With the signing of the Act of Union, Denmark recognized the Kingdom of Iceland as a fully sovereign state in personal union through a common monarch.

The Danish–Icelandic Act of Union, an agreement signed by Iceland and Denmark on 1 December 1918, recognized Iceland as a fully independent and sovereign state, known as the Kingdom of Iceland, which was freely associated to Denmark in a personal union with the Danish king. Iceland established its own flag, declared its neutrality and asked Denmark to represent on its behalf foreign affairs and defense interests, while maintaining full control of them. Iceland opened its first embassy in 1920. The Act would be up for revision in 1940 and could be revoked three years later if agreement was not reached.

The Kingdom of Iceland was a sovereign and independent country under a constitutional and hereditary monarchy that was established by the Act of Union with Denmark signed on 1 December 1918. It lasted until 17 June 1944 when a national referendum established the republic of Iceland in its place.

A personal union is a combination of two or more monarchical states that have the same monarch while their boundaries, laws, and interests remain distinct. A real union, by contrast, involves the constituent states being to some extent interlinked, such as by sharing some limited governmental institutions. Unlike a personal union, in a federation or a unitary state, a central (federal) government spanning all member states exists, with the degree of self-governance distinguishing the two. The ruler in a personal union does not need to be a hereditary monarch.

Christian X was King of Denmark from 1912 until his death in 1947, and the only King of Iceland as Kristján X, holding the title as a result of the personal union between Denmark and independent Iceland between 1918 and 1944.