On March 19 1999 the Icelandic Parliament, Althing, approved a new Act on International Trading Companies (ITCs), which is likely to create interest in the aviation industry. The act moves towards creating a legal and commercial environment that is capable of attracting new business enterprises. This will be achieved through a number of tax benefits and exemptions, which will be granted to companies that are licensed under the act. However, the scope and nature of the business transactions in which these ITCs can be involved is limited.

Although the act is based on the fisheries trade, its scope is not limited to this industry. It also creates a range of possibilities for the aviation industry.

The aviation industry is a highly regulated sector, both at national and at international level. An explanatory statement that accompanied the bill for the International Trading Companies Act states that the new legislation will not relax the existing requirements under the Aviation Act (No. 60/1998) that relate to the registration of aircraft on the Icelandic Civil Aviation Register.

Pursuant to Article 10 of the Aviation Act, an aircraft may be registered on the Icelandic register if it is owned by (i) Icelandic persons domiciled in Iceland or (ii) persons that are nationals and residents of a European Economic Area (EEA) member state. The owner of the aircraft must hold an Air Operator's Certificate and an operating licence only if he conducts air transport in Iceland as part of his business operations. The Act on Foreigners' Investment in Business Enterprises limits foreign investment in Icelandic companies conducting air transport in Iceland to 49% of the total shareholdings.

In the case of foreign-owned aircraft outside the EEA, the Civil Aviation Administration in Iceland (CAA) frequently permits registration in Iceland, as long as the aircraft is in the possession of an Icelandic entity. This has meant that, for example, US-owned aircraft that are dry-leased to an Icelandic entity and registered in Iceland may not be dry-leased to foreign operators. Subleasing outside of Iceland while on the Icelandic register is, however, allowed in the case of EEA-owned aircraft.

The restrictions established by the Icelandic Aviation Act thus only apply to foreign interests in professional airline operations within Iceland. This means that an ITC may own or possess aircraft which it then leases or sub-leases to parties outside of Iceland who are not involved in Icelandic air transport. The lease of Icelandic-registered aircrafts to foreign operators is sanctioned by Article 83 of the Chicago Convention. Although this convention has not yet been ratified, a number of countries have nonetheless implemented its provisions.

Aircrafts owned by an ITC must not necessarily also be registered in Iceland. The aircraft's only link to Iceland can through the ITC's ownership. The feasibility of this arrangement depends upon the civil aircraft registration rules in the other countries involved with respect to foreign (in this case Icelandic ITC-owned) aircraft.

The kinds of aircraft that are suitable for Icelandic-ITC ownership include private aircrafts (eg, corporate jets). Their operating costs may be reduced considerably, since a low tax rate applies in this case.

An Icelandic ITC that owns an aircraft which operates as a private jet outside Iceland need not hold an Air Operator's Certificate. In this case the foreign equity interest in the ITC may exceed 49%, since it does not conduct air transport within Icelandic jurisdiction.

Although this innovative legislation is now in force, it remains to be seen how the Civil Aviation Authority will interpret and apply these new rules. It also remains to be seen to what extent foreign investors in the aviation industry will avail themselves of this new opportunity which allow Icelandic-registered aircraft to operate globally while enjoying benefits such as an income tax rate as low as 5%, and an exemptin from property taxes.

So far only one operating licence has been granted to an ITC aimed specifically at the aviation sector. The company is comprised of and represents Icelandic investors only.

For further information on this topic please contact Gunnar Sturluson at LOGOS by telephone (+354 540 0300) or by fax (+354 562 7186) or by e-mail ([email protected]).

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