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A foreign driver’s license is valid in Iceland for those who stay here on temporary basis. The principle is, however, that if a person has permanent residence in Iceland (normally legal domicile) he or she must hold an Icelandic driver’s license. Exceptions to the rule are as follows:

Driver’s license issued in the Faroe Islands or countries that are parties to the EEA Agreement gives the holder the same rights he or she has under the license of the issuing country. The rights are based on the validity of the license, but no longer than to the age of seventy.
Driver’s license issued in states that are not parties to the EEA Agreement gives the holder rights to drive in Iceland for up to one month after he or she have registered a legal domicile in Iceland. After that the person concerned must hold an Icelandic driver’s license in order to drive in Iceland.
Individuals who reside in Iceland (in most cases have legal domicile) can trade their foreign driver’s license for an Icelandic one. Application for a corresponding Icelandic driver’s license is to be submitted to the district commissioner (district magistrate) or the chief of police, regardless of residence, provided that he or she have legal domicile in Iceland.

Application form can be obtained from the district commissioners (magistrates) and the chief of police outside the greater Reykjavík area. Within the jurisdiction of the chief of police in Reykjavík applicants can resort to the district commissioners in Kópavogur and Hafnarfjörður. See the website of district commissioners (magistrates).

Nationals of countries that are not member states of the EEA Agreement will in most cases need to provide a statement about good health or a health certificate issued by a doctor, which ever is appropriate, and undergo a test of qualification. It is permitted to waive this last requirement if it is considered that the conditions for a driver’s license in the country where the license was issued are no less than the requirements in Iceland. When the application is handed in the applicant (if he is not an EEA citizen) might need to prove his residency by displaying his residence permit card or by other means demonstrate that he has a residence permit in Iceland.
If the driver’s license was issued in the Faroe Islands or in one of the EEA countries, the Icelandic license is usually issued without the applicant needing to undergo a test of qualification or submitting a health certificate or a statement about good health.
A person who is issued an Icelandic driver’s license on the basis of a foreign one must hand in the foreign license when the application is submitted.
In most cases it is so that no one is allowed to have driver’s licenses from more than one state which is party to the EEA Agreement.
Application for an Icelandic driver’s license, in exchange for a foreign one, shall include:
A photograph (35×45 mm) of the applicant
Foreign driver’s license
A statement about good health, or if appropriate a health certificate issued by a doctor, if the foreign license is not issued in the Faroe Islands or in member states of the EEA Agreement.