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Ministry of Finance and Economic Affairs

Act No. 42/2016 on Amending the Foreign Exchange Act, the Act on the Treatment Króna-Denominated Assets Subject to Special Restrictions, and the Act on a Special Tax on Financial Undertakings

This is an English translation. The original Icelandic text, as published in the is the authoritative text. Should there be discrepancy between this translation and the authoritative text, the latter prevails. No. 42 2 June 2016

ACT

Amending the Foreign Exchange Act, the Act on the Treatment of Króna-Denominated Assets Subject to Special Restrictions, and the Act on a Special Tax on Financial Undertakings (capital flow management measures to mitigate adverse effects of capital inflows)

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CHAPTER I

Amendments to the Foreign Exchange Act, no. 87/1992, with subsequent amendments

Article 1

Article 13(m) shall be amended to include two new paragraphs, which shall read as follows:

It is permissible to reinvest capital released by the sale or redemption of new investments that satisfy the requirements set forth in Paragraphs 2, 3, and 4.

With the assistance of a financial undertaking in Iceland, the investor shall report the reinvestment to the Central Bank of Iceland according to Paragraph 6, within one week of the date it takes place. The notification shall be accompanied by documentation confirming that the investment satisfies the requirements set forth in Paragraph 6.

Article 2

A new temporary provision shall be added to the Act and shall read as follows:

The Central Bank of Iceland is authorised, upon receiving approval from the Minister, to set rules providing for special reserve requirements relating to new inflows of foreign currency in connection with:

1. New investments and reinvestment of such new investments according to Article 13(m), in bonds or bills issued in domestic currency or deposited to domestic currency deposit accounts.

2. Domestic currency deposits with deposit undertakings in Iceland, other than those deriving from capital that is eligible for reinvestment according to Article 13(e) or Article 13(f), or that falls under Article 13(l) or Article 13(m), but not those deriving from capital according to Item 5 of this Paragraph.

3. New investments and reinvestment of such new investments according to Article 13(m), in unit share certificates of funds that invest in bonds or bills issued in domestic currency or own domestic currency deposits.

4. New investments and reinvestment of such new investments according to Article 13(m), in the equity of a company for the purpose of investing, directly or indirectly, in bonds or bills issued in domestic currency or deposited to domestic currency deposit accounts.

5. Loans granted to residents that are used for investments in domestic currency, for the benefit of the lender, in bonds or bills issued in domestic currency or deposited to domestic currency deposit accounts. The same applies to such loans that are used for investments in unit share certificates of funds or in the page 2 of 3

equity of a company that is invested or disposed of, directly or indirectly, in the manner described in the first sentence.

The special reserve requirements shall be satisfied by depositing the special reserve amount to a special reserve account with a deposit undertaking in Iceland. The special reserve ratio is applied to the special reserve base to determine the special reserve amount. The deposit undertaking shall, within the same business day, deposit an amount corresponding to the entire special reserve amount according to the first sentence to a capital flow account with the Central Bank of Iceland. The special reserve requirement shall conclude when the holding period has passed, irrespective of whether new inflows of foreign currency that create a special reserve base have been released via sale or redemption. Withdrawals from special reserve accounts are prohibited during the holding period. Deposits to deposit undertakings' capital flow accounts with the Central Bank of Iceland shall be subject to the same holding period and to a corresponding special reserve amount. It is prohibited to hypothecate the special reserve amount and deposit undertakings' deposits in capital flow accounts with the Central Bank of Iceland.

The rules according to Paragraph 1 shall contain further provisions on the implementation of the special reserve requirements, including:

1. the holding period, special reserve ratio, and interest rates on deposit undertakings' capital flow accounts with the Central Bank of Iceland; cf. the third sentence of Paragraph 2.

2. the settlement currency for the special reserve amount and the corresponding amount in deposit undertakings' capital flow accounts with the Central Bank of Iceland.

The special reserve ratio may range up to 75%, and the holding period may range up to five years. The Central Bank of Iceland's decisions on special reserve ratios, holding periods, and interest rates shall be based on the Bank's legally mandated objectives and on a thorough assessment of developments and prospects for the economy, monetary policy, and financial stability.

The rules according to Paragraph 1 may stipulate different holding periods, special reserve ratios, settlement currencies, and interest rates, depending on the type of funds that constitute the special reserve base.

Violations of this provision and the rules set on the basis of it are punishable by administrative fines and by penalties according to Articles 15(a)-15(d) and Articles 16, 16(a), and 16(b).

CHAPTER II

Amendments to the Act on the treatment of króna-denominated assets subject to special restrictions, no. 37/2016

Article3

Article 3 shall be amended to include a new numbered subparagraph, which shall read as follows: Those owners of offshore króna assets that are exempt from Article 13(b), Paragraph 3 of the Foreign Exchange Act due to transfer of custody from a non-resident legal entity to a deposit undertaking or custodian in Iceland on the basis of a written application received by the Central Bank of Iceland prior to the entry into force of this Act.

Article 4

The following shall be added to the third sentence of Article 4, Paragraph 1 of the Act: , participation in the Central Bank of Iceland's 2016 foreign currency auction, transfers between accounts according to Article 2, Item 1(a), and investments in page 3 of 3

financial instruments according to the exemption list issued by the Central Bank of Iceland, cf. the authorisation in Article 13(b), Paragraph 4 of the Foreign Exchange Act, after 23 May 2016.

Article 5

In Article 9, Paragraph 1, the following shall be inserted after the words "to use the funds": for foreign exchange transactions in the Central Bank of Iceland's 2016 foreign currency auction or.

Article 6

The following amendments shall be made to Article 10 of the Act:

a. The following shall be added to Paragraph 1: and in financial instruments issued in domestic currency that are specified on the Central Bank of Iceland's investment list according to Paragraph 5.

b. The words "shall be held" in Paragraph 3 shall be replaced by: and other financial instruments according to Paragraph 1 shall be held.

c. The following shall be added to Paragraph 4, after the words "Central Bank of Iceland certificates of deposit": and other financial instruments according to Paragraph 1.

d. A new paragraph shall be added and shall read as follows:

The Central Bank of Iceland is authorised to decide at any time which financial instruments issued in domestic currency the owners of deposits according to Paragraph 1 may invest in. Financial instruments according to the first sentence shall be specified on a special investment list that shall be published on the Central Bank website.

e. The title of the Article shall read as follows: Authorisation for investment in Central Bank of Iceland certificates of deposit and financial instruments issued in domestic currency

CHAPTER III

Amendment to the Act on a Special Tax on Financial Undertakings, No. 155/2010,

with subsequent amendments

Article 7

A new temporary provision shall be added to the Act and shall read as follows:

It is permissible to deduct from the tax base according to Article 3 the liabilities of a taxable entity in an amount corresponding to the total of the special reserve amounts according to Temporary Provision III of the Foreign Exchange Act.

CHAPTER IV

Entry into force

Article 8

This Act shall enter into force at once. Without prejudice to the provisions of Article 8, Paragraph 2 of the Act on the Law and Ministerial Gazette and the Official Gazette, this Act shall enter into force upon publication.

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Passed by Parliament on 2 June 2016.

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