Observations of ocean currents in the Arctic interior show a curious, and hitherto unexplained, vertical and temporal distribution of mesoscale activity. A marked seasonal cycle is found close to the surface: strong eddy activity during summer, observed from both satellites and moorings, is followed by very quiet winters. In contrast, subsurface eddies persist all year long within the deeper halocline and below. Informed by baroclinic instability analysis, we explore the origin and evolution of mesoscale eddies in the seasonally ice-covered interior Arctic Ocean. We find that the surface seasonal cycle is controlled by friction with sea ice, dissipating existing eddies and preventing the growth of new ones. In contrast, subsurface eddies, enabled by interior potential vorticity gradients and shielded by a strong stratification at a depth of approximately 50 m, can grow independently of the presence of sea ice. A high-resolution pan-Arctic ocean model confirms that the interior Arctic basin is baroclinically unstable all year long at depth. We address possible implications for the transport of water masses between the margins and the interior of the Arctic basin, and for climate models’ ability to capture the fundamental difference in mesoscale activity between ice-covered and ice-free regions.