(July 16, 2015) On July 3, 2015, the Icelandic Parliament (Althingi) passed legislation (The Act on a Stability Levy) to ease capital controls and bank regulation in the country, provided certain conditions are met. The regulations were set in place following the 2008 banking crash in the country. (Press Release, Legislation on Stability Levy Adopted Unanimously, Ministry of Finance and Economic affairs website (July 3, 2015).)
The legislation was submitted to the Althingi on June 8 this year, following the announcement by the Prime Minister and Minister of Finance and Economic Affairs of a comprehensive action plan for removal of capital controls. (Id.)
The strict regulations that prohibited currency exchange outside Iceland left a total of Icelandic Krona (ISK) 121 billion of foreign assets that had to remain within the country. The problems in handling these assets have been complex. Relaxing the regulations risks instability in the currency exchange market. (Questions and Answers, Ministry of Finance and Economic Affairs website (last visited June 17, 2015).)
Composition Agreements for Failed Icelandic Banks
The Ministry of Finance announced on June 8 that the estates of the bankrupted banks have until the end of the year to complete composition agreements, on the basis of which they may receive authorization to transfer funds; otherwise they will face the imposition of a stability tax of 39% on the estate assets. (Comprehensive Strategy for Capital Account Liberalisation Announced, Ministry of Finance and Economic Affairs website (June 8, 2015).)
An important effect of meeting the December 31 deadline for composition agreements is that entities that meet the deadline will not be considered taxable entities for purposes of the Foreign Exchange Act, no. 87/1992. (Id.; Act No 87/1992 on Foreign Exchange, Ministry of Finance and Economic Affairs website.) The Central Bank of Iceland will determine whether enough measures have been taken by a bank to warrant granting it the tax-exempt status. (Announcement Concerning Capital Account Liberalisation Measures, SEDLABANKI ISLANDS (June 9, 2015).)
Icelandic Currency Held Offshore
Once the stability objectives prescribed in composition agreements have been met, Iceland may deal with its second problem, the handling of offshore ISK assets.
The non-national owners of offshore ISK will choose from three options to convert their ISK to another currency. The first option for is to participate in a currency auction, which would give ISK holders the chance to bid for foreign currency for a fee. The Icelandic Authorities would thus control how much Icelandic currency becomes available en masse. The second alternative for non-nationals holding ISK is to purchase long-term Icelandic state bonds with the Krona in foreign currency. The third is to create locked, non-interest-bearing accounts in the other currency. (Comprehensive Strategy for Capital Account Liberalisation Announced, supra; Iceland to Lift Capital Controls in Place Since 2008 Crisis, BUSINESS INSIDER (June 8, 2015).)
Reactions to the Government Moves
Stakeholders in Icelandic banks are said to have accepted the terms suggested by the Althingi. (Eygló Svala Arnarsdóttir, Claimants of Collapsed Banks Accept Terms, ICELAND REVIEW (June 9, 2015).) The three-option plan, moreover, has been considered a bold move, according to press reports. (Alëx Elliott, International Lawyer “Speechless” over Iceland Capital Controls Plan, ICELAND REVIEW (June 13, 2015).) The measure has also gone over well with international rating agencies, such as Fitch Rating, which considers it beneficial for the country’s credit. (Fitch: Iceland Capital Controls Removal Positive; Execution Key, REUTERS (June 12, 2015).)
Prepared by Elin Hofverberg, Foreign Law Research Consultant, under the supervision of Luis Acosta, Chief, Foreign, Comparative, and International Law Division II.