Iceland Said to Discuss 25-40% Exit Tax Amid Creditor Talks

Representatives from Iceland’s government, central bank and parliament discussed imposing a tax as high as 40 percent on investors exiting the island, according to two people close to the talks.

Officials have yet to agree on a final plan for how they will unwind capital controls in place since 2008, said the people, who asked not to be named because the talks were private. The option not to impose an exit tax remains on the table, they said.

The discussions took place yesterday, on the eve of scheduled talks with creditors in Iceland’s failed banks. To enable a settlement, Iceland must scale back capital controls that have been protecting the krona since the country’s biggest banks defaulted on $85 billion six years ago. Hedge funds that have bought claims against the banks include Davidson Kempner Capital Management and Halcyon Loan Trading Fund.

Creditors understand Iceland’s efforts to protect its economy from capital flight, but will fight terms they deem too harsh, according to Timothy Coleman, senior managing director of Blackstone Group, which advises the creditors of Kaupthing Bank hf.

“They will use every part of every legal system available to them to ensure that they are treated appropriately and fairly,” he said in an interview.

Respecting Iceland

Creditors in Kaupthing, once Iceland’s biggest bank, say they are owed $23 billion, according to the bank’s first-half report. That’s more than three times as much as the bank has in reported assets.

“The creditors want to secure a solution that respects the people of Iceland and their capital controls. That would be number one,” Coleman said. “Number two would be to be paid back the money that they lent to the Icelandic banks. And, number three, the creditors have an expectation that they will be treated in accordance with international banking standards.”

Coleman said that, despite the differences between the two sides, he still thinks “a consensual deal is eminently achievable.” Especially if officials don’t opt for the same settlement terms for all three banks, Kaupthing, Landsbanki and Glitnir Bank hf, he said.

The Finance Ministry in Reykjavik set the process for settlement in motion last week, when it granted an exemption from capital controls to LBI hf -- a unit that represents creditors in failed Landsbanki Islands hf -- allowing it to repay 400 billion kronur ($3.2 billion) to priority claimants. A full proposal on unwinding capital controls is due this week.

Removing the restrictions would mark a final milestone in efforts to rebuild Iceland’s $15 billion economy.

If Iceland does decide to impose an exit tax, it will be levied on all investors planning to take money outside the country, the two people said.

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