The term free trade area is used when general rules on the collection of import duties and import and export restrictions are waived in trade in certain goods between the contracting states of a free trade agreement, provided that the goods are wholly obtained or have undergone sufficient processing within the territories of the contracting states. However, the contracting states may maintain different customs duties and import and export restrictions in relation to states that are not parties to the free trade area, the so-called third countries. General customs procedures are maintained at the borders between the states forming the free trade area in order to ensure, where applicable, the collection of customs duties and other import charges and to ensure compliance with laws on import and export restrictions.

In a customs union, the member states have eliminated customs duties and other trade barriers between themselves, while also adopting a common external tariff and a common trade policy towards third countries. Rules of origin for preferential tariff treatment are therefore unnecessary in trade within the union. Goods from third countries are cleared through customs at the external borders of the customs union and may thereafter circulate freely within the customs union territory.

The European Free Trade Association (EFTA), established in 1960 by the Convention establishing the European Free Trade Association, is an example of a free trade area.[1] In addition to Iceland, the current EFTA member states are Norway, Switzerland and Liechtenstein.

The European Community (EC), on the other hand, is, among other things, a customs union rather than a free trade area like EFTA. The member states of the European Community are:

• Austria

• Belgium

• Denmark

• Finland

• France

• Germany

• Greece

• Ireland

• Italy

• Luxembourg

• Netherlands

• Portugal

• Spain

• Sweden

• United Kingdom and Northern Ireland

[1] The Convention establishing the European Free Trade Association was published in Section C of the Official Gazette No. 7/1970.

Articles 2 and 4 of the Customs Act provide for the general customs obligation relating to the importation of goods into Iceland. This means that the importer must complete customs clearance for the goods before they may be released for free circulation.

As previously stated, the purpose of free trade agreements between two or more states is to eliminate or reduce customs duties and to remove or limit other trade barriers, such as licensing or quota requirements, in respect of the goods covered by the agreement. When the conditions of a free trade agreement for the reduction or elimination of customs duties or other direct trade barriers are fulfilled, the goods are considered to qualify for preferential treatment.[2]

It should be noted that preferential treatment is granted without exempting the goods from customs treatment. Preferential treatment is a special customs procedure that allows the importer to obtain a reduction of customs duties or duty-free treatment in relation to the general customs duty (Column A of the Customs Tariff) on the basis of a free trade agreement, provided that the conditions laid down in the agreement are fulfilled.

The importer must complete customs clearance for the goods before they may be released for free circulation. This procedure is necessary to ensure that customs duties and other charges imposed on the goods are paid, that any applicable import restrictions are observed, and that the validity of a claim for preferential treatment can be verified.

[2] Entitlement to preferential treatment under free trade agreements to which Iceland is a party must be based on statutory authority. Such authority is provided for in Article 4 of Customs Act No. 55/1987, cf. Article 2 of Act No. 87/1995 and Articles 2 and 11 of Act No. 91/1998, including Annex I thereto (the Customs Tariff), and Article 147 of the Act, cf. Article 10 of Chapter I of Act No. 104/2000.

Free trade agreements are international treaties. They do not automatically acquire the force of law in Iceland and therefore require implementation by the legislature.

Free trade agreements concluded since Iceland became a member of EFTA have generally been approved by Iceland through a parliamentary resolution authorising the government to ratify the relevant agreement. The customs amendments resulting from these agreements have been implemented through amendments to the Customs Tariff legislation, cf. Act No. 1/1970 on the Customs Tariff, Act No. 7/1973 on the Customs Tariff, Act No. 18/1993 amending the Customs Act No. 55/1987, and Act No. 87/1995 amending legislation due to Iceland’s accession to the World Trade Organization. This is, however, not an absolute rule.

Under Article 147(1) of the Customs Act, the Minister of Finance is authorised to implement provisions of free trade agreements and international agreements that provide for the reduction or elimination of customs duties. Provisions on customs reductions or customs exemptions in free trade agreements have been implemented on the basis of this statutory authority, together with parliamentary resolutions and government ratification, cf. agreements with various Central and Eastern European countries, Israel and Türkiye.

In addition, the Ministry of Finance and Economic Affairs has issued notices in Section B of the Official Gazette regarding special customs treatment under the EFTA agreements and bilateral agreements between Iceland and the relevant states, cf., for example, the recent notice on special customs treatment under the free trade agreement between the states of the European Free Trade Association and the Kingdom of Morocco and the protocol between the Republic of Iceland and the Kingdom of Morocco concerning agricultural products.

Under Article 19(2) and Article 122 of the Customs Act, the Minister is also authorised to issue regulations or other instructions laying down more detailed rules concerning the implementation of free trade agreement provisions for imports (Article 19) and exports (Article 122), such as requirements concerning supporting documents, cf. Notice No. 404/1987 on special customs treatment arising from Iceland’s membership of the European Free Trade Association (EFTA) and Iceland’s agreement with the European Economic Community (EEC).

The rules of origin are incorporated into free trade agreements as separate protocols or annexes. The rules of origin under the EEA Agreement are contained in Protocol 4 to the Agreement. The working or processing list setting out the required processing of non-originating materials is provided in Appendix II to Protocol 4.

In the EFTA Convention and in the agreements between the EFTA states and Bulgaria, Estonia, Israel, Latvia, Lithuania, Morocco, Poland, Romania, Slovakia, Slovenia, the Czech Republic and Türkiye, the rules of origin are contained in Annex B to the agreements. The working or processing list and explanatory notes are contained in Appendix II to Annex B.

In addition, Iceland has concluded bilateral agreements with individual states concerning agricultural products. These agreements contain specific rules of origin applicable to the products covered by the agreements.

The rules of origin in the agreement between Iceland and the Faroe Islands are contained in Annex 3 to the agreement.

The agreements can be accessed in full in English on the website of the European Free Trade Association.