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Luxembourg: Tax Administration Guidelines on Islamic Finance

(Feb. 4, 2010) The tax administration of Luxembourg issued a circular on January 12, 2010, on taxation of Islamic finance instruments. (Circular L.G.A. No. 55, cited in René Offermanns, Luxembourg: Guidelines on Islamic Finance Published, IBFD TAX NEWS SERVICE, Feb. 1, 2010, available by subscription from [email protected].) The financial products discussed in the document are the murabaha and the sukuk.

A murabaha is an “Islamic financing structure, where an intermediary buys a property with free and clear title to it. The intermediary and prospective buyer then agree upon a sale price (including an agreed upon profit for the intermediary) that can be made through a series of installments, or as a lump sum payment.” (What Does Murabaha Mean?, INVESTOPEDIA, http://www.inves
(last visited Feb. 3, 2010).) The provider's gain is fully taxable and is deemed to occur at the time the sales agreement is signed. The Circular does state, however, that if a part of the gain can be treated as remuneration for the deferral of payment by the final buyer, that part of the tax payment can be spread over the payment term. This deferral of payment over a term can be done only if:

1) the agreement indicates that the finance provider purchased the asset intending to resell it to a client within six months;

2) there are distinctions between the remuneration received for deferral of payment, the commission received for arranging the deal, and the purchase price of the asset;

3) clear statement of the remuneration to the finance provider is made and accepted by both parties;

4) the agreement states that the remuneration to the finance provider is given in return for the final purchaser being permitted to pay in installments; and

5) the remuneration is spread over the term of the deferred payment, for accounting and tax purposes. (Id.)

Sukok refers to financial certificates similar to bonds, but that comply with Islamic law. Since in Sharia law “the traditional Western interest paying bond structure is not permissible, the issuer of a sukuk sells an investor group the certificate, who then rents it back to the issuer for a predetermined rental fee.” (What Does Sukuk Mean? INVESTOPEDIA,<
(last visited Feb. 1, 2010).) The Circular also states that, for tax purposes, a sukuk should have the same treatment as a conventional bond. Payments received are taxed the way interest payments on a conventional debt instrument are taxed. Yield payments can be deducted, and tax payments are not withheld. (IBFD, supra.)