Luxembourg, a place of choice for shariah – compliant investments

Today, in period of uncertainty in the economic climate which leads to the questioning of the current financial system, Islamic finance seems to increase in popularity and tends to become a sustainable alternative to conventional finance.

Ruled by the shariah’s principles, Islamic finance’s main characteristic is the moral prohibition of interest earnings or usury and money lending together with investments in direct or indirect association with  “sinful” activity such as business involving alcohol, pork products, firearms, adult entertainment as well as any sort of speculation, betting and gambling.

In this context, given that only interest free forms of finance are considered permissible and in line with shariah’s principles, financial relationships between cash-holders and borrowers need to be based on risk-sharing and returns from investments in authorized activities.

In light of these moral requirements, different “products” or “concepts” have been created in order to find alternatives to conventional financing that enable to achieve the double objectives of being shariah-compliant and at the same time fiscally optimized.

Shariah – compliant “instruments”

The most popular shariah-compliant “concepts” or “instruments” that can be used to structure investments are the following:

• Musharaka (partnership);
• Mudaraba (partnership separating the cash-holders and the managers);
• Murabaha (sale with a differed payment);
• Ijara (leasing);
• Sukuk (profit participating bonds).

Luxembourg proactivity to adapt economic and legal framework to Islamic financing

With its dynamism and strong capability to adapt its legal and economic framework, Luxembourg became a key place for investment structures dedicated to Islamic finance in Europe and worldwide.

Investors are also drawned by an attractive tax regime, a well adapted legislative framework, the availability of professional expertise and as skilled multi-lingual workforce.

The legal and tax framework of Luxembourg has been adapted in order to ensure that shariah – compliant products and services could be created for structures with Luxembourg vehicles. Two circulars¹ have been indeed issued by the Luxembourg tax authorities in order to provide with clear guidelines on the tax treatment of shariah – compliant «concepts».

Well adapted investment vehicles for Islamic finance

In parallel to its strong position as the most popular place for the domiciliation of regularized funds such as UCITs, Luxembourg has built up a strong experience in hedge funds, private equity and real estate funds.

Indeed, with its broad range of investment vehicles (SIF, SICAR, securitization vehicles, SOPARFI) combined with a flexible legal and tax framework based on the economic reality (the substance over form principle), sophisticated structuring in line with the shariah – principles can be tailored-made for the investor’s needs.

Luxembourg, July  2012

[1] A circular issued on 28^th January 2010 respectively on 12^th January 2010 clarifying the direct and indirect tax treatment of Murabaha, sukuk and Ijara contracts