ICELAND: INVESTMENT CLIMATE STATEMENT 2009

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