Islamic finance at Deloitte
No interest...
but plenty of attention
Table of contents



        Foreword                                                                                   3
...
Luxembourg is emerging to be one of the most important centres for Islamic finance
around the world and was the first Euro...
Introduction



         Despite the financial crisis, fundamentals of the Islamic   In this environment, many states appe...
Islamic finance: moving from niche
market to a mainstream market


        History                                        ...
The principles of Islamic finance:
what is it all about?



         Islamic finance is a subtle mix of economy,
         ...
•  usharakah(equitypartnership):ahighlyflexible
   M                                                        The role of sc...
Luxembourg, an ideal regulatory,
legal and tax framework for
Islamic finance investments

        With its strong and stab...
How can Deloitte help you?



        First, what sets Deloitte apart is the fact that we are        are made. The extent ...
rcial
                                                                                                          omme      ...
Appendix 1
Vocabulary of Islamic finance


                                  Fatwa                                        ...
Appendix 2
Luxembourg double tax treaties network


                                                                      ...
Appendix 3 - Tax authorities issue
guidance on Islamic finance


                                                         ...
•	 	 he	agreement	clearly	specifies	the	predeter-
                                     T                                  ...
Contacts



For more information, please contact our team:




Benjamin Lam                                    Jean-Philip...
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2010 27 5 Islamic Finance&Appendix Online

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2010 27 5 Islamic Finance&Appendix Online

  1. 1. Islamic finance at Deloitte No interest... but plenty of attention
  2. 2. Table of contents Foreword 3 Introduction 4 Islamic finance: moving from niche market to a mainstream market 5 The principles of Islamic finance: what is it all about? 6 Luxembourg, an ideal regulatory, legal and tax framework for Islamic finance investments 8 How can Deloitte help you? 9 Contacts 12 2
  3. 3. Luxembourg is emerging to be one of the most important centres for Islamic finance around the world and was the first European country to become an associate member of the Islamic financial services board. Luxembourg's involvement in the Islamic finance sector started over 30 years ago, when, in the late 1970s and 1980s, the first Islamic financial institution and the first Islamic insurance company of Europe were domiciled in Luxembourg respectively. Those initial moves paved the way for a steady growth and development as a leading non-Muslim jurisdiction in the Islamic finance world. Since the first sukuk listing in Europe (Malaysia global sukuk) in 2002, Luxembourg has proved to be a key place for sukuk listing with its 16 sukuk listed on the Luxembourg stock exchange, representing approximately €5.2 bn. Besides, Luxembourg also is a host of choice for fund domiciliation with more than 40 Sharia'a compliant investment funds and sub-funds. Favoured due to its extensive network of double tax treaties (in particular with Middle Eastern countries), a specific tax circular for Islamic finance transactions, and with the expertise of highly skilled professionals, Luxembourg is now ready to take on the challenge of further developing tailor made services for the fastest growing class of ethical investments. Moreover, thanks to the support and sponsoring of its authorities, Luxembourg embodies a primary location for Islamic finance investments and is striving to become the European capital for Islamic finance. We hope this brochure will provide you with some useful insights. Please do not hesitate to contact us or any member of the Deloitte Islamic finance group should you have any questions concerning our capabilities and how we might support you in specific projects. Yours faithfully, Raymond Krawczykowski Daud Vicary Abdullah Luxembourg Islamic Finance Leader Global Islamic Finance Leader Islamic finance at Deloitte No interest... but plenty of attention 3
  4. 4. Introduction Despite the financial crisis, fundamentals of the Islamic In this environment, many states appear as specialist finance industry remain strong. With almost US$1 trillion Islamic finance platforms through the implementation of of funds under management, significant oil and gas dedicated regulatory and tax regimes (e.g. Malaysia, reserves and an expanding Muslim population in the Saudi Arabia, Kuwait). In Europe, Luxembourg is clearly MENASA (Middle East, North Africa and South Asia) a leading jurisdiction. In 2009, the Grand Duchy was region, Islamic finance protagonists have played their ranked as the largest non-Muslim place for fund cards well. Among the 20 largest sovereign wealth domiciliation with 7% of the global market share. funds, 9 of them, representing US$1,100 bn, are Setting up Islamic investment ventures in Luxembourg located in countries where Islam is the main faith. is building a bridge between two worlds, at the crossroad of converging interests of investors in need of opportunities serving the real economy on the one Luxembourg offers hand and Islamic fund promoters keen to distribute their products worldwide on the other hand. custom-made structures The flexible approach adopted by the Luxembourg to both sovereign wealth government, the regulator and other actors of the financial sector, its worldwide established proficiency in funds wishing to invest on terms of financial assets administration and distribution, as well as a highly skilled multilingual workforce, are a pan-European basis and some of the factors that make Luxembourg one of the most popular financial centres in the world. to Sharia'a compliant funds Through its attractive financial market place and its looking at a perfect location worldwide recognised expertise Luxembourg is the ideal location to manage and distribute Sharia'a compliant to serve Muslims and financial instruments on the global market. non-Muslims in Europe and in the rest of the world. 4
  5. 5. Islamic finance: moving from niche market to a mainstream market History The market size of Islamic finance Modern day Islamic finance emerged in the 1960s with The market size of assets held under Islamic finance is the establishment of the first Islamic bank in Egypt by estimated at US$800 bn and is expected to grow by Ahmad El Najjar and the set up of Lembaga Tabung 15% annually. Haji in Malaysia. Besides, Islamic finance also represents: Until the 1970s, Islamic banking was mostly focused • orethan300Islamicbankswindowsthatare m on the retail market. The rise of Islamic finance in present in at least 60 countries; the late 1970s coincided with the oil crises of that • orethan600Islamicfundsworldwidewithassets m decade, which created an immense amount of wealth under management of more than US$50 bn. The by bringing a large amount of capital to oil producing growth of index funds has been underpinned by countries. The emergence of wholesale banking and the launch of several Islamic indexes by prominent the associated product innovation is however a more providers over the past few years. The first was the recent development. Dow Jones Islamic Market Index, launched in 1999, In recent years, Islamic finance has attracted a number followed by the FTSE Global Islamic Index Series the of western multinational financial institutions, which sameyearandin2006bytheStandardPoor’s started offering Islamic financial products in the Sharia'a indices. International Islamic financial market and to a lesser The future of Islamic finance extent in the western world. Islamic finance is set for more growth as the Intensive efforts also have been made to harmonise widespread socio-economic development in the Islamic financial practices, from creating accounting MENASA region is expected to continue. standards for Islamic financial products (through the Accounting and Auditing Organization for Islamic The growth is driven by multiple factors such as: Financial Institutions, AAOIFI), to integration of those • growingMuslimpopulationstandingataround a standards with global corporate and risk management 1.7 bn, out of which 50 million in Europe looking at standards (i.e., Basel Accords I and II) through the investment products catered to their needs; Islamic Financial Services Board (IFSB). Islamic finance • hesearchforethicalinvestmentsbyMuslimand t also falls within the scope of the IMF and of the World non-Muslim investors; Bank. • heneedofinvestmentproductswheretoinvestoil t Today, Islamic finance represents a small but growing revenue surpluses; segment of the global finance industry estimated at 1% • heneedforIslamicprojectfinancingforthe t to 2% of the global financial assets worldwide. infrastructure projects in the region; • growingnumberofIslamicandconventional a financial institutions entering the space; • riseinsophisticationthroughgreaterfundamentals a in the contracts allowed under Sharia'a law and their appropriate utilisation in the development of modern financial instruments. By 2012, it is estimated that Islamic financial assets could reach about US$1,600 bn. Islamic finance at Deloitte No interest... but plenty of attention 5
  6. 6. The principles of Islamic finance: what is it all about? Islamic finance is a subtle mix of economy, ethics and Islamic law (Sharia'a) resulting in financial transactions based on fairness, profit and loss sharing and real transactions. The difference between Islamic finance and Stock screening conventional finance in investment consists of the fact Two types of screening are performed as regards that investors should observe certain principles in order Sharia'a compliant portfolios: an ethical screening to reconcile their belief with their investment practices. (sector-based) and a financial screening (accounting- This requires specific contracts and agreements while based). Indeed, in addition to removing companies doing business. Such contracts are generally based with non-compliant (haram) business activities, the on a risk-reward distribution key and their drafting companies are also examined for compliance with necessitates a lot of attention so as to exclude any certain financial ratios. The screening process focuses ambiguity between the different contracting parties. on three main areas which are leverage, cash and the Main principles - restrictions part of income coming from non-compliant activities. This evaluation is monitored on an ongoing basis by Avoid riba the Sharia'a board. It must be noted that some Sharia'a Riba which has come to be interpreted as interest, is compliant indexes already exist (e.g. Dow Jones). forbidden in Islamic transactions. This is a fundamental Nevertheless, although there is growing consensus principle for Islamic finance and banking. Therefore a amongst Islamic scholars relating to the financial conventional loan, for instance, is impermissible as it screening ratios to be applied, some differences in includes interest. approach may still exist. Avoid gharar and maysir Some contracts and structuring Any agreement that has a significant part of gharar (excessive uncertainty) or maysir (speculation) will be The main contracts that serve for developing more considered as invalid from a Sharia'a perspective. complex financial instruments, given the great potential for financial innovation and expansion in Islamic Preventable ambiguities and faults in the terms of the finance, are the following: contract are also banned. • udarabah(financingpartnership):profitsharing M Avoid haram partnership with only one of the partners providing According to Sharia'a, trade is only permitted in the the finance and the other having a return for goods and commodities that are declared halal (lawful). entrepreneurial activity. This usually applies to Consequently, any stock of a company that derives bank deposits and is a common basis for structuring substantial income from haram (unlawful) activities Sharia'a compliant investment funds. (e.g. alcohol, gambling, non-halal meat, conventional banking)shouldnotformapartofanIslamicinvestor’s • urabaha(cost-plussale):purchaseandsalefor M portfolio. a mark-up which is disclosed; 6
  7. 7. • usharakah(equitypartnership):ahighlyflexible M The role of scholars and the Sharia'a board tool for organising international business between In order to oversee the product development, and several business partners. Losses must be shared to get approval of a product as Sharia'a compliant, in the same proportion as contributed capital and promoters will need a Sharia'a board. profits will be distributed according to a pre-defined ratio. An interesting application of such agreement The board is typically made up of a team of prominent is a partnership in goodwill in which there may Islamic legal scholars, well disciplined in jurisprudence not be any form of cash investment, but a partner (fiqh), particularly in areas of transactions and contributes his name, credit or track record with business dealing. a particular value, thereby allowing his partner to The Sharia'a board is independent and has the duty engage in business; to monitor the Sharia'a compliance of the transac- • alam(Islamicforward):similartoaforwardsale S tions, the portfolio and the agreements as well as contract consisting of a purchase of a commodity initially advising on the set-up of investment funds and for future delivery with the price fully paid in contracts. advance. The salam purchaser (usually an Islamic In addition to the purification obligation monitoring, bank) advances money to the salam seller, the latter advising on the zakat (alms tax) calculation is also one delivers the commodities at maturity; of the other Sharia'a board responsibilities. The purpose • ukuk(Islamicbonds):investmentcertificates S ofzakatistodonateapartofone’swealthtothepoor evidencing a prorata ownership or a beneficial and needy. interest in an asset or enterprise; As the board has an advisory and supervisory role, • akaful(Islamicinsurance):insuranceprovidedona T a close communication needs to be maintained mutual basis; between the product development team and the board. •jarah(Islamicleasing):legallybindingcontract I whereby the owner of something which has intrisic value will transfer its usufruct to a third party for a predefined period in exchange for an agreed consideration. Islamic finance at Deloitte No interest... but plenty of attention 7
  8. 8. Luxembourg, an ideal regulatory, legal and tax framework for Islamic finance investments With its strong and stable legal environment and its Aside its international initiatives, Luxembourg also acts flexible tax organisation, Luxembourg is a domicile domestically. The Luxembourg tax authorities issued of choice for cross border distribution of investment a circular letter dealing with the tax treatment of products. Total assets under management amounted to murabaha and sukuk in January 2010. The circular also more than €1.8 bn and demonstrate that Luxembourg describes other Islamic finance transactions such continues to be the European leader for fund administration as musharakah, mudarabah, Ijarah and istisna. The and distribution around the world. tax authorities have taken a very pragmatic position, based on the substance over form approach, which The attractiveness of Luxembourg is strengthened by renders such transactions very attractive from a tax the fact that tailor-made structures, adapted to specific point of view (for more details on this subject please situations in order to deliver expected commercial see Appendix 3). outcome, are coupled to tax efficient returns. In addition, the Luxembourg investment funds Its unique blend of specialist service providers enables regulatory environment is particularly flexible and offers Luxembourg to offer fund promoters an extraordinarily the possibility to structure regulated vehicles in such a wide range of investment products having progressive way that they can accommodate Sharia'a compliant levels of flexibility, stretching from unregulated (i.e. investments. Soparfi) over lightly regulated (Specialised Investment Funds, SICAR) to strongly regulated (i.e. UCITS funds) Finally, besides an appealing tax and regulatory vehicles. regime, Luxembourg benefits from a full range of highly skilled service providers such as administrative Size, location and type of investors or investments will agents, custodian banks, domiciliation agents, paying drive the choice of vehicle. SIF might be particularly agents, transfer and register agents, lawyers, chartered suitable for structuring Sharia'a compliant investments accountants and tax advisors. for institutional investors, while Soparfi may be appropriate for MENASA based investment funds looking to use Luxembourg as a holding location. The monitoring of potential withholding tax costs is one of the key aspects of the structuring. Similarly, the review and development of exit strategies in a tax efficient perspective need to be considered since they can dramatically impact the expected returns on investments. In this respect, Luxembourg is particularly competitive thanks to its flexible environment allowing tax efficient structuring and its extensive network of 75 double tax treaties in force, awaiting ratification or under negotiation, offering interesting withholding tax rates and taxation regime of gains. It includes notably in-force tax treaties with Azerbaijan, Indonesia, Malaysia, Morocco, Qatar, Singapore, Turkey, Tunisia, United Arab Emirates and Uzbekistan, signed treaties awaiting ratification with Albania, Bahrain, Kazakhstan and Kuwait together with advanced negotiations with, Lebanon, Pakistan and Syria. 8
  9. 9. How can Deloitte help you? First, what sets Deloitte apart is the fact that we are are made. The extent of our industry experience allows the only big four firm that offers the market a holistic us to design and implement an effective audit plan. proposition by having a Sharia'a scholar within our This enables us to accomplish our audit objectives network enabling us to provide Sharia'a compliant efficiently while maximising our contribution to the solutions to our clients. Deloitte has appointed Mufti clients’businessthroughouraudit,Islamicfinanceand Hassaan Kaleem, a pupil of the industry renowned asset management teams. Sheikh Mohammed Taqi Usmani. We continue to enhance the value of our audit services. Apart from this, Deloitte Luxembourg participates As a result we have developed and integrated numerous in various working groups of the Luxembourg Fund innovative tools and techniques to perform value- Association (ALFI). added audits. We have developed accounting policies, accounting guidance and audit procedures for Islamic Very recently, ALFI created a new working group in the finance investment products. Middle East to present the Luxembourg fund industry in the region. Mr. Aly El Azhary (audit partner of Deloitte Consulting and financial advisory Saudi Arabia) is a member of that working group and is Enterprise risk services participating actively as a local bridgehead to reinforce Identifying opportunities, avoiding risks, dealing with the relations with the Middle Eastern market. threats and developing a strong core business are all Secondly, our global Islamic finance practice comprises a important in achieving business objectives along with dedicated group of experienced Islamic finance consideringSharia'acompliance.Deloitte’srisk professionals, backed by a global network of industry professionals help clients to identify, analyse and control specialists drawn from our consulting, tax and financial risk. Global leader enterprise risk management, our advisory services dedicated to the seamless delivery of service offering covers the areas of strategy, operations, services. reporting and compliance across an entire business including people, process, technology and data. Deloitte has also established an Islamic Finance Knowledge Center in Bahrain. Thanks to its research Investment management services function (survey, publication and library compiling) This department includes, among others, the following and strong connections established with a wide range relevant services lines to Sharia'a investment funds: of Islamic finance markets (forum, seminar, webcast, - Fund engineering fund registration workshop), our practitioners aligned to this center of This service line is involved in the launch of new excellence may provide technical support and practical investment products, and is to be considered as a very expertise relating to the Islamic finance industry. This efficient guide for new comers to the Luxembourg ensures that we are acutely aware of the challenges that jurisdiction. We assist with the prospectus definition Islamic finance actors are facing around the world and and team up as a partner throughout the fund set-up are able to respond to their needs effectively. phase. Thanks to our “one-stop-shop” fund registration With services encompassing financial advisory on sukuk service, we are able to assist the registration of UCITS as issuances and financing transactions, tax and accounting well as non-UCITS funds in foreign jurisdictions from the advice on cross-border transactions, as well as Islamic beginning of the procedure until the maintenance of the finance conversions and compliance through our consulting fund registration in target markets. This service has been practice,Deloitte’sinternationalcapabilitiesprovidea of great support to fund promoters distributing their one-stop solution for clients seeking to undertake Islamic products on a pan-European basis. finance transactions by offering specialised solutions - Investment compliance, business compliance tailored to the needs of our clients. regulatory issues Audit services Through cold testing processes of investment objectives and the investment universe of the funds, we can assist Deloitte’sauditapproachispartner-led,especiallyinthe Sharia'a boards and fund directors in their ongoing planning phase when significant audit strategy decisions Islamic finance at Deloitte No interest... but plenty of attention 9
  10. 10. rcial omme Finan al/ c c ial t tion ax era Op B s on uy Due diligence tit f o /S i n ut el mi atio l- sid ns lu e ci Va ad s vis Isla ice o rv ry se Me on Securities valuation rger ti Deloitte Valua s capabilities Management acquisition in Islamic finance s ory a dv vis isor ing ad y nn nt pla e tm es it Ca Ex Inv pi t al r a ising De g bt in ur t ra isi uc n str g g in urc s so Deal Equit y r aising monitoring of the investment portfolio. We may also - highly skilled Luxembourg chartered accountants to provide resources to assist with the processing of the temporarilyhelpwithclients’organisation; income purification calculations. - training sessions and hotlines on Lux GAAP and - Fund service providers selection (custodian and IFRS matters. fund administrator) Such accounting services are monitored by one key This service line evaluates the custody and fund contact person who provides the entity with a cross administration service providers from both practice support, follow up of its day-to-day operations qualitative and quantitative perspective. We provide and ensures compliance with Luxembourg requirements you with analysis and evaluation through scoring grids at all stages of its lifecycle. and analysis of pricing proposals to provide the fund sponsors with the necessary aids and market insights Tax to identify appropriate service providers. Within the Deloitte Luxembourg international tax Corporate services department, we have dedicated tax specialists who are also familiar with the principles of Islamic finance. Our in-house corporate-legal experts, familiar with the Islamic finance principles, provide strategic solutions The Luxembourg international tax department therefore regarding the implementation of investment vehicles in is very well placed to provide tax advice on Islamic Luxembourg, including financial instrument issuance, finance products and Sharia'a investment funds. drafting of prospectus, co-ordination and representation in Our tax specialists, familiar with the principles of Islamic front of the Luxembourg financial supervisory authority. finance can provide: Accounting services - tax structuring advice for Islamic finance products and Deloitte offers accounting consultancy and compliance Sharia'a investment funds, both from a direct tax and services to Luxembourg Islamic finance investment indirect tax viewpoint; vehicles, from initial thoughts over implementation of - assistance regarding tax due diligence work; Sharia'a compliant structures to the day-to-day management of these entities. This includes mainly: - ongoing tax assistance regarding tax compliance (direct tax compliance and VAT); • Accountingassistancewhensettingupthestructure - assistance regarding the review or drafting of the tax • ccountingcomplianceandreportingforregulated A sections of legal documents such as private placement and unregulated vehicles under Lux GAAP and IFRS memoranda or prospectuses. (in accordance with CSSF and financial sector regulations for regulated vehicles if applicable) Our unique combination of knowledge in the Islamic finance and international tax area ensures that the • ConsolidationunderLuxGAAPandIFRS Sharia'a compliant products or vehicles set up through • Specificassistancesuchasproviding: Luxembourg will be structured in the most tax efficient way, whether these structures are unregulated (Soparfi) or - financial analysis at group level for management or regulated vehicles (such as UCITS, specialised Sharia'a board purposes; 10 investment funds, SICAR and securitisation vehicles).
  11. 11. Appendix 1 Vocabulary of Islamic finance Fatwa Musharakah An authoritative legal opinion based on the Sharia’a Agreement involving several capital providers provided by an Islamic legal specialist. towards the financing of a project or a business. Any profits will be shared on a pre-agreed ratio while Gharar losses are shared on the basis of contributed capital. Any element of uncertainty in a contract as to the Management may be carried out by all parties or existence, the quantity or the quality of the subject solely by one of them. matter of the contract. It also involves any contractual ambiguity of the terms of the contract. Riba Such doubt may render agreements void. Within the context of financial operations, it means an increase over the principal in a loan transaction Ijarah which is not allowed by the Quran. Sharia’a strongly Agreement involving the usufruct of a specific dislikes money earning solely by passage of time. non-monetary asset for a defined period of time in Riba is generally defined as an unlawful advantage exchange of rental payments. For the leasing period, by way of excess or deferment. the lessor keeps the ownership of the asset and bears all liabilities non-connected to the use of such Sharia’a board asset. The contract may also include a promise of Panel of qualified scholars delivering guidance and ownership transfer (ijara muntabhia bi tamleek). supervision on the development of financial services and products to ensure their compliance with Islamic Istisna precepts. It includes notably delivering annual letters Contractual agreement for producing welll described of audited Sharia’a compliance as well as overseeing goods or buiding at a given price and on a given the portfolio’s purification and advising on the alms date in the future. Such contract may be notably tax (zakat) calculation. used for providing the financing of infrastructure projects (e.g. plant, bridge, highway, etc). Sukuk Often considered as Islamic bonds, sukuk are in Maysir reality investment certificates evidencing an Literally this means gambling, playing games of undivided prorata ownership of an underlying chance or speculating with the intention of making tangible asset. Sukuk are structured in such a way that an unearned profit. The prohibition of maysir is often their holders run a credit risk and receive part of the used as the basis for criticism of standard financial profit and not a fixed interest payment in advance. The practices such as conventional insurance, derivative products underlying sukuk could be represented by contracts and speculation. contracts such as ijarah, musharakah or mudarabah. Mudarabah Takaful An agreement made between a capital provider (rab System of mutual insurance in which the participants al mal) and another party (mudarib) who manages donate their contributions to a common fund. It may the project using his entrepreneurial skills. Profits be used to pay claims for damages suffered by some arising from that enterprise are distributed according of the participants. The company’s role is restricted to a predetermined ratio while financial losses are to managing the insurance operations and/or borne by the rab al mal except in cases of investing the insurance contributions. managerial misconduct or breach of contractual terms by the mudarib. Zakat A religious obligation of alms-giving, to pay annually Murabaha 2.5%1 of certain categories of wealth to the poor. Agreement with a credit institution for the sale of a good at a price wich includes a profit margin agreed Sources: Islamic financial services board and Deloitte by both parties. As a cost plus financing technique, it requires the good to be sold to the client with an agreed mark-up. 1 2.57575% for a solar calendar year. © 2010 Deloitte S.A. Member of Deloitte Touche Tohmatsu.
  12. 12. Appendix 2 Luxembourg double tax treaties network 37 6 44 11 17 33 9 10 32 19 24 3 50 25 40 14 34 1 66 8 75 63 39 38 12 45 4116 36 28 51 72 69 5 2 52 64 61 13 26 23 59 35 43 49 67 21 15 7 56 62 54 73 29 31 70 22 68 55 53 58 47 65 57 74 30 71 46 42 Double tax treaties in force 18 Double tax treaties pending 4 48 20 60 Europe and Central Asia 01. Austria 02. Azerbaijan 03. Belgium 05. Bulgaria 08. Czech Rep. 09. Denmark 10. Estonia 11. Finland 12. France 13. Georgia 14. Germany 15. Greece 16. Hungary 17. Iceland 19. Ireland 21. Italy 24. Latvia 25. Lithuania 27. Malta 28. Moldova 32. Netherlands 33. Norway 34. Poland 35. Portugal 36. Romania 37. Russia 38. San Marino 40. Slovakia 41. Slovenia 43. Spain 44. Sweden 45. Switzerland 49. Turkey 50. United Kingdom 52. Uzbekistan 59. Albania 61. Armenia 62. Cyprus 63. Kazakhstan 64. Kyrgyzstan 66. Liechtenstein 67. Macedonia 69. Monaco 72. Serbia 75. Ukraine Americas West, South Asia and Africa East and South-East Asia 04. Brazil 06. Canada 20. South Africa 31. India 42. Israel 07. China 18. Indonesia 29. Mexico 47. Trinidad Tobago 48. Mauritius 54. Morocco 55. Qatar 22. Hong Kong 23. Japan 51. United states 56. Tunisia 58. U.A.E. 65. Bahrain 26. South Korea 30. Malaysia 60. Argentina 68. Barbados 70. Kuwait 71. Lebanon 73. Pakistan 39. Mongolia 46. Singapore 74. Syria 53. Thailand 57. Vietnam DTT Countries in MENASA Tax treaties in force Tax treaties signed awaiting for ratification Tax treaties under negotiation Malaysia Bahrain (signed 06/05/2009) Lebanon Indonesia Kuwait (signed 11/12/2007) Syria United Arab Emirates Kazakhstan (signed 26/06/2008) Pakistan Morocco Albania (signed 14/01/2009) Qatar Turkey Tunisia Uzbekistan Azerbaijan © 2010 Deloitte S.A. Member of Deloitte Touche Tohmatsu.
  13. 13. Appendix 3 - Tax authorities issue guidance on Islamic finance The main features of the circular are as follows: The Luxembourg tax Murabaha: authorities issued a circular Murabaha refers to a sale transaction whereby assets are sold under deferred terms at cost plus a profit letter on 12 January 2010 that mark-up. The cost price and the mark-up are known by both the buyer and the seller. Both Islamic and clarifies the tax treatment of conventional financial institutions (FIs) can act as buyers-sellers in murabaha financing arrangement. various Islamic financing The pre-determined mark-up represents the arrangements and issues. remuneration for the FI. Example: The circular essentially deals with the tax treatment Market of murabaha and sukuk but also describes other Transfer of Spot €40,000 instruments, such as musharakah, mudarabah, ijarah, assets payment ijarah-wa-iqtina and istisna. FI The circular coincides with other activities designed Payment Transfer of €40,000 to market Luxembourg as a European hub for Islamic + under assets €8,000 deffered finance. The Crown Prince of Luxembourg and the terms Finance Minister recently led a successful mission to Buyer promote Luxembourg as a global financial services center to Bahrain and the United Arab Emirates. This mission was embarked on shortly after it was Buyer A approaches a financial institution (FI) to announced that the Luxembourg-United Arab purchase a car, the market price of which is Emirates tax treaty would become effective as from 1 €40,000. FI buys the car on the market for €40,000 January 2010. Luxembourg’s tax treaty network now and obtains title to the vehicle. FI sells the car to its includes signed treaties with Bahrain, Kuwait and client, Buyer A, for €40,000, plus a mark-up of Qatar, with negotiations in progress for treaties with €8,000. FI transfers ownership of the vehicle to Lebanon and Syria. Buyer A against deferred payments (e.g. €12,000 per year over four years). Luxembourg has actually played an active role in Islamic finance since the 1980s: Since the total price of the car amounts to €48,000, FI would realise a gain of €8,000 on the sale. In a • he first Islamic insurance company (takaful) in T conventional “buy-sell” transaction, that gain might Europe was established in Luxembourg in 1983; be taxed in the year of disposal. • 6 sukuk are currently listed on the Luxembourg 1 The circular however, adopts a “substance-over- stock exchange (representing approximately form” approach and provides that the taxation of €5.2 bn in notes); the income can be deferred over the term of the • uxembourg hosts more than 40 Sharia’a- L transaction (as would be the case in a conventional compliant investment funds and subfunds. financing arrangement). This favorable treatment will be granted if the following conditions are satisfied: The circular further enhances the attractiveness of Luxembourg as a hub for Islamic finance activities. • he agreement between FI and Buyer A clearly T It confirms Luxembourg’s approach to Islamic finance states that the finance provider acquires the goods and clarifies the tax treatment of Islamic finance with the aim of reselling them (immediately or instruments such as murabaha and sukuk. within a maximum period of six months following the initial acquisition);
  14. 14. • he agreement clearly specifies the predeter- T Sukuk holders (i.e. investors) acquire sukuk issued mined mark-up as remuneration for the services by the Luxembourg vehicle for cash payments. provided, and this mark-up must be known and The Issuer uses the funds to finance the acquisition accepted by both parties; and of specific assets (e.g. real estate, airplane, etc.). Potential profits are paid periodically to the sukuk • he remuneration must be deferred for accounting T holders or the sukuk holders are exposed to losses and tax purposes in the finance provider’s books incurred on the underlying investments. “Tracking (based on a straight-line method), regardless of sukuk” can enable the tracing of the profits and when reimbursement is actually made. losses to specific assets. The securitisation vehicle Sukuk may provide more guarantees to investors in terms Sukuk are the second type of Islamic financial of the segregation of assets and profits/losses. transaction analysed in the circular. Sukuk are invest- According to the circular, for Luxembourg tax ment certificates evidencing the undivided pro rata purposes, sukuk would be treated like conventional ownership of an underlying tangible asset. Sukuk bonds and the yield on sukuk would be treated are structured in such a way that their holders, in as interest payments on conventional debt instru- principle, run a credit risk and receive part or all of ments. This tax treatment would apply even though the potential underlying profits. the yield on the instrument is directly contingent on Luxembourg-based Soparfi and securitisation vehicles, the income earned on the underlying asset. Hence, the among others, are flexible vehicles that can be used yield will be tax deductible at the level of the sukuk to issue sukuk, as illustrated in the example below. issuer in the same way as interest on a conventional debt obligation. No withholding tax applies on such Example: a yield under Luxembourg domestic law (implications of EU savings directive should be fairly limited given Sukuk holder (investor) the nature of the instruments and the residency of the investors). Sukuk A Sukuk B Conclusion Profits distribution Profits distribution The circular letter confirms the pragmatic approach or possible losses Luxembourg entity or possible losses on asset A on asset B followed in Luxembourg for decades, thus facilitating (Soparfi or securitisation vehicle) (plane leasing) (building leasing) the development of Sharia’a-compliant products and structures. The circular ensures clarity and security as Assets to the tax treatment of, in particular, murabaha and Plane leasing Building leasing sukuk, which is important for Islamic finance operators and investors. The circular demonstrates a clear commitment on the part of the Luxembourg government and the tax authorities to position the Grand Duchy as a significant hub for Islamic finance. © 2010 Deloitte S.A. Member of Deloitte Touche Tohmatsu.
  15. 15. Contacts For more information, please contact our team: Benjamin Lam Jean-Philippe Drescher Jean-Philippe Foury Raymond Krawczykowski Partner - Audit Partner -TAX-Corporate Legal Partner - TAX-Accounting Partner-TAX-International/MA Phone: +352 451452 429 Phone: +352 451452 123 Phone: +352 451452 418 Phone: +352 451452 500 Email: blam@deloitte.lu Email: jpdrescher@deloitte.lu Email: jpfoury@deloitte.lu Email: rkrawczykowski@deloitte.lu Jan Van Delden Lou Kiesch Alain Verbeken Loquet Erwan Partner - Audit Partner - ERS-Regulatory Consulting Directeur - TAX-International / GFSI Partner - TAX-Indirect Taxes Phone: +352 451 452 114 Phone: +352 621 182 456 Phone: +352 451 452 513 Phone: +352 451 452 583 Email: jvandelden@deloitte.lu Email: lkiesch@deloitte.lu Email: alverbeken@deloitte.lu Email: eloquet@deloitte.lu Marco Crosetto Daud Vicary Abdullah Dan Arendt David Capocci Partner - Audit Global Islamic Finance Leader Partner - Corporate Finance Partner-Taxinternational/MA Phone: +352 451 452 645 Phone: +603 772 365 72 Phone: +352 451 452 621 Phone: +352 451 452 437 Email: mcrosetto@deloitte.lu Email: dvicary@deloitte.com Email: darendt@deloitte.lu Email: dcapocci@deloitte.lu Xavier Zaegel Johhny Yip Dawood Ahmedji Aly el Azhary Partner - Enterprise risk services Partner - Audit Directeur - Financial Advisory Partner - Audit Phone: +352 451 452 748 Phone: +352 451 452 489 Phone: +973 172 144 90 Phone: +966 (0) 265 727 25 Email: xzaegel@deloitte.lu Email: jyiplanyan@deloitte.lu Email: daahmedji@deloitte.com Email: alelazhary@deloitte.com Connect to our new Islamic finance portal: www.islamicfinance.deloitte.com About Deloitte Touche Tohmatsu: Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in 140countries,Deloittebringsworld-classcapabilitiesanddeeplocalexpertisetohelpclientssucceedwherevertheyoperate.Deloitte’s169,000professionalsarecommittedtobecoming thestandardofexcellence.Deloitte’sprofessionalsareunifiedbyacollaborativeculturethatfostersintegrity,outstandingvaluetomarketsandclients,commitmenttoeachother,and strengthfromculturaldiversity.Theyenjoyanenvironmentofcontinuouslearning,challengingexperiences,andenrichingcareeropportunities.Deloitte’sprofessionalsarededicatedto strengthening corporate responsibility, building public trust, and making a positive impact in their communities. Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its member firms. © 2010 Deloitte S.A. Member of Deloitte Touche Tohmatsu Designed and produced by MarCom at Deloitte, Luxembourg

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