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Iceland

2008 Investment Climate Statement - Iceland

Openness to Foreign Investment

Foreign direct investment is generally welcomed in Iceland, although there are some limitations in the fisheries sector, the energy sector and the airline sector. These limitations are stipulated in the Act on Investment by Non-Residents in Business Enterprise or in specific legislation, and upon the fulfillment of other conditions and acquisition of licenses required by law. The sanctity of contracts is bound by law and applies equally to foreign and Icelandic parties.

Iceland is a member of the European Economic Area (EEA) Agreement, and as such investment in Iceland by EEA residents is in principle free, apart from exceptions in certain sectors:

Fisheries: Only the following may conduct fishing operations within the Icelandic fisheries jurisdiction or own or run enterprises engaged in fish processing:

  • Icelandic citizens and other Icelandic entities.
  • Icelandic legal entities that are wholly Icelandic-owned or are:
    1. Controlled by Icelandic entities
    2. Not under more than 25 percent ownership of foreign entities (up to 33 percent in certain circumstances)
    3. In other respects under the ownership of Icelandic citizens or Icelandic legal entities.

Fish processing is defined as any processing that preserves marine products from decay including production of fish oil and fish meal, but does not include further processing designed to render products more suitable for distribution or consumption. Canning of seafood, however, is open to foreign investment.

Energy: Ownership of energy exploitation rights, such as waterfalls and geothermal energy, is restricted to Icelandic citizens as well as parties from the EEA. The same applies to enterprises which produce or distribute energy. However, in 2007 a foreign investment firm was able to purchase a small holding of an energy investment company that owns shares in an energy producer.

Civil Aviation: The maximum total shareholding owned by non-residents (except residents of a country that is a member of the EEA) in Icelandic airline companies is 49 percent.

An individual domiciled within the EEA and/or OECD may run a business or take part in a business enterprise with unlimited liability in Iceland, while those from outside need to apply for permission from the Minister of Commerce or another appropriate authority. Limited liability companies and other legal entities with domicile outside the EEA and the OECD may operate in Iceland provided that this is permitted in an international treaty to which Iceland is a party or if permission is granted by the Minister of Commerce.

Most foreign investment in Iceland has been focused on the energy intensive aluminum sector. Two U.S.-owned companies (Century Aluminum and Alcoa) own and operate aluminum smelters in Iceland. Century Aluminum has a smelter facility in Hvalfjordur and Alcoa has a smelter in Reydarfjordur. Additionally, Alcan (purchased by Rio Tinto in 2007) operates a smelter in Hafnarfjordur. The Icelandic Investment Agency is working to encourage investment in high technology areas such as data storage centers and a new underwater data cable, which will help those endeavors, is scheduled for completion in 2008.

There is little to no societal discrimination against foreign investors in Iceland, and no legal discrimination against them.

The U.S. does not have a bilateral investment treaty (BIT) with Iceland.

Conversion and Transfer Policies

Icelandic law provides for full convertibility and transferability of dividends, profits, interest on loans, debentures, mortgages, lease payments and invested capital.

Expropriation and Compensation

As far as the U.S. Embassy is aware, the Icelandic government has never expropriated a foreign investment. No major investment disputes have occurred in recent memory.


Dispute Settlement

There are no recent cases of major investment disputes involving foreign investors in Iceland. The Icelandic system is well equipped to handle any trade and investment dispute, and the process is very transparent.

The Icelandic civil law system enforces property rights, contractual rights and the means to protect these rights. The Icelandic court system is independent from the parliament and government. Foreign parties must abide by the same rules as Icelandic parties, and they enjoy the same privileges in court; there is no discrimination against foreign parties in the Icelandic court system. When trade or investment disputes are settled, the settlement is usually in the local currency.

Under the Constitution, sentences may be passed by the courts only. The courts are divided into two classes: the Lower Courts, where most cases are heard, and the Supreme Court, which hears appeals from the lower courts.

There are eight lower courts and one Supreme Court, all hearing private and public cases. A special court called the Labor Court is concerned with labor disputes.

Iceland has been a member of the International Center for Settlement of Investment Disputes (ICSID) since 1966.

Performance Requirements and Incentives

Broadly speaking, Iceland does not offer direct subsidies for business investment. Its prime incentives lie in the favorable environment for businesses in general, including low corporate tax, competitive labor costs and payroll costs, and low energy prices. Industrial sites are available around Iceland at competitive cost. Local communities may offer certain further incentives.

As a member of the EEA, Iceland has access to EU research funds for R&D programs and joint ventures undertaken with companies from at least one other EEA country. Grants are issued for specific projects on a case-by-case basis by bodies including the New Business Venture Fund and Science Fund.

Film and TV production in Iceland is subsidized by the government in the form of a rebate of a portion of production costs. To qualify, the production company must be incorporated in Iceland. An Icelandic branch or a representative office of a corporation registered in one of the EEA countries is considered as incorporated for these purposes. There are no requirements as to the production budget, but the film should promote Icelandic culture as well as introduce Iceland's history and natural beauty. The film and TV production cost rebate rate is currently 14 percent.

Right to Private Ownership and Establishment

Other than fishing, energy, and airlines, foreign entities are free to establish and own any type of business enterprise and engage in all forms of legal remunerative activity. Icelandic law treats private and public enterprises with equality when it comes to market access and other business operations. Foreign investors are permitted to participate in privatization of government-owned businesses, subject to restrictions imposed by the government.

A foreign party must establish an identity number (kennitala) before it is possible to establish a bank account, but it is little trouble establishing such an identity number and the whole process takes less than a week. If a foreign citizen from outside the EEA wishes to purchase land or real estate in Iceland, a permit is required from the Ministry of Justice.

Protection of Property Rights

Iceland is a member of the EEA and therefore accepts jurisdiction of the EEA Court. Property Rights are recognized and protected in the Constitution of Iceland. Secured interests in property are bound by law and enforced as such and there is a very reliable system which records such security interests.

The Icelandic Patent Office -- a governmental agency under supervision of the Ministry of Industry and Commerce --handles all patent disputes in Iceland. The legal framework concerning intellectual property rights (IPR) in Iceland is in all respects equivalent to that of other industrialized countries in Europe. Iceland is a World Trade Organization (WTO) member, and Icelandic legislation complies with WTO TRIPS requirements.

As an EFTA state and member of the EEA, Iceland has implemented all relevant EU regulations and directives in the field of IPR. Furthermore, Iceland is bound by bilateral EFTA free-trade agreements which include provisions on IPR.

Iceland is a member of the European Patent Organization. Iceland is a member of WIPO and a party to most WIPO-administered agreements.

Transparency of the Regulatory System

Icelandic laws regulating business practices are consistent with those of most OECD member states, and are increasingly based on European Union directives as a result of Iceland's EEA membership.

The Competition Authority is responsible for the enforcement of anti-monopoly regulations and promotion of effective competition in business activities. This includes eliminating unreasonable barriers and restrictions on freedom in business operations, preventing harmful oligopoly and restriction of competition and facilitating the access of new competitors to the market.

The Consumer Agency holds primary responsibility for market surveillance of business operators, transparency of the markets with respect to safety and consumers' legal rights, and enforcement of legislation concerning protection of consumers' health, legal and economical rights.

The system as a whole is transparent, though bureaucratic delays can occur. All proposed laws and regulations are published in draft forms and are open for comment.

Legislative Process: The Icelandic parliament (Althingi) consists of a single chamber of 63 members and a simple majority is required for ordinary bills to become law. All bills that are introduced in the parliament are in draft form. Drafts are open to the public and are published on the parliament's web page. Interested parties can comment on proposed law and regulations. All NGOs involved are summoned to comment on proposed laws that affect them.

Efficient Capital Markets and Portfolio Investment

Iceland is a member of the EEA and therefore there is no restriction on the flow of capital, goods and labor within the EU zone.

The Icelandic financial system is broadly in line with those of other European and Western nations, and largely in harmony with European Union legislation. In recent years the government has emphasized privatization and economic liberalization.

Business credit is offered by commercial and savings banks, investment banks and securities houses. A strong non-bank sector has evolved, covering stock broking, leasing and a wide range of other financial services. International players are established in insurance and Icelandic finance companies have associations with global funds.

The Iceland Stock Exchange (ICEX) became a part of the OMX Nordic Exchange in 2006.

The legal framework controlling activities of Icelandic financial enterprises is based on European Union (EU) Directives. Icelandic legislation in this field has undergone extensive revision in recent years to bring it into line with legislation of other member states of the European Economic Area (EEA). In the next few years, changes in this legislation are expected, which will affect the operating environment of issuers, ICEX members and regulated OTC markets.

The Icelandic banking system came under scrutiny in 2006 from several of the world's largest financial firms, largely due to concerns over the degree of interconnectedness between major actors in the Icelandic economy. In response, the banks adopted measures to reduce vulnerabilities, which helped them in summer 2007 when the krona was affected by changes in the credit markets.

Political Violence

Iceland is a politically stable democracy, and politically motivated violence is not a threat to foreign holdings.

Corruption

Isolated cases of corruption occur but are not an obstacle to foreign investment. In a 2007 survey by Transparency International, Iceland was ranked sixth out of 180 countries for least corrupt countries. In 2006, Iceland had tied for first place.

Bilateral Investment Agreements

Iceland has bilateral free trade agreements (FTAs) with the European Union and its member states, Greenland, and the Faeroe Islands. Iceland is also bound by FTAs with the following countries through its membership in the European Free Trade Association (EFTA), composed of Iceland, Lichtenstein, Norway, and Switzerland:
Canada, Chile, Croatia, Egypt, Israel, Jordan, Korea, Lebanon, Macedonia, Mexico, Morocco, Palestinian Authority, the South African Customs Union, Singapore, Tunisia and Turkey.

Iceland does not have a bilateral investment treaty nor an FTA with the U.S. There is a U.S.-Iceland bilateral taxation treaty.

OPIC and Other Investment Insurance Programs

There are no current OPIC operations in Iceland. Political risk insurance and project financing are readily available at competitive rates on the local and international markets. Iceland is not a member of Multilateral Investment Guarantee Agency and there are no known plans for Iceland to become a member.

Labor

Of Iceland's population of 312,872 on December 1, 2007, the labor force totaled 174,600. The total participation rate was 83.1 percent in October 2007. Unemployment averaged 1.0 percent for 2007.

The Icelandic labor market is highly unionized with more than 85 percent of employees belonging to unions. A joint negotiating committee with representatives from national and local governments, Iceland's largest banks, and several other large employers negotiates an annual collective wage agreement with the unions representing workers in the public sector and some parts of the private sector.

With the EEA agreement, free movement of labor from the EU states is quickly becoming the norm, and has been embraced by local firms as a solution for their manpower shortage at a time of extremely low unemployment. Foreign labor now represents ten percent of the total labor force, or 18,000 people. The government estimates that 11,000 workers included in this figure came to Iceland in 2006, in the wake of loosened documentary requirements for citizens of the most recent states to join the EU. Most of these new arrivals found work in the construction sector.

Foreign Trade Zones/Free Ports

Under the EEA agreement, Free Ports or Foreign Trade Zones are not permitted in Iceland.

Foreign Direct Investment Statistics

Foreign investment statistics: The following tables reflect data available as of January 2007. Figures on investment position refer to book value. These figures are limited to companies in which a single foreign investor holds 10 percent or more of the equity capital and do not include foreign ownership interests via third party investment. Investment flow statistics are based on market value.

Major foreign investors: Under Icelandic law, investment statistics gathered by the Central Bank and Icelandic Bureau of Statistics cannot be released on a company- or project-specific basis. Major U.S. investors in Iceland include: Century Aluminum, Alcoa (aluminum), and deCODE Genetics (biotech). Many U.S. companies are represented through Icelandic agents.

Information in this chapter was primarily obtained from the Central Bank of Iceland.

Table 0: Average exchange rate ISK/$1
Year 2001 2002 2003 2004 2005 2006 2007
Avg. Rate 97.95 91.81 76.94 70.29 63.01 69.94 64.17

Table I: Foreign Direct Investment in Iceland by Country (Million ISK)
Year 2001 2002 2003 2004 2005 2006
Total FDI 70,652 64,292 84,709 127,445 296,550 538,407
U.S. 28,101 18,460 13,089 25,229 30,414 38,507
Sweden 804 1,875 1,305 1,652 3,859 4,734
Belgium/Lux 10,152 10,040 25,644 53,756 70,657 178,016
Switzerland 15,068 13,183 10,615 9,073 9,423 11,390
UK 1,880 1,338 146 116 7,573 13,817
Denmark 4,013 4,935 4,433 4,622 5,311 5,796
Japan 442 13 45 0 0 0
Europe 41,861 44,451 70,809 100,826 262,882 494,452

FDI percent of GDP
2001 2002 2003 2004 2005 2006
9.42 8.22 10.43 16.2 35.3 61.4

Table II: Foreign Direct Investment in Iceland by Industry (Million ISK)
Year 2001 2002 2003 2004 2005 2006
Metal/Heavy Ind. 29,914 25,165 21,941 37,630 76,782 154,021
Financial 3,376 3,013 1,341 727 117,536 243,410
Trade & Repairs 6,101 11,203 2,974 3,293 3,148 6,388
Software, Research and Management
Holding 19,255 9,061 39,824 64,674 23,150 40,709
Food Products 2,320 2,613 2,983 3,220 4,481 14,148
Telecom (-113) 2,099 2,162 288 14,639 13,167

Table III: Icelandic Foreign Direct Investment abroad by Country (Million ISK)
Year 2001 2002 2003 2004 2005 2006
Total 86,770 101,316 123,056 246,585 635,559 952,092
U.S. 17,945 12,315 11,307 11,119 96,021 89,384
Belgium/Lux 16,311 33,690 36,463 34,685 39,521 109,403
France 4,968 4,389 4,965 9,655 1,225 8,936
UK 13,585 16,789 25,297 64,656 166,666 216,505
Netherlands 5,920 5,191 6,391 10,138 152,947 189,670
Canada 1,813 1,381 3,859 3,913 4,033 2,618
All Europe 64,492 84,709 104,976 221,294 518,681 829,396
Percent of GDP 11.35 12.59 14.81 31.4 75.6 108.6

Table IV: Icelandic Foreign Direct Investment abroad by Industry (Million ISK)
Year 2001 2002 2003 2004 2005 2006
Real Estate and Business Activities 23,814 39,708 39,378 46,101 231,853 355,316
Food Products 21,792 21,464 23,412 38,846 47,431 75,438
Petroleum, Chemical, Rubber and Plastic Prod. 7,013 8,684 12,234 17,410 102,331 153,156
Trade and Repairs 14,159 9,142 17,590 30,471 62,436 72,961
Transport and Communication 4,944 4,274 4,589 8,441 38,191 49,484
Finance Activities 8,717 12,878 19,465 97,472 144,736 227,203


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