VZCZCXYZ0000
PP RUEHWEB

DE RUEHRK #0027/01 0331519
ZNR UUUUU ZZH
P 021519Z FEB 09
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC PRIORITY 3971
INFO RUCPDOC/USDOC WASHDC
RUCPCIM/CIMS NTDB WASHDC
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS REYKJAVIK 000027 
 
STATE PLEASE PASS TO USTR JASON BUNTIN 
 
STATE FOR EUR/NB, EEB/IFD/OIA J NATHANIEL HATCHER 
 
SIPDIS 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD ELAB KTDB PGOV OPIC USTR IC
SUBJECT:  ICELAND: INVESTMENT CLIMATE STATEMENT 2009 
 
REFS: A) 08 STATE 123907 B) Evans-Hatcher email 1/28/09 
 
¶1.  (U) Post submits the following Investment Climate Statement for 
Iceland for 2009.  Responses are keyed to reftel.  This report has 
been sent by unclassified email to J. Nathaniel Hatcher in 
EEB/IFD/OIA per reftel instructions.  The statistics portion at the 
end of this report was only sent by email (Ref B). 
 
¶2. (U) Begin report: 
 
--Openness to Foreign Investment 
 
The Icelandic Government encourages foreign investment in most 
sectors.  The majority of investment is in energy-intensive 
industries such as aluminum smelting that take advantage of the 
country's abundant renewable energy resources.  Icelandic laws 
regulating and protecting foreign investments are consistent with 
OECD and European Union (EU) standards.  As Iceland is a member of 
the European Economic Area (EEA), most EU commercial legislation and 
directives take effect in Iceland.  The major law governing foreign 
investment is the 1996 Act on Investment by Non-residents in 
Business Enterprises, which grants national treatment to 
non-residents of the EEA (including U.S. citizens).  The law 
dictates that foreign ownership of businesses is generally 
unrestricted, but with limitations in fishing, energy and aviation 
sectors.  Non-residents cannot own more than five percent in fishing 
and fish processing companies; cannot hold hydro and geothermal 
power harnessing rights and cannot manufacture or distribute energy; 
and cannot own more than 49 percent in aviation companies. However, 
according to the Ministry of Industry, the restrictions on 
manufacturing energy can be avoided by establishing a holding 
company somewhere in the EU that operates the power plant. Icelandic 
law also restricts the ability of non EEA-citizens to own land, but 
this may be waived by the Ministry of Justice. Icelandic courts 
uphold the sanctity of contracts as a matter of course. The 
Competition Authority is responsible for upholding the competition 
law and obligations under international agreements. 
 
There is no automatic screening of investors, although bidders in 
privatization sales may have to go through a pre-qualification 
process. Potential U.S. bidders in privatization auctions need to 
follow the process closely, since the procedures are often ad hoc 
and deadlines can be short. The U.S. does not have a bilateral 
investment treaty (BIT) with Iceland.  A Trade and Investment 
Framework Agreement was signed on January 15, 2009. 
 
The Icelandic economy experienced high volatility in 2008, due 
partly to the size of the economy, the currency and the global 
liquidity crisis.  The 12-month inflation in December 2008 measured 
at 18.1 percent.  Over the course of 2008 the stock market index OMX 
15, which consisted of the 15 companies listed on the OMX Iceland 
Stock Exchange with the highest market capitalization, went from 
6318.02 to 352.16. At present only ten companies make up the index. 
In the same time period the krona devalued 100 percent against the 
dollar, from 62 ISK to USD to 120.87 ISK to USD as measured by the 
Central Bank of Iceland.  Both the OMX 15 and the exchange value of 
the ISK had been appreciating rapidly in previous years.  In October 
2008 the government took over control of the three big Icelandic 
commercial banks. 
 
--Conversion and Transfer Policies 
Until recently, Icelandic law provided for full convertibility and 
transferability of dividends, profits, interest on loans, 
debentures, mortgages, lease payments and invested capital. However, 
following the financial turmoil in fall 2008, movements of capital 
to and from Iceland were restricted by the Rules on Foreign Exchange 
issued by the Central Bank in November 2008 and amended in December 
¶2008. These rules are supposed to be temporary measures to 
strengthen and stabilize the exchange rate of the ISK and are 
scheduled to be revised no later than March 1, 2009. 
The rules restrict the outflow of foreign currencies from Iceland 
unless the currency is used to import goods or services or to 
travel. This means at the present time that foreign investors in 
Iceland cannot remove their capital.   The rules allow for 
purchasing foreign currencies to pay on interest, indexation, 
dividends, capital gains, contractual installment payments and 
salaries. It is prohibited to settle transactions of transferable 
financial instruments denominated in ISK in foreign currencies, and 
to conduct cross-border prepayment of financial instruments. Sales 
proceeds from transactions in financial instruments that take place 
in Iceland must be deposited in to the seller's account in Iceland. 
Purchasing of foreign currencies by means of withdrawals from 
ISK-denominated bank accounts at domestic financial institutions or 
the Central Bank is not allowed, as is withdrawing foreign 
currencies in cash from foreign currency-accounts in Iceland without 
demonstrating that it will be used to pay for goods and services. 
Borrowing and lending between domestic and foreign parties for 
purposes other than cross-border transactions with goods and 
services is not allowed if the amount exceeds 10,000,000 ISK. 
 
--Expropriation and Compensation 
As far as the U.S. Embassy is aware, the Icelandic government has 
never expropriated a foreign investment. Some actions of the 
Icelandic government immediately before and during the financial 
crisis in October 2008, including the Central Bank takeover of 75 
percent of Glitnir Bank (thereby causing the value of the bank's 
shares to plummet in value) and the subsequent takeover of the three 
major banks with significant foreign investment interests, have been 
described by private investors as an expropriation of sorts. 
However, the assets and claims against the banks are still being 
evaluated (see dispute settlement).  The Constitution of Iceland 
proclaims that no one may be obliged to surrender his property 
unless required by public interests and that such a measure shall be 
provided for by law and full compensation be paid. A special 
committee is appointed every five years to review and proclaim the 
legality of expropriation cases. If the committee proclaims a case 
to be legal it will negotiate an amount of compensation with the 
appropriate parties. If an amount cannot be agreed upon, the 
committee determines a fair value after hearing the case of all 
parties. Cases of expropriations are fairly rare and in most cases 
involve real estate and land being expropriated because of water and 
power facilitation, road construction, city planning or things of 
similar nature. 
 
--Dispute Settlement 
Iceland has ratified the major international conventions governing 
arbitration and the settlement of investment disputes. Iceland 
accepts binding arbitration of investment disputes. 
 
After the Government took over control of the three big Icelandic 
commercial banks in October 2008, it separated the bank's domestic 
operations from their foreign operations and passed a bill that 
places the claims of depositors as top priority. Currently debtors, 
some of whom are American, are negotiating with the government on 
how to their settle claims on the banks. As of now it is not clear 
how they will be compensated. There are no other recent cases of 
major investment disputes involving foreign investors in Iceland and 
the Icelandic system has been considered well equipped to handle any 
trade and investment dispute. 
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 remitted 
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 providing for a 
favorable environment for businesses, including low corporate tax 
rates and low energy prices. Industrial sites are available around 
Iceland at competitive cost. Local communities may offer certain 
additional incentives. 
 
As a member of the EEA, Iceland has access to EU research funds for 
R&D programs and joint ventures can be 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 are 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 in 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. 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. 
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 the privatization 
of government-owned businesses, subject to restrictions imposed by 
the government. 
 
A foreign party must solicit an identity number (kennitala) before 
establishing a bank account. The process typically takes less than a 
week. 
 
--Protection of Property Rights 
Iceland adheres to key international agreements on property rights 
(e.g., Paris Union Convention for the Protection of Industrial 
Property). Trademarks, copyrights, trade secrets and industrial 
designs are all protected under Icelandic law. As with many other 
issues, Iceland is following the European lead in protection of 
property rights and adheres to the European Patent Convention of 
¶1973. In 2005, Iceland signed the Patent Cooperation Treaty (PCT) 
 
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 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. 
Much of Iceland's financial regulatory system was put in place only 
in the 1990s, thus transparency is occasionally a concern (i.e. in 
public procurement, and in privatization sales where the process is 
established by the government on an ad hoc basis). 
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 for the public record 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 
The financial sector is currently in great turmoil. In October 2008 
the banking system collapsed and the Financial Supervisory Authority 
of Iceland took control over the three big Icelandic commercial 
banks.  Resolution Committees were appointed that split each bank 
into two entities, a domestic one and an international one, and 
subsequently appointed new CEO's over the domestic entities. The 
banking system is being restructured and the banks' assets are being 
reevaluated. The supply of capital is limited as the banks were 
recapitalized by the Government as funding on the international 
wholesale capital markets was difficult to obtain. It is likely that 
Iceland will see a flood of personal and business bankruptcies in 
early 2009 across all sectors, including investment banks and other 
financial institutions. 
The OMX Nordic Exchange operates the market for securities in 
Iceland and trades various products. The prices of companies listed 
on the OMX have fallen greatly in the recent past. 
 
--Political Violence 
At the time of this report's drafting in January 2009, Iceland 
experienced intense political protests stemming from the October 
2008 financial crisis.  Public protests spurred the government to 
dissolve and a new coalition to form prior to early elections in 
spring 2009 (originally scheduled for spring 2011.)  Although this 
is presently an uncertain time, most expect political stability to 
return.  There has been no politically motivated violence towards 
foreign holdings. 
 
--Corruption 
Isolated cases of corruption occur but are not an obstacle to 
foreign investment. In a 2008 survey by Transparency International, 
Iceland tied for the seventh out of 180 countries for the least 
corrupt. In 2007, Iceland was ranked sixth and in 2006, Iceland tied 
for the first place. 
 
--Bilateral Investment Agreements 
The U.S. does not have a bilateral investment treaty (BIT) with 
Iceland nor an FTA with the U.S.  There is a U.S.-Iceland bilateral 
taxation treaty and a Trade and Investment Cooperation Forum 
Agreement (TIFA). 
 
--OPIC and Other Investment Insurance Programs 
Political risk insurance and project financing were readily 
available at competitive rates on the local and international 
markets.  With the financial collapse in fall 2008 and the current 
rebuilding in the banking sector, project financing may be 
temporarily limited.  Iceland is a member of Multilateral Investment 
Guarantee Agency. 
 
--Labor 
Until the financial collapse in fall 2008, demand for labor exceeded 
supply. According to Statistics Iceland the unemployment rate of the 
workforce, which consisted of more than 80 percent of the 
population, was less than 3 percent over the period 2005-2007. Many 
large construction projects, requiring a large number of skilled and 
unskilled workers, were built during that period.  The Icelandic 
workforce is highly skilled.  Foreign labor moved to Iceland to fill 
the majority of unskilled service and semi-skilled construction 
jobs; the number of foreign citizens residing in Iceland doubled. 
With the EEA agreement, free movement of labor from the EU quickly 
became the norm, and was embraced by local firms as a solution for 
their manpower shortage at times of extremely low unemployment. 
The labor market conditions changed dramatically following the fall 
2008 economic crisis.  The unemployment rate rose rapidly, from 
under 2 percent to 6.5 percent in three months. Unemployment is 
expected to rise, with foreign and domestic labor leaving Iceland 
for better job prospects. 
 
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. Iceland has ratified around 20 ILO conventions, 
including those that protect the basic worker rights. 
 
The government has imposed mandatory mediation when strikes have 
threatened key sectors in the economy such as the fishing industry. 
 
--Foreign Direct Investment Statistics 
Foreign investment statistics: The tables reflect data available as 
of January 2008. 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. 
¶3. (U) End report. 
 
VAN VOORST