LUXEMBOURG - Sukuk assets qualified as guaranteed debt securities

The Grand-Duchy Grand-Duchy of Luxembourg is historically one of the first European actors in Islamic finance sector since the 1970s. Luxembourg was the first European Stock exchange to list a Sukuk in 2002 and currently hosts more than 40 regulated Sharia’a-compliant investment funds and sub funds. (source)

The Luxembourg direct and indirect tax authorities have already issued two circulars [i] strengthening the substance over form approach in order to ensure an equal treatment of Islamic finance products compared to conventional products. The Luxembourg direct tax authorities have notably recognized that Sukuk have to be considered as debt instruments from a tax perspective. Consequently, the tax treatment applicable to yield on Sukuk will be the same than for conventional Interest on bonds.

Going forward, the Luxembourg Regulatory Authority (CSSF) clarified on 26 January the rules applicable to Sukuk issuance as to the prospectus. Sukuk may be treated as asset backed securities or as guaranteed debt securities. In this last case, the CSSF considers that the description of the underlying entities may be made as per the Annex VI of the Prospectus Regulation [ii].

The minimum information disclosure required for guaranteed securities concerns:

    * Nature of the Guarantee. It includes a description of any arrangements including [iii] commitments to ensure obligations to repay debt securities and/or the payment of the yield. Such description shall set out how the arrangement is intended to ensure that the guaranteed payments will be duly serviced.
    * Terms and conditions of the Guarantee. It must also include all details about conditionality on the application of the guarantee, guarantor’s power of veto to changes Security holder’s rights.
    * Information to be disclosed about the Guarantor. It must disclose information about itself as if it were the issuer of that same type of Security that is the subject of the guarantee.
    * Indication of the places where the public may have access to the material contracts and other documents relating to the insurance has also to be included.

Conclusion

In continuity of the development of this market and in order to offer, apart from the secured tax treatment, a secured regulatory environment to Sukuk (and other Islamic finance products), the Luxembourg tax authorities and the regulator are continuously developing regulations for providing a secure and stable environment, with an aim to further facilitate issuance of such products in Luxembourg.

Deloitte Luxembourg developed an extensive knowledge in the area of Islamic finance. We would accordingly be very pleased to assist you in relation to any other queries you may have in this respect. Please also refer to our dedicated brochure and to Deloitte’s Islamic finance Portal for further information.

1-  Direct Tax Circular L.G.-A n° 55 of 12 January 2010 on Islamic finance; Indirect Tax Circular n° 749 of 17 June 2010 on Islamic finance on Murabaha and Ijarah agreements.
2-  Commission regulation 809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council as regards information contained in prospectuses as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements.
3-  i.e. in the form of guarantee, surety, Keep well Agreement, Mono-line Insurance policy or other equivalent commitment.

(Source: Deloitte)
Source : http://www.abbl.lu/news-publications/news-archive/member-news/sukuk-assets-qualified-guaranteed-debt-securities%E2%80%A8?goback=.gde_1091527_member_42329882 - Feb 02, 2011