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24 06 2010 Tax Alert Islamic Finance

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24 06 2010 Tax Alert Islamic Finance

  1. 1. Luxembourg Corporate Tax & International Tax The Corporate Tax & International Teams are Luxembourg Tax Alert. dedicated teams of highly skilled tax 24 June 2010 professionals providing comprehensive consultancy and compliance services in Islamic Finance: Guidance on real estate the area of corporate and international tax. transactions We can provide all services in this respect and also perform a wide 1 range of other services, The Indirect Tax Authorities issued a circular on 17 June 2010 that covers some in particular for business operating in transfer tax issues related to Murabaha and Ijara agreements. The circular provides international for an extension of the existing tax incentives in the field of transfer taxes and VAT to environment and locally. Murabaha and Ijarah operations. The main features of the circular are as follows. If you need further “Substance over form approach” information, please refer to your usual The circular provides for the definition of the above mentioned contracts taking into Deloitte contact person or contact: consideration the substance of each agreement. Georges Deitz +352 451 452 578 • Murabaha which is assimilated to a cost plus profit agreement. gdeitz@deloitte.lu • Ijarah which is assimilated to a leasing agreement. If you no longer wish to receive this newsletter, Such Sharia’a compliant contracts require intermediary structures to be interposed please let us know by such as Special Purpose Vehicle (SPV). e-mail to lutaxalert@deloitte.lu Transfer taxes treatment Sale of shares in an entity owning real estate As a rule, no transfer taxes will be levied on the sale of shares of a Luxembourg real estate rich company. On the other hand, sale of shares of partnerships or economic 2 interest groupings, owning Luxembourg real estate, will trigger a 6% transfer tax . In case the operator (SPV) disclosed in the deed that the purpose of the transaction is to buy the property in order to resell it, such rate will be increased to 7.2%. However, only 1.2% tax will be levied on such purchasing deed provided that resale deed registration will be concomitant. Taxable basis for transfer taxes The circular clarifies also the tax treatment applicable to the predetermined mark-up 1 Administration de l’Enregistrement et des Domaines. 2 Law of 21 December 2001, article 9, 1°.
  2. 2. concluded in a Sharia'a agreement. Such profit margin will be assimilated as interest and consequently not subject to tax. The transfer tax levied on the resale transaction will be consequently levied on the acquisition price of the real estate by the SPV. However, such treatment will be only granted if the below conditions are met: • The client must take immediately possession of the property after the resale; • The delay between the acquisition of the property by the financial operator and the resale to the client must not exceed 10 days; • The initial acquisition contract of the asset must contain a clause specifying that that asset was bought under the terms of Murabaha agreement; • A copy of the Murabaha agreement must be attached to the authentic deed. VAT treatment The circular confirms that SPVs created under Murabaha or Ijara contracts are subject to VAT. Any real estate transaction under such Sharia'a compliant financial instruments may however benefit from VAT exemption under article 44 §1 f) and g) of the VAT law. Conclusion This circular will provide clarity and more security in the real estate transactions involving Sharia'a compliant financial instruments. It confirms the willingness of the Luxembourg Government to facilitate the development of Sharia’a compliant products and structures and to position the Grand Duchy as a significant hub for Islamic finance. Download here a copy of the circular (in French) Additional details can be found in our Islamic Finance brochure Home | Security | Legal | Privacy Deloitte S.A. 560, rue de Neudorf L-2220 Luxembourg © 2010 Deloitte S.A. Deloitte refers to one or more 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. Deloitte RSS feeds Unsubscribe

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