New Irish finance bill to facilitate sukuk transactions

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Ireland, like other EU countries, is warming to Islamic finance and Dublin has emerged as an Islamic investment fund domicile rival to the Channel Islands and Luxembourg. Indeed several Shariah-compliant funds are registered there including the Oasis Crescent Global Equity Fund and the recently-launched CIMB Global Islamic Equity Fund. The Irish government is also keen to promote the island as a more attractive location for international fund raising operations in addition to providing Irish companies with an alternative source of funding.

International market players in the Islamic finance space such as global auditing and advisory firm PriceWaterhouseCoopers (PWC) have welcomed the Irish legal initiative, stressing that the Finance Bill 2010 proposes new legislation that will facilitate sukuk transactions by extending to this form of financing the relieving (tax neutrality) provisions which currently apply to equivalent conventional financing.

The legislation clarifies that the sukuk certificate should be considered a security and confirms that the investment return on that certificate should be treated as interest on a security for the purposes of the Taxes Act (subject to restrictions). In addition, it confirms that the sukuk issuer will be entitled to a deduction in respect of the coupon paid as though it was a conventional interest payment. The bill also introduces amendments to the stamp acts to ensure that no stamp duty will arise on the issue, transfer or redemption of a sukuk certificate. Amendments have also been proposed to the VAT Act to exempt from VAT specified financial transactions i.e. Islamic finance transactions where those transactions correspond to financial services transactions as listed in the VAT Act.

The taxation of funds is governed by part 27 of the Taxes Consolidation Act (TCA) 1997. Chapter 1A of that Part applies the gross-roll-up taxation regime to all funds set up after March 31, 2000. According to the Revenue Service, the regime does not impose an annual tax on the profits of the fund but requires the fund/fund manager to deduct and account for tax out of payments made to unit holders - except for certain classes of unit holder who can, by use of a declaration procedure, be paid gross. Provided the fund is constituted in accordance with Chapter 1A, these arrangements apply irrespective of whether the fund is a Shariah-compliant fund or a conventional fund.

There is no stamp duty on the issuance or redemption of units/shares in a fund. In addition, the transfer of units/shares in a fund is not chargeable to stamp duty to the extent that the fund is an investment undertaking within the meaning of section 739B of the TCA 1997 or a common contractual fund within the meaning of section 739I of the TCA 1997.

The Finance Bill 2010 also deals with UCITS management companies and introduced changes that are aimed at enhancing Ireland as a leading location both for UCITS (III and IV) and non-UCITS funds and which also came into effect in January 2010. UCITs are undertakings for collective investment in transferable securities - a popular vehicle or structure used to launch funds and investment products.

According to PWC, an important reform introduced in the bill allows UCITS management companies located in one EU jurisdiction to manage UCITS domiciled in another EU jurisdiction. One of the areas of concern was whether the activities of the management company could bring a foreign UCITS within the charge to tax in the management company's home jurisdiction, e.g. by creating a branch or agency or causing the fund to be regarded as tax resident there.

The finance bill also extends Irish stamp duty provisions to provide for relief from stamp duty arising on the transfer of fund assets under fund mergers and reorganizations. Specifically, it allows for the effective reorganization of funds into a master/feeder structure, (which is also now permitted under UCITS IV). The bill similarly removes the technical charge to Irish stamp duty arising from the transfer of assets from one sub-fund to another within the same unit trust scheme.

Islamic finance market players stress that the above changes will increase Irelands' competitiveness and attractiveness as a domicile for sukuk issuance and the launch of Islamic equity and other such products.

By Mushtak Parker

© Arab News 2010