Direct investment

When an investor in one country owns 10% or more of the share capital of a company in another country, it is called Foreign Direct Investment. It is assumed that when the holding is this large or larger, it is the investor's intention to influence the management and policy of the company and to establish a long-term business relationship. The investor's loans (his contribution other than equity) or companies owned by him are considered as his additional investment in the company in question.

In the banks publication of direct investment the directional principle is followed. According to the principle, reverse investment between related parties in excluded and loans, between an investor and a company owned by him, are netted out and entered to either the assets or liabilities side, depending on whether the investor is a resident or a non-resident. Special purpose entities are excluded in the directional principle.

Direct investment in the balance of payments statistics as well as in the external position of the economy is presented according to the so-called asset and liability principle, which implies that asset and liability items are on a gross basis (claims between parent and subsidiary are not netted against each other). For example, this presentation implies that a domestic investor's loan to a foreign company owned by him is presented on the liability side of the external position of the economy but is not netted against the investor's loan claims on the foreign company on the asset side.

Loans between an investor and enterprises that are linked to it in a direct investment relationship are not considered direct investment if both parties are depository institutions, mutual funds or other financial institutions other than insurance companies and pension funds. In such cases, the loan is classified as other investment.

Real estate transactions are classified as direct investment. Investment in real estate is not considered a financial instrument and is special in that respect. Real estate transactions can be with individual real estate but also as real estate companies or holding companies.

Transactions related to direct investment are defined as interactions wherein the parties trade financial assets and liabilities by mutual agreement. Direct investment transactions are classified as equity or debt.

Real estate transactions are classified under direct investment. Investments in individual properties are considered equity transactions. Real estate transactions can be limited to a single piece of property but can also include real estate companies or holding companies.

It is assumed that the direct investment is made with the intention of the direct investor to influence the management and policies of the direct investment company and to establish a long-term business relationship. Loans from investors (their contribution other than equity) or from companies owned by them are considered to be additional investments by them in the relevant company.

Shareholdings and other securities holdings between residents and non-residents are classified as portfolio investment (holdings less than 10%) unless there is a direct investment relationship between the parties. Investments in equity securities are usually short-term and, unlike direct investment, are not intended to exert control over the management or policies of the company.

SPE are included with direct investment according to the asset and liability principle but are excluded in statistics according to the directional principle. SPEs are companies that are often established for tax purposes and whose actual operations are limited or non-existent. Some companies of this type are registered in Iceland; however, they are wholly owned by non-residents and own stakes in or loan claims against FDI related companies abroad, but they have no domestic assets. Actually, they are only shells for capital flowing through Iceland and have very limited economic impact. SPEs are included in statistics on Iceland’s balance of payments and international investment position from 2013 onwards, but reliable information on their balance sheets from before that time has been lacking.

Direct investment relationship
A direct investor, a direct investment enterprise, and fellow enterprises are considered to be engaged in a direct investment relationship.

Fellow enterprises
Entities that are neither under the control or influence of one another but are both under the control or influence of the same direct investor.

The ultimate controlling parent
The ultimate controlling parent is the entity at the top of the chain of ownership, where control over companies is maintained through direct or indirect majority ownership.

Control
A company that wields a total of 50% or more of the voting power in another company through direct or indirect ownership is considered to have control over the latter company.

Influenc
A company that wields a total of 10-50% of the voting power in another company through direct or indirect ownership is considered to exert influence over the latter company.

Direct ownership
An ownership share in another company.

Indirect ownershp
Ownership in a company through another company.

Direct investment position
Provide information on the total stock of investment made abroad and received from abroad

Direct investment flows
Net transactions with inward and outward financial assets and liabilities.

Reverse investment
This type of relationship covers the direct investment enterprise’s position and transactions with equity (under 10%) or loans to the direct investor.

Loans between related parties
This involves loans between parties who do not control or influence each other but are both under the control or influence of the same direct investor.

Transactions in direct investment are classified according to whether they belong under equity or loans.

Equity
Transactions with equity take the form of share capital and reinvested earnings.

• Equity securities transactions
  Equity securities are claims for a specified ownership share in an undertaking, and they entitle the owner to a portion of the book value of the company and its annual profit.

• Reinvestment
  Reinvested earnings is an imputed value that includes the portion of net profit (excluding price and exchange rate movements) that is not paid out to shareholders as dividends. Reinvestment therefore reflects changes in the value of equity between two periods.

Loans

• Loans are financial assets generated when a lender loans money directly to a borrower. Loans are further classified as long and short-term claims and debts.

• Debt securities are negotiable instruments serving as evidence of a debt. Among them are bills, bonds, notes, certificates of deposit, debentures, asset-backed securities, money market instruments, and similar instruments normally traded in the financial markets.

• Deposits. Deposits are standardised, non-negotiable agreements offered by deposit taking institutions (deposit money banks, or DMBs). The term of deposits can vary, depending on the agreement. Deposits generally imply that the debtor is obliged to return the principal to the investor.

• Trade credit is a claim generated when a provider of goods or services grants a customer an extension of time to pay or receive advance payment for goods or services. The trade credit and advances derive from the fact that payment for the goods or services is not remitted at the time the goods are delivered or the service provided.

• Other accounts receivable/payable include accounts receivable or payable other than those specified above. They can include tax liabilities, securities transactions, wages, or dividends.

A resident is any individual and legal entity permanently residing in Iceland, irrespective of nationality. Students and embassy employees are exempt from the residency requirement. Therefore, Icelandic students and their families who reside abroad are considered residents, and foreign embassy employees are considered non-residents. Non-residents shall mean all parties except residents.