Global Trade Alert

On 18 December 2010, the Icelandic government passed act 163/2010 amending the country's VAT Act in order to increase the competitiveness of its data centre industry. The regulation came into force on 1 May 2011.
 
As described by EFTA's Surveillance Authority in document 193/14/COL, the amendment included the following three changes:

1. "non-imposition of VAT on electronically supplied services,
2. non-imposition of VAT on supply of mixed services to customers of data centres,
3. VAT exemption for import of servers" for non-resident owners.

The usual VAT rate in Iceland is 25.5, with certain products charged at a reduced rate of 7%.
The three changes represent financial incentives for Icelandic data center services:
The first change meant in practice that foreign customers of Icelandic data centres could buy electronically supplied services without paying the Icelandic VAT.
The second change exempted foreign customers from the VAT on such services as maintenance or cooling in the data centres.
With regard to the third change, it allowed foreign nationals to import servers into Iceland given a list of conditions. One of these conditions was that the imported servers were imported and used by the same non-resident customers of the Icelandic data centres.
 
On 16 January 2013, the EFTA Surveillance Authority issued decision 3/13/COL classifying the second and third change as state aid, which was incompatible with the state aid provisions of the EEA Agreement. The stated reason for the incompatability was the alleged distortion of competition in the internal market due to the transfer of state ressources to Icelandic data centres.
Shortly after the ruling, on 13 March 2013, the Icelandic parliament passed a law immediately repealing its 2010 amendment of the VAT Act.
The GTA includes state guarantees and other financial incentives that are likely to affect the restructuring and performance of firms facing international competition, whether from imports, in export markets, and from foreign subsidiaries.