Dubai Conference - Legal and Regulatory Update


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This seminar gave an update on the Luxembourg UCITS framework, addressed the Alternative Investment Fund Managers Directive (AIFMD), provided an update on the tax-treaty network with a particular focus on Turkey and India as well as present practical cases of recent Shari’ah-compliant transactions and updates on the existing legal framework.

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Dubai Conference - Legal and Regulatory Update

  1. 1. Luxembourg, a global hubfor financial services Bishr Shiblaq Head of Dubai Representative Office 28 April 20111
  2. 2. 1. The Grand Duchy of Luxembourg  Historical origins go back to the year 963  Constitutional Monarchy  Founding member of NATO, the United Nations and the European Union  Seat of the European Court of Justice, the European Court of Auditors, the Secretariat of the European Parliament and the European Investment Bank  Member of the Euro Zone  Surface: 2,586 km2 / Population: 486,000  Workforce 310,000 (incl. 142,000 daily border migrants)  GDP per capita: € 62,626 (2008)2
  3. 3. 2. Country of origin of Luxembourg banks Brazil 2 Denmark 2 Israel 3 Portugal 2 China 4 Netherlands 4 Germany 44 Japan 5 Luxembourg 5 USA 7 UK; 8 Sweden 7 France 13 Belgium 10 Switzerland 10 Italy 9 Others 10  146 credit institutions (banks)  Total balance sheet : € 758 billion  Employees: 26,254 Source: CSSF3
  4. 4. 3. Country of origin of Luxembourg PSF Liechtenstein 2 Denmark 5 Italy 7 Sweden 2 USA 11 Luxembourg 96 France 19 Switzerland 14 UK 24 Germany 21 Belgium 38 Netherlands 29 Others 38  306 other professionals of the financial sector (PSF)  Total balance sheet: € 22 billion Source: CSSF4  Employees : 14,159
  5. 5. 4. The Luxembourg Financial Center - Players  3,705 undertakings for collective investment (UCI) – total AUM: € 2,208 billion (February 2011)  261 re-insurance companies and 96 insurance companies  Other players incl. pension funds, securitization vehicles, SICARs, SOPARFIs, private holding companies  Great diversity of players  8th largest financial center in the world5
  6. 6. 5. The Luxembourg Financial Center - Activities  Fund formation, administration and management → Luxembourg ranked 2nd largest in the world (behind US)  Corporate and financial structuring → use of Luxembourg-based vehicles for M&A, securitization, venture capital and wealth management  Private banking → Luxembourg is the most important private banking center in the Eurozone and is ranked 2nd largest in the world for international private banking (UBS 2006: 15% market share behind Switzerland with 28%)  Bond listing → more than 30,000 securities listed with the LuxSE  Clearing and settlement of securities’ transactions (Clearstream)6
  7. 7. 6. The Luxembourg Financial Center – Products  Collective investment schemes (UCITS / UCIs / SIFs);  Investment companies in risk capital (SICARs);  Securitization vehicles;  Non-regulated investment vehicles (SOPARFIs);  Life insurance products, insurance policy as an underlying for individual portfolio management (unit linked policies);  Private banking products: discretionary asset management – fiduciary structures – banking privacy – private holding companies.7
  8. 8. 7. The Luxembourg Financial Center – Advantages  Luxembourg is one of the founding members of the EU;  Onshore jurisdiction, with a recognized KYC and AML legislation;  Efficient but flexible regulation;  Accessible and responsive regulator (CSSF);  Choice between regulated or non-regulated vehicles;  Tax efficiency and one of the broadest treaty network available;  Expertise in financial services, in particular investment funds, internationally recognized.8
  9. 9. Investment Funds: Legal andRegulatory updateFlorence StainierPartner, Investment Funds28 April 20119
  10. 10. Agenda I. Luxembourg fund industry II. UCITS Update A. Overview B. Update about CSSF supervision C. Re-domiciliation in the air III. From UCITS to UCITS IV… and UCITS V A. UCITS IV in a nutshell B. Simplified Notification Procedure C. Key Investor Information Document D. Merger and Master-Feeder structures IV. Miscellaneous10
  11. 11. I. Luxembourg fund industry … at a glance: • 3.667 investment funds • 12.937 fund units • 2.198,99 billion euros in assets under management11 Figures as at November 30, 2010 Source: CSSF
  12. 12. I. Luxembourg fund industry (2) 20 years of sustained growth Net assets of Luxembourg domiciled UCIs December 2010 2500000 2 198.994 2000000 Growth rate 12 months 19.45% 1500000 €billion 1000000 500000 012 Figures as at November 30, 2010 Source: CSSF
  13. 13. I. Luxembourg fund industry (3) 20 years of sustained growth Number of Luxembourg domiciled UCIs December 2010 Growth rate 3667 4000 12 months 3500 5.89% Number of funds 3000 2500 2000 1500 1000 500 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2001 2003 2004 2005 2006 2007 2008 2009 Dec. 201013 Figures as at November 30, 2010 Source: CSSF
  14. 14. I. Luxembourg fund industry (4) Luxembourg: the hub for international fund distribution 0 20 40 60 80 100 BE 1,3 76.2% of all UCITS registered in at least 3 countries (including home states) are Luxembourg funds FR 2,1 UK 2,5 IE 12,9 LU 76,214
  15. 15. I. Luxembourg fund industry (5) Luxembourg: No 1 for global fund distribution Luxembourg market share of cross-border funds for public distribution15 Figures as at November 30, 2010 Source: CSSF
  16. 16. II. UCITS Update A. Overview Retail Investors Strong Supervisory Framework UCITS High Risk TS, MMI, UCI, Diversification Cash, Derivatives EU Passport EEA, Asia, Middle East, Americas16
  17. 17. II. UCITS Update (2) B. Update about CSSF Supervision Management Company UCITS Investment Manager • Subject to prudential supervision • Cooperation between the UCITS supervisory authority and the supervisory authority of the investment manager17
  18. 18. II. UCITS Update (3) C. Re-domiciliation in the air…  GOOD REASONS TO RE-DOMICILE IN LUXEMBOURG  Solid regulation and continuous Quality UCITS prudential supervision  Reputation: stable jurisdiction, Brand predictable planning and long term investment decisions  Attractive tax regime Track  Experienced fund administration, Record custody and transfer agency ? services  Strongly developed compliance and risk management structures  Expertise and know-how, commitment to excellence and reliability and Master-Feeder…  Access to worldwide distribution18
  19. 19. III. From UCITS to UCITS IV… and UCITS V UCITS UCITS III UCITS IV UCITS V 20 December 1985 21 January 2002 13 July 2009 Driving Forces Permit cross-border More asset classes eligible Permit industry offering of open-ended (bank deposits, units of other consolidation, improve investment funds to EU UCIs, MM and use of efficiency and increase investors derivatives) investor protection Benefits  Harmonization of  Widening of investment Principal amendments to investor protection rules power and product offering in UCITS regime:  Marketing through UCITS  Simplified notification simple notification  Enhanced risk management procedures process - passport procedures  KII  EU-wide fund merger regime  Management company passport  Master-Feeder structures19
  20. 20. III. From UCITS to UCITS IV… and UCITS V (2) A. UCITS IV – in a nutshell Reduce Administrative Notification Burden Procedure COORDINATION REGULATOR Increase Investor Key Investor Protection Information Increase ManCo Fund Mergers Market Passport Efficiency Master-Feeder Date of Implementation : July 1st, 201120
  21. 21. III. From UCITS to UCITS IV… and UCITS V (3) B. Simplified Notification Procedure • Objective: improve time to market / reduction of costs • Regulator to regulator notification • Overal efficiency21
  22. 22. III. From UCITS to UCITS IV… and UCITS V (4) C. Key Investor Information Document (KIID) • Objective: improve retail investors protection and information • Standard & harmonized format & presentation • Maximum 2 pages long • Comprehensible form & presentation: short & simple22
  23. 23. III. From UCITS to UCITS IV… and UCITS V (5) D. Mergers and Master-Feeder structures • Objective: consolidation of EU fund industry – efficiencies – economies of scale • Enhancement of the ability to complete cross-border fund mergers • Adoption of a model for facilitating master feeder structures UCITS V TO COME23
  24. 24. IV. Miscellaneous A. Products trend B. Cross investments C. P Shares24
  25. 25. The Alternative InvestmentFund Managers DirectiveA special focus on private equity fundsPierre BeisselPartner28 April 201125
  26. 26. The AIFMD in the context of the European regulatory framework Asset managers Investors alarmed MiFID review aim to navigate over EU reform replies flood funds through big process in – a record? rocks ahead Europe prepares Insurers still The AIFMD – a for governance uneasy over benefit or a green paper Solvency II hazard? EU urged to go UCITS IV ahead with European regulations on paperwork will tougher bank OTC derivatives spark surprise rules disquiet regulators26
  27. 27. Similar stories elsewhere.... United States: New Investment United States: Dodd-Franck Funds Regulations in tougher banking challenges ahead the UAE regulations Qatar: ......ESCA Impact of the QFCRA’s new approved AIFMD on UAE local based managers regime for CIS distributors... ??? [....] Executive compensation Asia.... under review...27
  28. 28. The regulatory approach adopted by the AIFMD  Creation of a harmonised and stringent regulatory and supervisory framework for AIFM  AIFMD = a Managers’ Directive rather than a Product Directive  Creation of a passport for European and third country managers28
  29. 29. The regulatory approach adopted by the AIFMD  In scope:  EU AIFM managing EU (LUX) AIF or non-EU AIF  Non-EU AIFM (e.g., DUBAI) managing EU (LUX) AIF  Non-EU AIFM (DUBAI) marketing non-EU AIF in the EU29
  31. 31. The European Fund Industry in numbers (as of 31 December 2010) Non-UCITS UCITS Assets Assets Market share Country Country € millions € millions in % Germany 876,105 Luxembourg 1,880,612 31.4% Luxembourg 318,382 France 1,210,280 20.2% Ireland 204,795 Ireland 758,531 12.7% France 191,345 UK 675,401 11.3% UK 118,556 Germany 249,748 4.2% Switzerland 57,218 Switzerland 195,998 3.3% Italy 56,701 Italy 175,358 2.9% Spain 7,231 Sweden 162,446 2.7% Sweden 3,643 Spain 162,337 2.7% Others 200,914 Others 518,919 7.1% Total: 2,034,890 Total: 5,989,630 100%31 Source: EFAMA Quarterly Statistical Release, February 2011, No. 44
  32. 32. The European (AIF AND NON-AIF) Fund Industry in numbers32
  33. 33. Luxembourg – the leading European private equity hub  The leading European regulated private equity centre  Over 300 regulated private equity funds  Over US$ 40 billion of PE/VC fund assets administered in Luxembourg  Growth of 850% over last 5 years  Leading private equity service providers present in Luxembourg  Leading global private equity managers operating in Luxembourg US$ 40 billion in assets Over 300 regulated funds33
  35. 35. Consequences for Dubai based PE manager  Dubai PE manager has no European investors for the AIF it manages: NO IMPACT  Dubai PE manager has European investors in the AIF it manages: IMPACT  Dubai PE manager wishes to use a European alternative investment fund (AIF) vehicle/regime without EU investors: [NO] IMPACT  Dubai PE manager wishes to use a European alternative investment fund (AIF) vehicle/regime with EU investors: IMPACT35
  36. 36. How can Dubai and Luxembourg work together under the AIFMD?36
  37. 37. Luxembourg: distribution platform and gateway to Europe for Dubai PE manager  2013 LUX AIFM LUX AIF EU for and Passport  2015 LUX AIF Dubai AIFM LUX AIFM Dubai AIF EU for and for Passport Dubai AIF37
  38. 38. How can Dubai and Luxembourg work together outside the AIFMD?38
  39. 39. Luxembourg: European PE acquisition gateway Dubai Investors LEVEL 1 Manager Non EU LEVEL 2 AIF LEVEL 3 LUXCO LEVEL 4 EU TARGET39
  40. 40. Luxembourg: European PE acquisition gateway Luxembourg is Europe’s premier acquisition and financing hub: extensive tax treaty network tax efficient entry level and exit planning fiscal and legal planning/structuring flexibility/certainty AIFMD applies to AIFM and indirectly to AIF, but: does not apply to special purpose acquisition vehicles (SPV) also provides for exceptions and exemptions40
  41. 41. Challenges & Opportunities41
  42. 42. Challenges and opportunities for Luxembourg  Positioning as AIF pan-European and global distribution platform  efficient network of MOUs and cooperation arrangements with “asset manager” jurisdictions (US, Hong Kong, Switzerland, Channel Islands, Singapore, UAE etc.)  Positioning as center of excellence for AIFM  leverage on strong UCITS position  creation of ManCo (AIFM) with appropriate substance and monitoring requirements  center of excellence in risk management  Adequate regulatory framework for service providers (central administration, custodian banks):  focus on monitoring functions  flexible outsourcing  intra-group delegation42
  43. 43. Timeline43
  44. 44. TimelineNovember December July November June July 2015 2018 2010 2010 2011 2011 2012 2013 Issue of Passport End of Start of ESMA Transpo-Adoption Planned Level 2 for third private work on advice to sition into of entry into measures country place- Level 2 EC nationalDirective force by EC AIFM + ment legislation expected law expected AIF regimes44
  45. 45. Thank you for your attention! Questions & answers45
  46. 46. Tax structuring: recent developments and country focus on TurkeyThierry LesagePartner28 April 201146
  47. 47. Part. 1 General aspects47
  48. 48. Key strengths of Luxembourg as holding and financing location  Flexible and secure tax environment  Advantageous domestic tax system  No need for specific legislation for shari’ah compliant transactions as the tax system is based on  an economic approach; and  a substance over form principle  Well-developed tax treaty network48
  49. 49. Luxembourg offers for shari’ah compliant transactions  Extensive participation exemption regime (for dividends income, capital gains, outbound dividend payments and net worth tax purposes)  Several tax incentives (e.g. 80% exemption for IP income)  No exit taxation enabling appropriate repatriation plannings  Lowest VAT rate within the European Union (15%)  Attractive tax regime for different investment vehicles and investors (e.g. family wealth management companies, securitization vehicles, SICARs, UCITs…)49
  50. 50. Luxembourg basic tax features Income tax rate 28.80% (CIT + MBT; Luxembourg city) Net Wealth tax rate 0.5% Capital duty No WHT on dividend 15% (with several exemptions/reductions) WHT on interest 0% (very limited exceptions) WHT on royalties 0% Tax certainty can be achieved through an efficient advance tax agreement practice Double tax treaties in force 6250
  51. 51. Double tax treaty network – treaties in force Armenia Germany Malta Slovakia Austria Greece Mauritius Slovenia Azerbaijan Hong Kong Mexico South Africa Bahrain Hungary South Korea Moldova Belgium Iceland Spain Mongolia Sweden Brazil India Bulgaria Indonesia Morocco Switzerland Canada Ireland Netherlands Thailand China Israel Norway Trinidad and Tobago Czech Republic Italy Poland Tunisia Denmark Japan Portugal Turkey Estonia Latvia Qatar United Arab Emirates Finland Liechtenstein Romania United Kingdom France Lithuania Russia United States Georgia Malaysia San Marino Uzbekistan Monaco Singapore Viet-Nam51
  52. 52. Double tax treaty network – treaties not in force yet Albania Kazakhstan Macedonia Syria Argentina Kuwait Pakistan Ukraine Barbados Kyrgyzstan Panama Uruguay Cyprus Lebanon Serbia and Montenegro52
  53. 53. Part. 2 Recent developments on intra-group financing53
  54. 54. Circular 164/2 LIR on intra-group financing transactions  On 28 January 2011, the Luxembourg tax authorities issued the Circular 164/2 LIR on the tax treatment of companies engaged in intra-group financing transactions.  The Circular introduces transfer pricing guidelines for the determination of arm’s length character of intra-group financing transactions.  New rules are based on article 9 of the OECD Model Convention and the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.  The Circular addresses the tax treatment of intra-group financing transactions and governs the prior clearance thereof through advance transfer pricing confirmations.54
  55. 55. Scope of the Circular 164/2 LIR  The provisions of the Circular apply to all “entities engaged in intra-group financing transactions ”  Four conditions must be fulfilled: 1. Granting loans 2. as a main activity 3. to direct or indirect affiliated / controlled companies 4. Debt-funded55
  56. 56. Arm’s length character determination Comparability analysis  As per the Circular, two types of comparability analysis are available to justify the arm’s length character of the concerned transactions: 1. Comparable uncontrolled transaction analysis = comparison of the transactions to those realised by an entity exercising a comparable activity, such as a financial company subject to the regulatory requirements of the CSSF. 2. Indirect comparability analysis = justifying the transaction by taking into account tangible and economics factors/criteria :  prudential ratio of the entity  credit risk exposure  additional expenses (solvability)  specific contractual duties/provisions  exposure on foreign currency exchange56
  57. 57. Advance Pricing Agreement (APA)  Conditions to be fulfilled to obtain an APA in Luxembourg: 1. Composition of the executive board : predominance of Luxembourg managers/ directors 2. Manager / Director with well established professional skills and power to act 3. Key decisions on the conduct of the business are taken in Luxembourg 4. Bank account in Luxembourg 5. Respect of the general tax filing obligations 6. Not be a fiscal resident in another State 7. Appropriate equity amount given the risks associated to the activities performed = 1% x nominal value of financing activity or max Euro 2 million57
  58. 58. Documents required  Following documents are required in order to apply for an APA:  Proper information on the taxpayer and the related entities  Detailed description of the transactions  The name of all States involved  Presentation of the legal structure of the group  The fiscal years covered by the APA  A transfer pricing study respecting the OECD guidelines  A general description of the relevant market situation  An analysis of all other relevant tax problems associated to the activities performed  Declaration that the information transmitted is complete and truthful58
  59. 59. Validity of the APA  The duration of the validity of the APA depends on each individual case, but may not exceed 5 years  Once 5-year period has expired, the Luxembourg tax authorities may, upon request, grant a new confirmation for a maximum period of 5 years  The APA has a binding effect on the Luxembourg tax authorities unless: – the situation or the operations described were incomplete or not accurate; – the essential elements of the operations differ from the request; or – the confirmation is not complying with international law.59
  60. 60. Part. 3 Shari’ah-compliant transactions60
  61. 61. Tax Circular on Islamic finance  The Luxembourg tax authorities published an administrative Circular related to shar’iah compliant finance instruments (Circular L.G.-A n 55 dated 12 January 2010)  In particular, the Circular clarifies the Luxembourg direct tax treatment of murabaha and sukuk:  Economic approach confirmed  Luxembourg UCIs investing in Islamic finance instruments are excluded from the scope of the Circular61
  62. 62. Tax treatment of Sukuk  Analysed as debt instrument from a Luxembourg tax perspective  Thus, the remuneration paid to the sukuk holder = interest payment  Remuneration is tax deductible at the level of the sukuk issuer  Not subject to a WHT in Luxembourg  Remuneration = income from transferable securities  Luxembourg tax provisions related to typical silent partners and profit-linked obligations are not applicable62
  63. 63. Sukuk financing structure  Tax treatment  LuxCo fully-taxable entity subject to Investors corporate income taxes and net worth tax, but Equity &  profits from the Eligible Assets repatriated Profit-participating notes “PPN”/ sukuk through PPN / sukuk  no withholding tax on payments under the LuxCo PPN /sukuk  payments under the PPN / sukuk are deductible expenses  return on the PPN / sukuk equal to the net profit derived from the Eligible Assets less an arm’s length margin Eligible Assets Eligible Assets  only taxation of the margin  Upon exit, generally (i) no withholding tax on distribution of liquidation proceeds and (ii) no taxation of capital gain on LuxCo shares realised by non-resident shareholders.63
  64. 64. Tax treatment of murabaha transaction  Analysed as a sale, the gain i.e. the difference between acquisition and sales price realised by the financing entity under the murabaha transaction – the “Gain” – being as a rule taxable upon signature of the agreement  However, the Gain being the remuneration of a deferral of payment (comparable to an interest), in such case possibility of a deferred taxation i.e. taxation on a straight-line basis during the period of the deferral of payment64
  65. 65. Tax treatment of murabaha transaction  The Gain qualifies as interest if:  pursuant to the murabaha agreement, it is clear that the financing entity acquiring the asset sells it back simultaneously or in a period not exceeding 6 months;  the murabaha agreement distinguishes between (i) the remuneration of the financing entity for its intermediation (ii) the acquisition price paid by the financing entity and (iii) the acquisition price paid by the investor;  the Gain of the financing entity must be clearly stated, known and accepted by both parties;  the Gain must be expressly qualified as being the counterpart of the service rendered to the client and resulting from the deferral of payment granted to the client; and  from an accounting and tax perspective, the Gain is accounted for on a straight-line basis by the financing entity, irrespective of the actual payments made.65
  66. 66. Murabaha financing structure  Tax treatment Seller  Profit of EuCo repatriated to LuxCo through Cash e.g. dividends, interest, royaltiesTransfer of payment  Generally, no local withholding tax andEUCo 100 application of EU Directives Investors  Exemption for dividend income, capital gains Investment Bank and liquidation proceeds from EUCo at the level of LuxCo Equity & PPN  At the level of LuxCo, profits from EUCo offset by (i) payments under the murabaha and (ii) payments under the PPN LuxCo  Remuneration on murabaha and PPN, not subject to withholding taxes Dividend,  Remuneration on murabaha and PPN generally interest, deductible expenses royalties  Possible withholding tax exemption on dividends EUCo under an applicable double tax treaty  Upon exit, generally no withholding tax on distribution of liquidation proceeds and no taxation of capital gain on LuxCo shares66
  67. 67. Part. 4 Country focus - Turkey67
  68. 68. DTT between Luxembourg and Turkey – Key features Exchange of information  Promulgation in March 2011 by Turkish Official Gazette of the Amendment Protocol of the DTT (signed on 30 September 2009) concerning the exchange of information.  Turkish tax authorities should start treating Luxembourg as an OECD white list jurisdiction.  “Anti-tax haven” provisions should not apply to payments from Turkish companies to Luxembourg companies.68
  69. 69. DTT between Luxembourg and Turkey – Key features Withholding taxes rates  Dividends (Art. 10): - 10% of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 25% of the capital of the company paying the dividend - 20% of the gross amount of the dividends in all others cases  Interest (Art. 11): - 10% of the gross amount of the interest if it is paid on a loan made for a period of more than 2 years - 15% of the gross amount of the interest in all others cases  Royalties (Art. 12): - 10 % of the gross amount if the beneficial owner is resident in Luxembourg69
  70. 70. DTT between Luxembourg and Turkey – Key features Capital gains on disposal of participation (Art. 13):  Disposal before 12 months: – Gains may become subject to tax in Turkey – Luxembourg should generally exempt the gain by application of the DTT  Disposal after 12 months: – No taxation in Turkey nor in Luxembourg (Luxembourg participation exemption should be available)70
  71. 71. Acquisition structure example Description  Investor incorporates or buys SPV  Investor funds SPV with a mix of equity Investor and a profit participating loan ( “PPL”) (UAE)  SPV acquires the Target Tax treatment PPL  The PPL’s interest has two components: – a fixed annual interest rate of 0.5-1% SPV – a profit participating interest tracking the income (Luxembourg) that SPV derives from specific assets  Repatriation of profits through the payment of the variable interest  No WHT levied on interest payment Target under the PPL nor its reimbursement (Turkey)  A range of instruments can be used (e.g. convertible bonds, total return swaps) as an alternative to a PPL71
  72. 72. Timeline and exit gains Acquisition 6 months 12 months Sale of SPV Gains potentially subject to Gains not subject to tax in Luxembourg and tax in Luxembourg Turkey Sale of Turkish - Gains subject to tax inTurkey Gains not subject to Target - Luxembourg should exempt the gain by application tax in Luxembourg of the DTT and Turkey72
  73. 73. Islamic Finance inLuxembourg: Case studiesBishr Shiblaq,Head of Dubai Representative Office 28 April 201173
  74. 74. Overview (Part 1) – Islamic Finance in Luxembourg 1978 First Islamic finance institution established in a Western country (Islamic Banking System, later Islamic Finance House Universal Holdings S.A.) 1983 First Shari’a compliant insurance company in a Western country (Solidarity Takafol S.A.) 1990 Other renowned Islamic finance institutions set up Luxembourg establishments:Faisal Finance and FWU Group 2002 LuxSE, first Western stock exchange to enter the Sukuk market (Malaysia Global Sukuk) 2010 Luxembourg Central Bank first EU Central Bank to become a member of the Islamic Financial Services Board (IFSB) 2010 Luxembourg Tax Circular clarifying the treatment Murabaha and Sukuk 2011 Luxembourg banks requested to join the Islamic Liquidity Management Corporation (Objective: Issuance of financial instruments to provide Islamic institutions with liquidity management solutions) 2011 First Annual IFSB meeting in a Western country (May 2011)74
  75. 75. Overview (Part 2) – Islamic Finance in Luxembourg  40 Shari’a compliant funds and subfunds registered in Luxembourg  16 Sukuk listed on the Luxembourg stock exchange  1 Shari’a compliant insurance company  Specialised teams and dedicated services for Shari’a compliant structures and funds offered by Luxembourg Service Providers, including Arendt & Medernach75
  76. 76. Overview of Islamic finance cases Residential  Islamic Banks Real Estate Commercial Hotels  Corporate Investors Shopping Centers Infrastructure  Private Equity Firms Islamic Funds  HNWI  Governmental Entities  Semi-gov. Entities Private Equity (… and others) Securitisations76
  77. 77. Real Estate - Unregulated Acquisition Structures77
  78. 78. Real Estate Acquisition in Europe GCC PPL Equity (1%) UAE Convertible UAE and IFL loan (99%) IFLLuxembourg LuxCo LuxCoShareholder Shareholder Loan Loan Target ItalyCo FrenchCoJurisdiction 78
  79. 79. Real Estate: UK Mixed-Used Development Private Placement Joint Venture Agreement Memorandum CaymanCo LuxCo Project Company (Jersey) JVCO (Cayman) Finance Company Occupational Tenants (Luxembourg) Conventional Funding Shari’a Compliant Funding79
  80. 80. Private Equity80
  81. 81. Private Equity: Participation in Turkish companies Islamic Bank (GCC) 100% LuxCo Target Co 1 Target Co2 TargetCo 3 (Turkey) (Turkey) (Turkey)81
  82. 82. Private Equity: Shari’a compliant transaction GCC- Turkey Investment Bank & Investors Offshore SPV Murabaha & Mudaraba LuxCo 1 Equity, Murabaha Luxco 2 Real Estate Private Equity Company82
  83. 83. Private Equity: Investment into Russian Companies Payment Delegation Agreement QatarCo PanamaCo (Qatar) Interest Free Loan 100% Participation Loan (Panama) Soparfi 50% 50% Partner Soparfi (Luxembourg) (Luxembourg) Interest Free Loan Fixed Interest Loan at 4% JV Soparfi 100% (Luxembourg) Finco 100% (Luxembourg) (less one share) InvestmentCo SPV1 Fixed Interest Loan 100% RusSPV1 Fixed Interest Loan at 4,25% (4% plus 0,25% (Russia) taxable margin*) Target Group83
  84. 84. Islamic Funds & Shari’a compliant platforms84
  85. 85. Islamic Funds in Luxembourg Luxembourg offers a full range of regulated investment vehicles perfectly suitable for the structuring of Islamic transactions and activities and worldwide distribution to retail and institutional investors Islamic investment funds provide for special features:  Shari’a board: a Shari’a board may be appointed in any type of Luxembourg regulated vehicles, in order to validate the structure of the fund and its investment policy from a Shari’a perspective  Ban of haram activities: criteria for selecting the investments of the fund and excluding haram activities may also be provided as the basics of the investment policy of an investment fund  Specific limits: exclusion of riba may be ensured by providing some ratios of illiquid assets to be complied with. Interdiction of gharar may also be achieved by express prohibitions included in the sales documents  Purification of haram income: purification processes are commonly accepted and implemented by Luxembourg authorities and service providers and may be described in sales documents  Luxembourg law perfectly allows the integration of such specifc features in conventional regulated vehicles.85
  86. 86. Islamic Funds: Luxembourg share in Islamic funds Source: E&Y Islamic Funds Report 200986
  87. 87. Development of several Islamic Platforms in Luxembourg  New Trend to establish platforms for different Islamic products  Islamic Fund Platforms for UCITS and SIF:  Amiri Sharia EquitiesPlatform  IDO Shariah Investment Platform  Luxembourg Alternatives UCITS Platform – LAUP  Luxembourg Financial Group InvAG TGV  Sukuk platforms on the basis of the Luxembourg Securisation Law  Platform for Takaful and Retakaful87
  88. 88. Sukuk Structures based on the Luxembourg Securitisation Law88
  89. 89. Sukuk al Mudaraba/ Musharaka structure89
  90. 90. Sukuk al Ijara structure90
  91. 91. Sukuk Issuance Platforms in Luxembourg  Deutsche Bank: Al Miyar S.A.  Dar Al Istithmar: Al Waseelah Capital S.A.91
  92. 92. Sukuk Issuance Platform92
  93. 93. Listing of Sukuk93
  94. 94. Listing of Sukuk Luxembourg Stock Exchange (LuxSE):  Founded in 1929  Leading Listing Market for bonds, securities and sukuk with 46 % of international bonds in Europe being listed thereon  Over 4200 issuers from 105 different countries  More than 55 countries have at least one issue of their sovereign debt listed thereon  First Western stock exchange to enter the sukuk market LuxSE offers broad listing options via its two markets:  Regulated Market:  Euro MTF: became the preferred listing platform for sukuk94
  95. 95. Listing of Sukuk  Listing and admission to trading of sukuk on either of the markets does not trigger any additional requirements  The content of the prospectus will vary according to the structure of the transaction underlying the issue of the particular sukuk  CSSF clarification (treated as asset backed securities for purposes of approval of the prospectus)  Today the LuxSE has become one of the most important in Europe for sukuk listing95
  96. 96. Sukuk listed in Luxembourg Sukuk issue Curr. Size Issued Maturity Salam Bounian Development Company Sukuk Ltd USD 137,500,000 2008 2018 Qreic Sukuk LLC, Qatar USD 270,000,000 2006 2016 Petronas Global Sukuk Ltd USD 1,500,000,000 2009 2014 Wings FZCO USD 550,000,000 2005 2012 Gold Sukuk DMCC USD 200,000,000 2005 2010 IDB Trust Services USD 500,000,000 2005 2010 Pakistan International Sukuk Co USD 600,000,000 2005 2010 Qatar Global Sukuk USD 700,000,000 2003 2010 BMA International Sukuk Company USD 250,000,000 2004 2009 Dubai Global Sukuk FZCO USD 1,000,000,000 2004 2009 Sarawak Corporate Sukuk, Malaysia USD 350,000,000 2004 2009 Stichting Sachsen-Anhalt EUR 100,000,000 2004 2009 Tabreed Financing Corporation, UAE USD 200,000,000 2004 2009 Solidarity Trust Services USD 400,000,000 2003 2008 Malaysia Global Sukuk USD 600,000,000 2002 2007 Al Myiar Capital SA (programme for issuing secs) USD96
  97. 97. Establishment of an Islamic Bank / Professional of the Financial Sector in Luxembourg97
  98. 98. Establishment of an Islamic Bank/ PSF in Luxembourg  Many GCC inquiries regarding the establishment of an Islamic Bank in Luxembourg, but to date none of these projects has been realised.  As of March 2011, 146 conventional banks and almost 300 professionals of the financial sectors (PSF) in Luxembourg  21 types of PSF an d 6 types of support PSF that can be created in Luxembourg  No additional Luxembourg requirements to be fullfilled for the establishment of an Islamic Bank. Advantages:  Banking license in the heart of the EU  Branches in the EU that can be opened more easily  Access to the EU markets: European Passport for Credit Institutions and PSF qualifying as Investment Firms98
  99. 99. Islamic Bank / PSF: Using the European Passport99
  100. 100. Holding Structure for a foreign Islamic Bank Shareholders Shareholders Shareholders Private Placement of Shares Luxembourg Holding Company S.A. Real Holding Estate Education Other Takaful Re-Takaful Company Other Banks Islamic Bank10 0
  101. 101. Thank you101