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Richard T de Belder Partner Denton Wilde Sapte LLP London

The conflict between the Shari’a and conventional business and finance laws – a practitioner’s perspective. Richard T de Belder Partner Denton Wilde Sapte LLP London. Agenda. Introduction Choice of law Riba Islamic finance calculation of returns Default rate interest Taxation issues

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Richard T de Belder Partner Denton Wilde Sapte LLP London

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  1. The conflict between the Shari’a and conventional business and finance laws – a practitioner’s perspective Richard T de Belder Partner Denton Wilde Sapte LLP London

  2. Agenda • Introduction • Choice of law • Riba • Islamic finance calculation of returns • Default rate interest • Taxation issues • Doing business issues • Regulatory issues with Sukuk • Registration requirements

  3. Choice of law • A conventional choice of law • Shari’a Supervisory Boards • Contractual variations: • This Agreement shall be governed by and construed in accordance with the laws of *, except where their laws conflict with the Shari’a, where the latter shall prevail. • Recent Variation • This Agreement shall be governed by the provisions of the laws of * to the extent their laws do not conflict with the Shari’a, where the Sharia shall apply. The interpretation of the Shari’a shall be conclusively decided by the Shari’a Supervisory Board of *.

  4. Choice of law C’td… • Problems with these clauses • Some English decisions – the Symphony Gems and Beximco judgments • An Abu Dhabi judgment

  5. Riba • Definition • References to interest in many Middle Eastern jurisdictions • Grounds used to justify • UAE Constitutional Bench decision

  6. Islamic Finance calculation of returns • How calculated – by reference to a conventional benchmark • No current Shari’a compliant alternative • Justifications used

  7. Default rate interest • Laws and practice only refer to conventional interest • Initial exclusions of such provisions in Islamic Finance transactions – the results • Current practice – compensation/late payment amounts; donated to charity.

  8. Taxation issues • Tax laws not enacted to take into account Islamic Finance structures which are dictated by the need to be Shari’a compliant • Relevant taxes: • Documentary taxes; • Taxation of returns and taxation of Sukuk; • Taxes on transfer of assets; • Value added taxes and sales taxes • Documentary taxes • Shari’a requirements regarding an asset transfer • Ijara and Murabaha structures – two transfers of title – impact of documentary taxes such as stamp duty land tax • UK changes

  9. Taxation issues C’td… • Taxation of returns and of Sukuk • Interest can be deducted in calculating taxable profits • Islamic Finance returns such as profit/variable returns not deductible • Effect – Islamic financial institutions could be taxable on entire profit/variable return • UK tax law changes to deal with murabaha, diminishing musharika and sukuk

  10. Taxation issues C’td… • Taxation of transfers of assets • Issues arise due to requirement for Islamic financers or investors to have an ownership interest – assets being transferred at beginning and end of a transaction • Issues also if the customer transfers an asset as its contribution to a Musharaka • Transfers can trigger capital gains tax • UK Government has amended legislation, although there are still issues.

  11. Taxation issues C’td… • VAT and sales taxes • Due to Shari’a requirement for ownership interests, transfers of assets can lead to a VAT charge • Conventional financial services are basically VAT exempt

  12. Regulatory issues with Sukuk • What is a Sukuk? • Treated as “collective investment schemes” • Adverse impact when compared with conventional bonds – i.e., requirements surrounding “establishing, operating and winding up” a collective investment scheme

  13. Registration requirements • Shari’a position on a sale/transfer of an asset • Statutory requirements to register • Impact on non-registration: • Third parties • Void • Bankruptcy issues

  14. Doing business issues • Nature of Islamic finance products leads to creation of particular entities • Do these entities need to be licences and comply with other “doing business” requirements? • Problem areas: • Nationality limits • Annual accounts and filings • Approval of Central Bank and other regulatory bodies • Need to have physical offices, employees etc…

  15. An example of conventional laws being used to accommodate Shari’a requirements • Differences relating to Sukuk compared with conventional bonds • Ownership issues • Current solution – common law trust; legal and beneficial ownership interests.

  16. Laws relating to financial institutions • Banking laws usually geared for conventional banks • Prohibited activities often those that an Islamic finance institution needs to engage in: • Partnerships • Joint ventures • Owning real estate not directly connected to its business • Trading activities • The UAE example

  17. The conflict between the Shari’a and conventional business and finance laws – a practitioner’s perspective Richard T de Belder Partner Denton Wilde Sapte LLP London 7994351

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