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Legal Guide 2007 www.islamicfi nancenews.com
Recent Islamic Finance Developments in the UK (continued..)
in Sukuk. The FA 2007 changes are very
welcome and it is hoped this will trigger
the emergence of Shariah compliant UKbased
bond issues and securitizations.
Over the last fi ve years, Sukuk instruments
have developed rapidly. This year, Sukuk
issuances are predicted to exceed US$70
billion.
Tax concerns
Prior to FA 2007, the principal tax concern
about Sukuk arrangements was that a UKresident
issuer would be taxable on the
profi ts received in respect of the assets but
not entitled to any deduction for payments
made to Sukuk holders in respect of those
profi ts. The new legislation eliminates this
concern by treating the income payments
“as if” they were payments of interest
that enable the issuer to get a deduction
in computing its tax liability. Additionally,
there are provisions in the new legislation
that equate Sukuk to traditional debt
securities for other tax purposes such as
the “qualifying corporate bond” regime and
the tax treatment of discounts.
In order to dismiss concerns that the
introduction of a benefi cial regime
for such products could facilitate tax
avoidance schemes, there are a number
of conditions that need to be met in order
for arrangements to fall within this regime.
These include:
• the payments made to the Sukuk
holders must not exceed a
reasonable commercial return on
the amounts subscribed
• the arrangements must be treated
as a fi nancial liability of the issuer
under International Accounting
Standards
• the Sukuk must be listed on a
recognised stock exchange. This
will eliminate UK withholding tax in
respect of the payments.
Among other things, this change will allow
fi nancial institutions that have granted
Shariah compliant mortgages over the
last three years (taking advantage of the
alternative fi nance provisions that have
already been introduced) to securitize
those mortgages in a tax-effi cient manner.
Certain forms of Islamic mortgages,
such as diminishing Musharakah, are
exempt from SDLT when held by fi nancial
institutions. This change is critical and will
enable Islamic mortgages of UK land and
buildings to be securitized.
“There are provisions
in the new legislation
that equate Sukuk to
traditional debt securities
for other tax purposes”
The Sukuk market is developing at a rapid
rate and will need to be closely monitored
in order to ensure that the legislative
framework can keep track of the changes.
Through groups such as the Islamic
Finance Experts Group, the government
has signaled that it wants to stay ahead
of the fi eld in this area and promote rather
than react to the changes needed.
continued....
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