Islamic finance investments in Luxembourg
An ideal regulatory, legal and tax framework
Why should Islamic finance invest in Luxembourg? With its strong and stable legal environment and its flexible tax organisation, Luxembourg is a domicile of choice for cross border distribution of investment products.
Total assets under management amounted to more than €2.7 billion and demonstrate that Luxembourg continues to be the European leader for fund administration and distribution around the world.
The attractiveness of Luxembourg is strengthened by the fact that tailor-made structures, adapted to specific situations in order to deliver expected commercial outcome, are coupled to tax efficient returns.
Its unique blend of specialist service providers enables Luxembourg to offer fund promoters an extraordinarily wide range of investment products having progressive levels of flexibility, stretching from unregulated (i.e. Soparfi) over lightly regulated (Specialised Investment Funds, SICAR) to strongly regulated (i.e. UCITS funds) vehicles.
Size, location and type of investors or investments will drive the choice of vehicle. SIF might be particularly suitable for structuring Sharia'a compliant investments for institutional investors, while Soparfi may be appropriate for MENASA based investment funds looking to use Luxembourg as a holding of Islamic finance.
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 including more than 90 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, Bahrain, Indonesia, Kazakhstan, Malaysia, Morocco, Qatar, Singapore, Tadjikistan, Turkey, Tunisia, United Arab Emirates and Uzbekistan, signed treaties awaiting ratification with Albania, Kuwait and Saudi Arabia together with advanced negotiations with, Brunei, Egypt, Kyrgyzistan, Lebanon, Oman, Pakistan and Syria.
Aside its international initiatives, Luxembourg also acts domestically. The Luxembourg tax authorities issued a circular letter dealing with the tax treatment of murabaha and sukuk. The circular also describes other Islamic finance transactions such as musharakah, mudarabah, Ijarah and istisna. The tax authorities have taken a very pragmatic position, based on the substance over form approach, which renders such transactions very attractive from a tax point of view (for more details on this subject please see Appendix 2).
In addition, the Luxembourg investment funds regulatory environment is particularly flexible and offers the possibility to structure regulated vehicles in such a way that they can accommodate Sharia'a compliant investments.
Finally, besides an appealing tax and regulatory regime, Luxembourg benefits from a full range of highly skilled service providers such as administrative agents, custodian banks, domiciliation agents, paying agents, transfer and register agents, lawyers, chartered accountants and tax advisors.