MARKET OVERVIEW
Regulatory environment
Banking in Iceland is given a legal framework in the Act on Commercial Banks and Savings Banks of July 12, 1996. Supervision is exercised by the Central Bank´s Bank Inspectorate in accordance with provisions in the Central Bank Act of 1986.
Requirements of the Directives of the European Union are met
Banking law in Iceland has in recent years been brought into line with Directives applicable in the European Union (EU) after Iceland became a founding member of the European Economic Area (EEA) on 1 January 1994. As from the beginning of 1994 all foreign exchange controls were abolished, with the exception of statistical reporting.
Size of the banking system
Present there are in operation 3 commercial banks, thereof 2 stateowned, and 30 savings banks The size of the population should be kept in mind when considering the size of the banking system and its deposits and assets. Iceland has a population of 270.000.
The assets on the balance sheets of commercial banks at the end of 1994 totalled ISK 212.5 billions and in the savings banks ISK 45.6 billions. The commercial banks reported a profit in 1994 of ISK 484.6 millions while the savings banks reported a profit of ISK 330.3 millions. The whole banking system reported a net return on equity (ROE) of 3.9% which still was a considerable improvement of the negative ROE of 0.9% in 1993.
The capital ratios of both commercial and savings banks meet the minimum requirements, i.e. were between 9.7 % and 10.8% for the commercial banks.
SECURE AND RELIABLE BANKING
The Central Bank of Iceland
Under the Central Bank of Iceland Act of 1986, Chapter IV, it is incumbent upon the Central Bank to inspect and supervise the activities of deposit taking institutions. This activity is carried out by a separate department of the Central Bank, reporting to the Governors and Board of Directors of the Central Bank.
Supervisory authorities in countries within the European Economic Area are permitted to conduct checks in branches in Iceland of institutions based in those countries, after notification to the Bank Inspectorate.
Capital adequacy
Article 54 of the Act on Commercial Banks and Savings Banks provides that the own funds of banks, as defined, shall not at any time be less than 8% of risk-adjusted assets, off- balance sheet items, and taking into the account the risk of changing foreign exchange rates and the risk of other items of market risk, i.e. the total assets of the bank concerned, in accordance with rules set by the Central Bank regarding the assessment of risk-adjusted assets and off- balance sheet items for the calculation of solvency rations of the banks.
Confidentiality
Under the Act on Commercial and Savings Banks, and similar provisions in the acts on other financial institutions, bank directors, bank managers, auditors and other employees of banks are obliged not to divulge any information concerning the personal circumstances of the clients of the relevant institution and other matters of which they become aware in the course of their work and which should be kept secret according to law or the nature of the case. These rules apply unless a judge decrees that the information must be supplied to a court or the police or there is a duty in law to provide the information.
Deposit compensation.
In order to secure the receivables of depositors in commercial banks and savings banks, and to facilitate the stable operations of banks, two separate Deposit Guarantee Funds are operated, one for commercial banks and one for savings banks. Article 80 of the Act for Commercial and Savings banks sets the guidelines for the minimum total assets of these Funds - 1% of the average of insured deposits in the year before. If the minimum is not met, all commercial banks and savings banks are obliged to pay an annual fee to the applicable Deposit Guarantee Fund, equal to 0.15% of the average of insured deposits each year of bank concerned. Until the minimum is met each bank is obliged to guarantee an equal share to their share in the missing amount.
A new bank is obliged to pay an annual fee of 0.15% for the first seven years of operating in Iceland and to give a guarantee for the difference between the payment and the minimum total assets of the applicable Fund, as defined in the article.
Deposit Guarantee Fund for Commercial Banks.
The Commercial Banks´ Deposit Guarantee Fund is an independent institution owned by the state. All commercial banks are obliged be members in the Fund. It has two separate functions and operates in two separate departments, a deposit department and a loan department, and the assets of either department must not be used to meet the liabilities of the other.
Deposit Guarantee Fund for Savings Banks.
The Fund is, as opposed to the Commercial Banks Fund, a private institution of which all savings banks must be members.
Non-bank financial institutions.
The Act on Credit Institutions other than Commercial Banks and Savings Banks was enacted in 1993. It governs the activities of such institutions, prominent among which are the so-called loan funds of the diverse industries.
Non-bank financial institutions are subject to exactly the same rules on capital ratios, audits, inspections, dissolution and mergers as banks.
FOREIGN BANK OPERATIONS
Commercial and savings banks based in countries of the European Economic Area and which have received operating licences from the competent authorities in those countries may establish branches in Iceland two months after the Bank Inspectorate receives an announcement to this effect from the competent authorities in their home countries.
The Bank Inspectorate must obtain from the competent authority in the home country of the foreign bank the following information:
1 A description of the activities of the branch, its structure and proposed activities in Iceland,
2 confirmation that the proposed activities are permitted in the home country,
3 the address of the branch,
4 the names of the managers of the branch,
5 the amount of own funds and the solvency ratio of the bank, and
6 measures taken in the home country, where these exist, to guarantee deposits in the branch.
Foreign commercial and savings banks, based in countries of the European Economic Area and which have received operating licences from the competent authorities in those countries, may provide services in Iceland without establishing branches, after the Bank Inspectorate has received a notification to that effect from the competent authorities in the home country concerned.
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Taxation
A dividend paid by company resident in Iceland to a non-resident shareholder is a subject to a withholding tax assessment. The tax rate is 10% in case of an individual and 20% in case of corporate shareholders, unless reduced by a treaty.
Withholding tax on interest income for corporates is deductible from regular tax assessment.
A royalty paid by a company resident in Iceland to a non-resident is subject to income tax assessment. The tax rate is 33% in case of payments to legal entities and 30,41% to individuals. Under all treaties concluded by Iceland, royalties paid to non-residents are exempt from tax.
Non-resident companies are subject to income tax on their net taxable income from Icelandic sources. This is imposed on their net income after allowable deductions at the rate applicable to resident companies. Non-resident companies are also subject to taxation on their net worth, wherever their assets may be located, provided their assets are actually used to earn taxable income in Iceland. The rates for state net worth tax and extraordinary net worth tax are the same as those applicable to resident companies.
It should be noted that a resident company can use dividend paid as a subtraction from profits before declaration of taxable income is made.
It makes no difference if the entity is a bank or an other type og financial institution where tax rate is concerned.
Double taxation agreements
Iceland has made double taxation agreements with the following countries:
- Denmark (Greenland not included)
- Estonia
- Faroe Islands
- Finland
- France
- Germany
- Latvia
- Norway
- Sweden
- Switzerland
- UK - income only
- USA
Convertibility of currency
The Icelandic currency is Icelandic Krónur. The exchange rate of Krónur is registered by the Central Bank of Iceland. The principal rule under Icelandic law is unlimited convertibility of Krónur when importing and exporting goods and services.
A foreign entity can make a foreign currency deposit if the account is registered in the name of the entity and under an Icelandic ID number. The bank concerned is obliged to notify the Central Bank about the status of the account on regular basis for statistical purposes. A foreign entity can receive credit in Iceland without limitations unless a foreign state or a municipality is concerned, if so a special authorisation has to be obtained from the Central Bank.
Trading with currency is unlimited as a principal rule, although Article 3 of The Act on Foreign Exchange Services of November 17, 1992, provides The Central Bank an authorization to postpone all or some transactions for 6 months at the time, if the trading leads to destabilisation of the exchange rate or the balance of payments. No difference is made whether the sum converted is a profit from a transaction or not.
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The content of this article is intended to provide only general information on the subject. Legal advice should be sought for your specific circumstances.
