A Party at the North Pole#

I have never organized a party at the North Pole. However, if I were given the task, I would probably start by encouraging people to attend such a celebration, as it is not entirely a given that anyone would bother to go to such an unusual place without encouragement.

Next, I would probably make sure that interested guests have easy access to the venue, check whether they will have enough to eat and drink there, and then probably check whether staff is available to handle the party service. If the atmosphere is tense before the event and I even foresee that intruders are expected at the North Pole, I would possibly hire a doorman to show them the door. Doormen would certainly not be the first thing I would think of.

Overregulation Ahead#

This column is not actually about a party at the North Pole. It is about the Minister of Industry’s bill for an act on the review of foreign investments for reasons of national security and public order. The aim of the act is to enable the government to ensure that investments and agreements by foreign parties in this country do not disrupt national security in Iceland.

In short, the bill means that all agreements that foreign parties intend to make with domestic parties in this country that fall under the law (more on that later) will require the approval of the Ministry of Industry before they can be implemented. Those agreements that fall within the scope of the law will go through a process with the minister, where it can take up to 18 weeks for the minister to decide whether the agreements comply with the law or not. After that deadline has passed, agreements are not automatically considered approved, and therefore there is nothing to prevent the proceedings from taking longer than four and a half months. In other words, agreements can remain with the minister for approval for an indefinite period. The minister is then authorized to charge a fee for the proceedings, according to his or her own decision at any time.

The regulations will cover, among other things, agreements on investment by foreign parties in domestic parties, the vast majority of loan agreements, as well as various types of cooperation and business agreements that domestic parties intend to make with foreign parties.

The bill means that all parties that are not established in Iceland and that make such agreements with domestic parties that fall under the bill can expect their agreements to be submitted to the minister for review. An Icelandic company with a small, foreign shareholder and a typical shareholders’ agreement in force can also trigger proceedings under the law.

No Distinction Between Parties#

No distinction is made between parties from the EEA and parties from other countries—all are considered foreign parties who need to obtain permission from the Minister to conduct business here that falls within the scope of the bill. It seems that only those parties that have 100% pure Icelandic ownership and operate without influence from foreign parties are saved.

As mentioned earlier, the rules are intended to prevent these foreign parties’ agreements with domestic parties from disrupting national security. Those domestic parties that are considered to operate in “sensitive sectors” are defined there and their freedom to conclude agreements as well as to seek foreign investment is restricted, in the interests of national security. Those parties that operate in sensitive sectors include parties that are related to important infrastructure, the country’s defense, energy issues, etc., which must actually be considered a fairly normal framework.

No One Will Escape Scrutiny#

However, unspecified parties working in “production or development of other important technologies” will also be considered to be working in sensitive areas, depending on what the minister decides from time to time. The technology that is considered “important” is not further defined and no framework is set for the minister’s authority in these definitional matters. In other words, the minister has the discretion to decide which technology companies will be subject to the law and subject to the restrictions on freedoms prescribed therein. All Icelandic technology companies may therefore have to comply with the law and expect the Minister of Industry and Trade to review their contracts and investments in them. And then decide on their legality within 18 weeks, or later, if necessary.

However, there are several points in the bill that require closer examination, as they do not stand up to scrutiny as is, but only a few of them are mentioned here.

The Foreign Parties#

It is interesting that parties from other EEA countries are considered foreign parties and will therefore have to knock on the door of the ministry to be allowed to do business here. It is indeed permissible to restrict the rights of parties from other countries under the EEA Agreement, based on justifications based on security considerations. However, the bill covers many more domestic operators than those concerned by security considerations, since it covers all those who develop “critical technology” in the opinion of the minister.

Breach of Iceland’s Obligations#

It is clear that not all parties developing important technologies can be considered to be of significance for security or public interest. The restrictions placed on investments and trade between parties within the EEA area and such parties are therefore clearly not all justified by security or public interest considerations and therefore go beyond what the exemption provisions of the EEA Agreement permit on the basis of public interest. Such restrictions are therefore simply a breach of Iceland’s obligations under the EEA Agreement. Since other countries have set similar rules, the fundamental rights of the EEA Agreement have nevertheless been respected. In any case, Icelandic companies are significantly disadvantaged in competition with companies in countries where the fundamental rights of the EEA Agreement are respected. What is the real purpose of the EEA Agreement then?

Constitutionally Protected Rights#

As mentioned above, the Minister is given discretion to decide which technologies, and more specifically which industries, fall under the provisions of the Act and who subsequently need his permission to conduct business.

First, courts have repeatedly ruled that it is not permissible to delegate to the executive branch a free assessment of restrictions on freedom of employment on the basis of Article 75 of the Constitution’s freedom of employment provision. Second, such a free assessment is not permitted under the property rights provision of Article 72 of the Constitution, which states that the right of foreign parties to own shares in a business enterprise in this country may be limited by law. Legal provisions that give the executive branch a free assessment of when to limit property rights simply do not meet that requirement. The bill therefore does not stand up to scrutiny on the basis of our own Constitution.

Intolerable Uncertainty#

Even if these violations of our fundamental rights were not intended, the proposed legislation simply creates intolerable uncertainty for anyone who intends to do business with foreign parties, is considering financing from abroad, or is planning to invest in this country, as it is clear that any technology company could fall under the Minister’s supervisory authority, should the Minister decide so himself. This uncertainty will generally reduce the willingness of foreign parties to invest in and do business with Icelandic intellectual and technology companies and also goes much further than is necessary to achieve the objectives of the law.

The intellectual property industry is one of the four main pillars of the Icelandic economy and generates export revenues that are close to revenues from the fishing industry and the aluminum industry, but it is expected that around 14% of Iceland’s export revenues will have flowed from the intellectual property industry in the year 2025. There are therefore enormous interests at stake for Icelandic business and society that careful attention is paid to the intellectual property and technology industry, its environment and the regulatory framework that concerns foreign trade.

Pouring Water into a Bucket Full of Water#

Access to new capital for innovative companies and the unhindered entry of new investors, as well as the acquisition of new business, is already a challenge enough, as it is an undisputed fact that the Icelandic business environment has numerous drags that are already causing far fewer foreign investors and customers to seek business here than they would otherwise. Examples of such drags include a weak and volatile currency, persistent inflation, high interest rates and expensive credit, high taxes in international comparison, few double taxation agreements and an uncompetitive tax environment for foreign parties, uncertainty and frequent changes in taxation and tax collection, including the reimbursement of research and development costs, in addition to the fact that the small size and low population of the country and the labor market hinder growth, without the immigration of foreign experts to the country being systematically facilitated.

All of these issues already work against a healthy business and investment environment in this country and contribute to less value creation than would otherwise be possible. The country’s employment and prosperity suffer as a result.

Some of these drags are difficult to remove, while others are relatively easy to fix if the will is there. Regulation that seeks to restrict access to foreign investment for security reasons needs to be very clearly defined in order to achieve only that purpose, without further hindering trade and capital flows to companies that have no impact on people’s security. Adding more obstacles to this country is like pouring water into a bucket full of water.

Foreign Investment in Icelandic Companies Has Been Declining Rapidly#

In this context, it is worth noting that foreign investment in cash in Icelandic listed companies has been declining rapidly in recent years and was, for example, many times smaller in 2024 than it was in 2022 and 2023, according to the Central Bank’s Economic Survey. Readers can probably see where I’m going with the metaphor of the party at the North Pole.

The proposed regulation is designed to make foreign business in this country even more unattractive by introducing even more obstacles than are already in place. Strange intentions in light of how few foreign investors are seeking to come here today and how difficult it is for Icelandic companies to actually take off. The bill is installing seat belts on an airplane that still lacks wings. Doormen are being hired to stop people from getting to a party at the North Pole.

The introduction to the bill states that “Strong and comprehensive legislation on investment screening [is] designed to increase confidence in the Icelandic investment environment for the benefit of the business community and society as a whole.” These words can be fully accepted. However, neither investors nor people working here are calling for further regulation that prevents capital from entering the country, but rather regulation that encourages capital to enter the country.

No investor looking at Iceland thinks that there is a lack of regulations that require the minister to decide whether or not a transaction can take place. This is simply starting at the wrong end, and the method used to “increase confidence in the Icelandic investment environment” is simply premature. Before the seat belts are installed, the wings need to be attached to the plane and the engines need to be taken care of. First, the party at the North Pole needs to be opened. Then, you can consider hiring a doorman.

The author is a partner at Frumtak and a lawyer.

Source: VB (in Icelandic)