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TAX NEWS - DECEMber 2009 | |||||||||||||||||||||||||||||||||||||||||||
Ireland Tax: Ireland's tax treatment of Islamic finance"Islamic finance" refers to any financial arrangement that is compliant with the principles of Islamic religious law ("Shari'a"). Islamic finance must comply not only with the laws of the land, as with conventional finance, but also with Shari'a. Anything that is not allowed by Shari'a cannot be undertaken by Islamic finance. Some key differences between conventional finance and Islamic finance include prohibition of interest, prohibition of certain activities (e.g. dealing in alcohol or gambling) and prohibition of uncertainty ("gharar") in any business transaction (such as short selling, speculation or derivatives). Islamic finance is equally attractive to non-Muslims because of its underlying values to avoid exploitation and its objective to share reward between the parties involved. Compliance with Shari'a in any venture is sought through the appointment of a Shari'a advisory board. Members of the Shari'a advisory board have extensive knowledge of Shari'a, enabling them to advise boards of directors on Shari'a matters. The ultimate responsibility of Shari'a compliance rests with the board. The Irish Financial Regulator recently established a specialist team to focus on the authorization of Shari'a funds. This team will ensure efficiency and consistency when processing such applications. In addition to this focus and support from the Financial Regulator, the Irish Revenue recently issued a bulletin outlining the tax treatment of various Shari'a compliant financial products and confirming that the tax treatment of these products should be the same as that applied to their respective conventional counterparts. As a result, there are a number of reasons why Ireland is an attractive proposition to those offering Shari'a compliant financial products: - Favorable tax regime; - Broad tax treaty network and favorable tax treatment of foreign dividends; - Efficient, innovative and business focused policies and regulation; - Access to the EU market; and - Ability to work on a global basis and liaise with specialists abroad. The confirmed tax treatment of Shari'a compliant funds, "Ijarah" arrangements and "Takaful" and "Retakaful" arrangements are summarized below. Shari'a compliant funds Shari'a funds established in Ireland as investment undertakings should be exempt from tax at the fund level, except where the fund is making payments to Irish tax residents (in which case the fund should deduct and account for tax out of payments made to unitholders). In addition, stamp duty should not arise on the transfer or exchange of units in Shari'a funds. The VAT position of Shari'a funds should be the same as existing Irish funds and needs to be reviewed on a case-bycase basis. Ijarah (leasing and hire purchase) arrangements All Ijarah leasing transactions that relate to movable property (i.e. anything other than real estate) should be treated in the same way for tax purposes as conventional leasing transactions. This should apply for lessors and lessees who enter into Ijarah leasing transactions. For operating leases, these are usually taxed in accordance with the entries in the accounts with no requirement for tax adjustments. In the case of finance leases, tax adjustments are required to eliminate the capital element of the finance lease from the taxable income and claim tax depreciation on the assets under lease. However, for short-term finance leases, an election can be made by lessors to follow accounting treatment for tax purposes, thus eliminating the need for tax adjustments. Irish stamp duty should not arise on Ijarah leasing arrangements provided they do not relate to immovable property. The Irish VAT analysis of leasing transactions can be complex and needs to be reviewed for each Ijarah transaction. Takaful (insurance) and Retakaful (reinsurance) arrangements Contributions received from policyholders relating to Takaful or Retakaful arrangements should be treated as taxable income. Where the company selling the Takaful or Retakaful arrangements is doing so as part of their trade, the applicable Irish tax rate will be 12.5%. Expenses incurred by a Takaful or Retakaful company should be deductible provided they are wholly and exclusively incurred for the purposes of the trade of the company. Contribution payments should also be deductible in a similar way to how insurance or reinsurance premiums are deductible for conventional insurance or reinsurance companies. Services related to Takaful and Retakaful arrangements should be exempt from VAT in Ireland in the same way as conventional insurance, reinsurance and life assurance arrangements. Irish stamp duty will arise in relation to Takaful and Retakaful arrangements where the risk being insured against is located within Ireland. Conclusion The clarifications already provided by Irish Revenue represent a positive move in enhancing the Islamic finance market in Ireland and in encouraging companies to engage in Islamic finance activities. Recent indications from the Irish authorities are that there are further clarifications to follow in this area, to include banking, securitization and other financial products (such as mortgages). These forthcoming clarifications should serve to boost related activities in Ireland and present a real opportunity for the international Islamic finance market to locate their activities in Ireland. | |||||||||||||||||||||||||||||||||||||||||||
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