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Legal Framework

Because of Iceland’s strong legal relationship with Europe, the legal framework of the Icelandic energy industry is very similar to what applies in the European Union (EU). Following is a description of the main priciples regarding foreign investment in the Icelandic energy sector and industry.We also describe how the energy policy of the EU affects Iceland and creates interesting opportunities for the Icelandic energy industry.

ACCESS FOR FOREIGN INVESTORS

According to Icelandic law and regulations, foreign ownership of businesses located in Iceland is generally unrestricted. However, certain restrictions apply to a limited number of commercial sectors, including the energy industry.

All individuals and other legal entities within the European Union (EU) and the European Economic Area (EEA) are permitted to own enterprises which produce or distribute energy. They are also allowed to own energy exploitation rights with regards to hydropower and geothermal energy.

Potential electricity-sector investors from outside of the EU or EEA need to obtain special permission by Icelandic authorities. This can obviously be a hindrance for investors from outside of Europe. However, if the investor has a subsidiary or other kind of company or legal entity somewhere within the EU or EEA, he would normally be able to invest in Iceland through that European entity. This, for example, applied to a Canadian firm that bought shares in an Icelandic electricity utility through a firm it registered in Sweden. If the Canadian company had attempted the investment directly, it would have needed special permission from the Icelandic authorities.

There are of course a number of law firms in Iceland that specialize in assisting foreign investors with legal issues, establishing a company, and contractual formalities. Iceland also has well-known international accounting brands (such as Deloitte, KPMG and PwC) providing in-depth knowledge of the local tax and accounting environment. Our readers are welcome to contact us for more information about legal- and tax services. Also, you can find useful information about the legal framework on the Invest in Iceland website.

INCENTIVES

The Icelandic Parliament has adopted a general act on incentives for initial investment in Iceland (law no. 99/2010). This new legislation has been approved by the EFTA Surveillance Authority (ESA) as a legitimate state aid scheme (this is important because of Iceland’s membership of the European Economic Area; EEA).

The government authorities are permitted to grant both general and regional incentives for new investments in Iceland up to a defined ceiling, in line with EU legislation. In addition to certain derogations from taxes and charges, incentives can also come in the form of direct cash grants, training aid and lease of land. Industrial sites are available around Iceland at competitive cost and local communities may offer certain extra incentives.

As a member of the European Economic Area (EEA), Iceland has access to research funds of the European Union (EU) for research and development programs and joint ventures undertaken with companies from at least one other EEA country (including all the countries within the EU).

EUROPEAN RENEWABLE ENERGY POLICY

In Iceland the electricity generation mix is 100% renewable (hydropower and geothermal power). In addition most of the heating also comes from renewable sources (geothermal). This is very different from most other European countries, where electricity from renewable sources only accounts for approximately 20% of each nation’s total energy, on average. In total, close to 85% of Iceland’s consumption of primary energy is renewable energy, while renewable energy sources now account for only 12% of the final consumption of energy within the EU (this refers to energy used as electricity, heating, cooling, and transportation).

The European Union has a target to increase the share of renewable energy sources in its gross final consumption of energy from 12% to 20% by 2020. This policy by the EU not only calls for major investment in renewable energy production, but creates great possibilities for countries with unharnessed green energy sources available. This policy of increasing the share of renewable energy especially applies to electricity production. Increasing renewable energy in transportation is more costly than in electricity generation, and hence the share of renewable energy sources in electricity generation is likely to be significantly higher than 20%.

It has been estimated that the renewable energy share in the electricity sector within the EU could be around 35% in 2020. This will call for dramatic increase in renewable electricity production with the construction of new large wind farms and solar electricity plants. It is likely that some or even substantial part of this new green electricity will be generated outside of the EU. Plans are for massive solar generation in northern Africa. A much less expensive option is that of harnessing renewable energy options in Iceland and linking Iceland and EU with a HVDC electric cable (HVDC stands for High Voltage Direct Current). Thus, the EU’s energy policy and legally binding targets are creating interesting possibilities for more investment in Iceland’s electricity sector.