By Cecilia Valente (Available at: http://uk.reuters.com/article/businessNews/idUKTRE53L41A20090422?sp=true)
LONDON (Reuters) – The government will change its current tax regime to facilitate Islamic-debt issuance and encourage the growth of London as an Islamic finance hub, the government said on Wednesday. The budget 2009 report envisaged changes to the stamp duty land tax, provision of relief from tax on capital gains and capital allowance rules to remove fiscal penalties to UK companies willing to issue sukuks, or Islamic bonds.
The treasury said in the budget report that the three measures were part of the “ongoing drive to promote the UK as a centre for Islamic finance.” The changes will come into effect by the end of the third quarter and end a regime which would have double-taxed the transactions needed to set up a sukuk. A sukuk, unlike a mainstream bond, is not based on interest payments. Investors instead receive returns achieved on the underlying asset made available by the debt issuer. The global sukuk market thrived in 2007 but has since stalled. It is expected to recover partially this year. The UK has already made the most significant changes to accommodate Islamic finance in Europe and hosts five Islamic banks and one insurer. France is mounting a challenge though and plans to launch the continent’s first corporate sukuk this year.
The UK hosts sukuk listings but is yet to issue them, mainly because of the tax hurdles, said Norton Rose lawyers Davide Barzilai and Angela Savin. They said the changes are expected to encourage UK corporates to use sukuk to tap new investors. “We have been waiting and lobbying for these (changes). Now it is down to commercial forces, hopefully the economy is in a sufficient state to attract this sort of product,” Barzilai said. “It is an excellent move by the government. The relief they are introducing should mean that from a tax perspective issuing sukuk based on real estate is completely viable,” Savin said. Savin and Barzilai said a sukuk issuance could follow this year as a consequence of the new development.
The most likely sukuk form would be one based on a buy and lease-back structure that allows an issuer to sell an asset, such as a building, to a special purpose vehicle (SPV), leasing the property for the maturity of the bond and buying it back. Because under this structure a property changes hands, the company issuing sukuks has been liable to tax when it sells the property and when it buys it back. “It is a taxable sale and if you have made a gain, that is a also a taxable gain,” said Mohammed Amin, partner and Islamic finance head at PricewaterhouseCoopers. “These (tax changes) are very important because it has not been practical for a UK company to issue sukuk and it will be made possible,” he said.
Burj Arab, Dubai, UAE