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The decision was made by the EFTA, which said that the tiny island nation had not broken depositor laws when it refused to compensate both countries.
Iceland is within its right to refuse payment to the British and Dutch governments for a financial bailout during the financial crisis a court has declared.
The decision was made by the European Free Trade Association (EFTA) which said that the tiny island nation had not broken depositor laws when it refused to compensate both countries, reported the Associated Press.
It also complicates efforts for both the UK and the Netherlands to collect money they believe they are owed by Iceland.
The Icelandic government was satisfied with the decision.
"Iceland has from the start maintained that there is legal uncertainty as to whether a state is responsible for ensuring payments of minimum guarantees to depositors using its own funds and has stressed the importance of having this issue clarified in court," a spokesperson for the Icelandic government said, reported BBC.
Icesave collapsed during the 2008 financial crisis cutting off depositors from the UK and the Netherlands from their money.
The online bank had begun offering bank accounts to depositors in the UK in 2006 and the Netherlands two years later.
The UK agreed to compensate depositors in Icesave for about $3.6 billion with the Icelandic banks paying out the rest, said the Irish Times.
It is estimated that Icesave's mother company, Landsbanki, had already paid back 90 percent of depositors.
Iceland had originally agreed to compensate the UK and Dutch governments' bailout to depositors.
However, a referendum in Iceland in 2010 rejected that idea, said BBC, while a second referendum in 2011 once again refused the deal.
Iceland is not a member of the European Union but participates in the European Economic Area.