On 19 November 2018, the Irish tax authority (the Revenue Commissioners or Revenue) issued a guidance note on the tax treatment of Islamic finance transactions (the Guidelines). While it should be noted that the Guidelines do not introduce any new provisions to the existing legal framework in Ireland, the Guidelines consolidate and provide greater clarity on the tax treatment for Islamic finance transactions, and will enhance investor and issuer confidence in Ireland as a key jurisdiction for Sukuk issuances and Shariah-compliant transactions generally. This note covers some of the issues outlined in the Guidelines at a high level.
The Guidelines cover a number of key common concepts and structures utilised in Shariah-compliant transactions, and include guidance on the tax treatment of:
- Islamic investment funds
- Takaful and Re-Takaful (insurance and re-insurance) transactions
- credit transactions (Murabaha and Diminishing Musharaka)
- leasing and hire purchase (Ijara) arrangements, and
- deposits (Mudaraba and Wakala) transactions.
Specified Financial Transactions
Part 8A of the Irish Taxes Consolidation Act 1997 (the TCA) sets out the tax treatment which applies to “specified financial transactions”. Specified financial transactions comprise credit transactions which are equivalent to credit sales and loans, deposit transactions and investment transactions, each defined in line with its Shariah-compliant equivalent (since Islamic Finance is not itself defined in Irish tax law). The benefit of qualifying as a specified financial transaction is that the return or profit on a qualifying product will be treated as interest for the purposes of the various Taxes Acts.
Part 8A of the TCA sets out the detailed requirements that a transaction needs to meet in order to be considered a “specified financial transaction”, depending on the structure concerned.
The Guidelines describe a Sukuk as an “investment transaction”, whereby a person acquires an “investment certificate” and receives an “investment return”. In particular, the Guidelines state that the investment certificate must:
- evidence the investor’s right to a share in the ownership of the underlying assets
- entitle the owner to a pro rata amount which is equivalent to a share in the profits or losses derived from the underlying assets
- not be issued to “specified persons”. A “specified person” in this context has the same meaning as in the Irish securitisation legislation and means a person who controls or is controlled by the issuing company and certain other connected persons, and
- be treated under Generally Accepted Accounting Principles (GAAP) as a financial liability of the issuing company in its accounts.
The Guidelines specifically state that Sukuk which do not grant an ownership interest in an underlying asset of the “qualifying company” (ie the issuer, which is required under section 267N of the TCA to be, amongst other things, resident/domiciled in Ireland) but rather in an underlying asset which is a financial liability of the counterparty that ultimately underpins the Sukuk arrangement and its related cash flows (ie the ultimate obligor), may be considered to relate to underlying assets that the issuer manages on behalf of the holders of the investment certificates. This ensures that various forms of Sukuk structures that are commonly used in the market are not precluded from qualifying as specified financial transactions
Furthermore, with regards to Sukuk, the Guidelines outline that:
- the definition of “investment return” equates to the amount equivalent to interest on a conventional bond and includes any premium payable on redemption
- Section 85A of the Irish Stamp Duty Consolidation Act provides for an exemption from stamp duty on the issue, transfer or redemption of qualifying investment certificates
- the certificate owner (ie the Sukukholder) is not regarded as having a legal or beneficial interest in the assets held by the “qualifying company” (ie the issuer) for purposes of capital allowances and taxable incomes and gains from the underlying assets
- income, profits, gains or losses arising from or attributable to the assets held by the certificate issuing company (including any increase or decrease in the value of the asset) shall be income, profits, gains or losses, as the case may be, of that company and that company shall be chargeable to corporation tax accordingly, and
- the issuing company may also treat investment returns payable in respect of investment certificates it has issued as expenses and such investment returns shall be deductible in computing its profits for tax purposes to the same extent as they would be deductible if they were interest payable by that company.
The Guidelines can be accessed here.
Developments in Ireland over the years are similar to those that have taken place in the United Kingdom, following the introduction of specific rules for the Stamp Duty Land Tax treatment of certain Shariah-compliant transactions in 2003, and direct tax provisions that were introduced in the then UK Finance Act 2005. Subsequent UK Finance Acts have supplemented and extended the range of transactions to which these rules apply and the treatment afforded to them.
Simmons & Simmons
In May 2018, Simmons & Simmons opened its Dublin office to reinforce its position as a leading advisor in the financial institutions and asset management & investment funds sectors. Together with our dedicated Middle East Capital Markets Practice and Islamic Finance offering, we are able to provide a dynamic offering in terms of expertise for those considered Ireland as a jurisdiction for Sukuk origination.
Should you have any questions or concerns as to the Guidelines, or generally as to Islamic finance transactions including Sukuk issuances, please feel free to contact us.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.