Luxembourg tax authorities issues guidelines on Islamic finance

On 12 January 2010, the Luxembourg tax authorities issued a circular laying down guidelines for the tax treatment of several Islamic financial instruments. The circular focuses mainly on the tax treatment of murabaha and sukuk but also discusses a number of other Shariah-compliant instruments, such as musharaka, mudaraba, ijara, ijara-wa-Iqtina and istisna.

With 16 sukuk listed on the Luxembourg stock exchange and more than 40 Shariah-compliant investment funds and subfunds, Luxembourg has become an important centre for Islamic finance.
The issuance of the circular confirms the importance Luxembourg attaches to this position.


Murabaha is a transaction in which an intermediary (the finance provider, often a financial institution) buys an asset and then resells it to its client at a predetermined price which includes a mark-up. Payment can be made in installments over a certain period of time. From a Luxembourg tax perspective, the finance provider's gain on the transaction is deemed realized as soon as the sales agreement with the client is signed and should, in principle, be subject to tax immediately and in its entirety. The circular specifies however that, to the extent a certain portion of the finance provider's gain can economically be treated as remuneration for the deferral of payment (comparable to interest on a conventional financial instrument), the taxation of that portion of the gain can be spread over the payment term.
To benefit from this treatment, the transaction must satisfy the following conditions:
The agreement must clearly state that the finance provider acquires the asset with a view to reselling it to its client (immediately or within a maximum period of six months following the acquisition);

-The agreement must distinguish: (i) the finance provider's remuneration for the deferral of payment, (ii) the finance provider's commission in return for its intermediation, and (iii) the acquisition price of the asset for both the client and the finance provider;
- The finance provider's remuneration must be clearly specified, known and accepted by both parties;
- The agreement must provide that the finance provider's remuneration is consideration for enabling the client to buy the asset at deferred payment terms;
- For accounting and tax purposes, the remuneration must be spread over the deferred payment term in the finance provider's books, regardless of when repayments are actually made.


According to the circular, sukuk are certificates that represent a receivable or a participation right for their holders. The yield on sukuk is variable and is linked to the performance of one or more tangible assets held by the sukuk issuer. However, in practice, the yield is often capped at a market rate (e.g. Euribor or Libor plus a margin).
The circular indicates that the tax treatment of sukuk is identical to that of conventional bonds and therefore the yield payments on sukuk are treated the same way as interest payments by an issuer of conventional debt instruments. The yield payments on sukuk are tax deductible for the issuer.
Furthermore, the circular also clarifies that sukuk do not qualify as participating bonds, meaning that in practice sukuk are not subject to withholding tax.

The circular confirms Luxembourg's ability and willingness to adapt to changing market needs and to serve as a business-friendly destination for professional services. In addition, by ensuring greater certainty and security as to the tax treatment of sukuk and murabaha, the circular will increase Luxembourg's attractiveness as an Islamic finance hub.