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Centuria and Islamic Finance
In recent years, Luxembourg has demonstrated a growing ambition to play a key role at the heart of contemporary Islamic finance and to position itself as a major center for the development of Islamic finance in Europe.
 
In fact, the first Islamic insurance company (Takaful) in Europe was created in Luxembourg in 1983.
 
16 Sukuk are currently listed on the Luxembourg stock exchange (representing approximately 6 billion euros), the majority of which are sovereign issues.
 
Furthermore, 40 Shariah compliant Funds and sub-funds are domiciled in Luxembourg, managed by the world’s leading specialists such as Al Dar Islamic World Equity Fund (managed by Pictet), BNP Paribas Equity Optimiser, Citi Islamic Portfolio Global Equity and HSBC Amanah Global Equity Index Fund. Other managers include Crédit Agricole Asset Management, Nomura and Bank of London and the Middle East (BLME).
 
This shows that the development of Islamic finance has been gaining pace within international finance over recent years.

 Assets under management currently amount to approximately 800 billion dollars(1) with an annual growth rate of 15 %(2).

Luxembourg’s ambition has recently been fulfilled with the adoption by the tax authorities on 12 January 2010 of circular L.G.-A n° 55 setting out the basic principles of Islamic finance and the tax treatment of certain Islamic instruments
such as the Murabaha and the Sukuk.
 
With its recognised expertise in financial structuring in Luxembourg, Centuria Capital Luxembourg has been active in this area for some time, offering customers suitable and high performing Shariah compliant tools. In collaboration with our parent company Centuria Capital, which has structured more than 2.5 billion euros of Islamic financing over recent years in various sectors and countries (France, United Kingdom, etc.) and through its Real Estate and Corporate Advisory Departments, we have enabled our customers in the Middle East to invest in major real estate projects and developments and to acquire significant stakes in numerous industrial companies via instruments such as Ijara agreements.
 
The wide range of investment vehicles available in Luxembourg enables us to find the most suitable and high performing Islamic finance solutions, notably through the use of Soparfi (Société de participation financière – financial holding companies) or securitisation vehicles which, due to their flexibility, are particularly suited to the issue of Sukuks.
 
Islamic finance is a system of financing (financial instruments) used by investors wishing to manage their investments in a manner which respects Islamic values. Islamic finance has its roots in the Koran and the Sunnah (the practices, words and rules of the Prophet).
 
The main objective of Islamic finance is to share profits and losses (Fair & Just, a principle whereby the profit must be the result of a mutually shared financial risk and not a guaranteed return on investment), and interest on loans and speculation is forbidden.
 
Shariah therefore encourages mutual assistance.
 
Shariah Boards are compliance boards made up of specialists (Faqih Fil-Shariah) responsible for certifying and endorsing, or not, compliance of the product or project with Shariah law.
 
These Boards may issue a view in the form of a legal opinion (fatwa) on the Shariah interpretation of a specific point.
 
Since beyond the general principles, there are no guidelines on the interpretation of Shariah law, the compliance boards often have differing points of view.
 
That being the case, every Islamic financial transaction must be approved by Islamic specialists in order to ensure that it is Shariah compliant.
 
POSSIBLE TECHNIQUES:
 
EQUITY FINANCING TECHNIQUES
 
Mudharaba: Profit sharing
 
This is a profit sharing agreement within the framework of which one of the parties (the Rab al Mal) provides capital while the other party (the Mudarib) provides his expertise as an entrepreneur.
 
While any losses incurred are born exclusively by the lender, any profits made are shared between both parties according to a ratio which has been pre-determined in the Mudharaba.
 
Musharaka: Investment through the acquisition of holdings or joint ventures
 
This is a partnership between two parties which both contribute equity in pre-determined conditions. Profits are shared according to a pre-established formula and losses are limited to the amount invested.
 
DEBT FINANCING TECHNIQUES:
 
Murabaha: Forward sale
 
This is a transaction which allows the client to buy an asset without having to take out an interest bearing loan.
 
The lender (for example, a bank or an ad hoc Luxembourg structure) acquires the asset and sells it on to the client on a deferred payment basis and against a pre-determined margin. Such a scheme is often used in the purchase of real estate.
 
In principle, in Luxembourg, the profit made on this sale is earned by the lender upon signature of the agreement and the full sum is immediately taxable (including the margin).
 
Nevertheless, the profit made by the lender constitutes remuneration for a deferred payment (comparable to interest in the context of a conventional loan) and may benefit from staggered taxation. In other words, the profit is taxed in a linear fashion over the life of the deferred payment.
 
In order for the profit of an Islamic product to be treated for tax purposes in the same way as interest income in conventional finance, Circular L.G.-A n°55 of 12 January 2010 requires that the transaction must meet the following conditions:
 
• the contract must clearly state that the lender is buying the asset with the purpose of reselling it to its client immediately or within a period that may not exceed 6 months,
 
• the contract must clearly identify the remuneration payable to the lender, the profit to be made by the lender in return for deferment of payment, the acquisition price for the client and the price paid by the lender for the asset,
 
• the lender’s profit must be clearly stated, known and accepted by both contracting parties,
 
• the lender’s profit must be specifically identified as a fee for services rendered to the client by the lender and which result from the effective deferral of the agreed payment granted to the investor, with the exception, notably, of the margin corresponding to the remuneration payable to the lender for its intermediary activity,
 
• from an accounting and tax point of view, the lender must spread the profit evenly over the period of the deferred payment, regardless of the repayments made.
 
Istisna: Made to order manufacture
 
This is an exception to the principle of Gharar, which prohibits the sale of an asset which the seller does not actually own. Istisna is therefore a contract of sale involving assets to be manufactured or assembled (or even processed) which are accurately described in the contract by means of their specifications.
 
Ijara: Leasing agreement
 
This is an agreement whereby a financial institution acquires equipment or property and leases it in exchange for regular payments of a pre-determined amount. Although once the lease has been finalised the lessor may no longer unilaterally increase the rental price, it can nevertheless index the amount of the fees provided this is clearly included in the agreement.
 
Sukuk: Asset-backed bonds – comparable to financial bonds
 
These are securities representing entitlement for the holder to a debt security or participating share (right to ownership), where both the income and capital are indexed to the performance of one or more tangible assets (or the right to usufruct of these assets) held by the issuer, used to remunerate and reimburse the Sukuk.
 
Remuneration is linked to the performance of the assets, but is often capped at a rate equivalent to conventional market rates (Euribor / Libor) plus a margin.
Repayment of the capital may be partial. Repayment of the Sukuk may be either gradual or made at the term pre-defined in the contract. Where the value of the assets financed is not enough to repay the nominal value of the securities, repayment of the capital is reduced by the shortfall ascertained. On the other hand, where the value of the assets exceeds the nominal value of the securities, only the capital is effectively repaid.
 
From a tax point of view and according to Circular L.G.-A n°55 of 12 January 2010, the treatment of a Sukuk is identical to the treatment of a loan in conventional finance and remuneration is treated in the same way as interest payments for bond issuers in conventional finance. As they are comparable to debt instruments (remuneration being treated in the same way as interest income from a tax point of view), payments made in connection with Sukuks
are deductible, providing it can be demonstrated that they were incurred in the interest of the company. Revenues from Sukuks are comparable to revenues from transferable securities. However, tax provisions relating to s and participating bonds are not applicable to this type of financial instrument.
 
FUTURE OPPORTUNITIES:
 
Luxembourg is able to offer a wide range of suitable and high performing vehicles that address the specific needs of investors. Its legal environment is robust and stable and benefits from a great deal of flexibility with regard to taxation. Luxembourg has a network of tax treaties with no fewer than 51 countries which are intended to cancel out the risk of double taxation. These include in particular the tax treaties signed with the United Arab Emirates, Qatar, Bahrain, Kuwait, Turkey, Indonesia, Malaysia and Uzbekistan. Negotiations are on-going with Lebanon, Syria and Pakistan.
 
CENTURIA CAPITAL LUXEMBOURG, YOUR FIRST CHOICE PARTNER FOR ISLAMIC FINANCE
 
Centuria Capital Luxembourg is a Financial Sector Professional, subject to supervision by the Commission de Surveillance du Secteur Lender (Financial Sector Supervisory Authority) and authorised by the Ministry of Finance to
act as:
 
- Registrar agent;
- Corporate domiciliation agent;
- Client communication agent;
- Financial sector administrative agent;
- Professional providing formation incorporation and management services.
 
Within the context of Islamic finance, Centuria Capital Luxembourg assists its customers at every stage of their project, offering suitable and high performing Shariah compliant tools, and more particularly, in the creation and management of ad hoc structures.
 
(1) Economist (2008) Saving and Souls, The Economist magazine, 2008
(2) Ali, Rahail (ed. 2008) Islamic Finance: a practical guide, Global Law and Business, 2008.
 
 
The comments expressed in this document in no way constitute a legal and/or fiscal opinion binding upon Centuria Capital Luxembourg S.A.
This document does not constitute a contractual document.