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:
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.
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.
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.
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.
Iceland is a politically stable democracy, and politically motivated violence is not a threat to foreign holdings.
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:
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.
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
Table I: Foreign Direct Investment in Iceland by Country (Million ISK)
FDI percent of GDP
Table II: Foreign Direct Investment in Iceland by Industry (Million ISK)
Table III: Icelandic Foreign Direct Investment abroad by Country (Million ISK)
Table IV: Icelandic Foreign Direct Investment abroad by Industry (Million ISK)