduced a procedure to help restructure otherwise solvent businesses experiencing serious financial trouble. This safeguard (“sauvegarde”) procedure complements the restructuring procedure called “règlement judiciaire” (RJ). Both procedures contain roughly the same steps, including a stay on assets, a twice-renewable six-month observation period to evaluate the financial condition of the company, and the negotiation of a restructuring plan between the insolvency administrator, the debtor and the creditors.
The main difference between the safeguard and RJ procedures is the financial state of the company. Firms facing financial difficulties that cannot be resolved without debt restructuring can file for the safeguard procedure. If their solvency is in doubt, firms have to file for the RJ procedure (or insolvency if they are not viable). The court can subsequently convert safeguard cases into RJ cases.
Epaulard and Zapha (2022) use heterogeneity in commercial courts’ propensity to convert safeguard cases into RJ cases to identify the causal effect of the conversion on firm survival, for filing over the period 2010-16. They find that the conversion to the RJ procedure, controlling for the firms’ financial condition and characteristics, reduces the probability of firm survival by 50 percentage points. Their results are robust to a wide range of robustness checks.
Furthermore, there is evidence supporting the hypothesis that the safeguard procedure, by sending the signal that the company is viable to stakeholders, especially clients, improves restructuring prospects relative to those in the RJ procedure, in which the low success rate is likely to alarm stakeholders, further reducing the chances of restructuring. The French experience shows the benefits of a specific pre-insolvency procedure, especially when the ordinary restructuring procedure has a low success rate.
Source: André and Demmou (2022), “Enhancing insolvency frameworks to support economic renewal”.
It is increasingly common to set up a special procedure for SMEs across OECD countries. SMEs face a higher probability of going through insolvency proceedings as the share of non-viable firms is higher among SMEs than among large companies (Banerjee and Hofmann, 2020). According to André and Demmou (2022), SMEs face some distinct obstacles in insolvency proceedings. High costs are one of them and can be alleviated via simplified insolvency procedures. Other obstacles include poor record keeping, which hampers successful restructuring. This problem can be partly addressed by enhancing access to counselling, notably in the context of simplified insolvency procedures. Furthermore, the value of assets at stake is generally low and creditors tend not to pay enough attention to SMEs. The new special procedure introduced recently in the United States tackles some of these issues, such as enhancing the voting system to approve a restructuring plan by a requisite majority of creditors, which encourages parties to accelerate voluntary agreements (Box 4.4).
In Iceland, there is no such special insolvency procedure for SMEs. The government may consider introducing simplified or pre-packaged in-court proceedings targeting SMEs and the possibility of having instalments in the payment of administrative expenses related to the insolvency proceedings. In parallel, the cost of insolvency procedures for SMEs can be lowered through subsidies for restructuring. In this respect, the creditors are allowed to deduct losses incurred as part of debt resolution from their corporate taxes in Japan (OECD, 2017c). Furthermore, other factors contributing to the success of a simplified restructuring procedure for SMEs can also be considered, such as enhancing the voting system for creditor approval of a restructuring plan and introducing a business recovery mediator in simplified proceedings (Box 4.4).
The United States introduced a new restructuring procedure for small businesses in February 2020 to reduce complexity and costs and address the lack of attention from creditors in ordinary SME procedures. The Act introduces a new sub-chapter V to Chapter 11 of the Bankruptcy Code. The debtor generally remains in possession and control of the company, which encourages the use of the procedure. Eligibility is essentially determined by the level of debt. The original debt ceiling was set at about USD 2.7 million, but was temporarily raised to USD 7.5 million during the pandemic. The higher ceiling was extended for another two years in June 2022. After June 2024, the threshold reverted back to the initial one adjusted for inflation.
This new procedure deviates from standard creditor-controlled procedures, in which the reorganisation plan has to be approved by a majority of participating creditors. It gives the court extensive power to enforce decisions made by a requisite majority of creditors on dissenting creditors, which encourages creditors and debtors to try to reach voluntary agreements. The nomination of a trustee, who is an experienced business professional and acts as a neutral adviser, also helps build consensual restructuring plans.
This new procedure also aims to speed up restructuring and to lower costs. The restructuring plan has to be presented within 90 days of the case initiation. Reduced information requirements, compared to ordinary Chapter 11 procedures, reduce the need for external expertise, which lowers costs.
Source: André and Demmou (2022), “Enhancing insolvency frameworks to support economic renewal”, updated.
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