Ireland Outlines Tax Laws for Shariah-Compliant Products

Ireland, like other European countries, is warming to Islamic finance and Dublin has emerged as an Islamic investment fund rival to the Channel Islands and Luxembourg.

Indeed several Shariah-compliant funds are registered there, including the Oasis Crescent Global Equity Fund which is based in Dublin and so is the planned CIMB Global Islamic Equity Fund which is due to be launched over the next month or so.

Last week the Irish Revenue Service, the tax authorities, outlined in detail the tax treatment of Shariah-compliant products and structures for the funds, leasing and Takaful (Islamic insurance) industries.

Part 27 of the Taxes Consolidation Act (TCA) 1997 governs the taxation of funds. Chapter 1A of that Part applies the gross-roll-up taxation regime to all funds set up after March 31, 2000. According to the Revenue Service, the regime does not impose an annual tax on the profits of the fund but requires the fund/fund manager to deduct and account for tax out of payments made to unit holders – except for certain classes of unit holder who can, by use of a declaration procedure, be paid gross.

Provided the fund is constituted in accordance with Chapter 1A, these arrangements apply irrespective of whether the fund is a Shariah-compliant fund or a conventional fund.

Any income received by a service provider, which is linked to the profits or performance of a fund should be treated as fee income where it relates to duties performed by the service provider. There is no specific VAT exemption for funds but would depend on the activities of the fund.

There is no stamp duty on the issuance or redemption of units/shares in a fund. In addition, the transfer of units/shares in a fund is not chargeable to stamp duty to the extent that the fund is an investment undertaking within the meaning of section 739B of the TCA 1997 or a common contractual fund within the meaning of section 739I of the TCA 1997.

As for Ijarah (leasing) transactions, the Irish Revenue Service says the provisions of the Taxes Consolidation Act 1997 will apply as if the Ijarah arrangement in relation to operating leases were a conventional operating lease arrangement, or if the Ijarah Muntahia Bittamleek in relation to finance leases were a conventional finance lease. Accordingly, a company that accounts for the transaction as a finance lease under generally accepted accounting practice may be taxed in accordance with the provisions of section 80A TCA 1997, in respect of relevant short term leases on making a claim and the Ijarah arrangement in relation to hire purchase, were a conventional hire purchase arrangement.

However, this confirmation is limited to Ijarah that refers to the leasing of plant and machinery and other chattels. It does not apply to the lease of immovable property.

Where the lease contract requires the lessee to make an additional payment toward a charitable cause in the event of a lease rental becoming overdue, the transaction will be treated as if the lessee had made the payment directly to the lessor and the lessor made the payment toward the charitable cause (which is in fact the normal sequence of payments). The lessee will be entitled to a deduction and the lessor will be treated as having received the income but will be entitled to a deduction under section 848A TCA 1997, subject to the provisions of that section.

There is no stamp duty for Ijarah (Leasing and Hire Purchase) arrangements where the asset involved does not comprise immovable property or an interest in immovable property. The VAT treatment of an Ijarah (Finance Lease and Hire Purchase) arrangement in relation to immovable property transactions will depend on the specifics of the agreements. Generally, such agreements are likely to be regarded as the supply of a freehold equivalent interest by the lessor to the lessee at the time the agreement is entered into. As regards arrangements which cover goods other than immovable property, the normal VAT rules concerning leasing (a supply of services), transfer of title (supply of goods) or hire purchase (a supply of goods), as appropriate, would apply.

Previous guidance given by the Revenue Service in relation to the taxation of conventional operating and finance leases and to hire purchase arrangements will, in substantially similar circumstances, also apply to the equivalent Ijarah transactions.

In relation to General Takaful and ReTakaful arrangements, contributions received by a Takaful provider from policyholders (Takaful members) and by a ReTakaful company from Takaful companies, as members of the ReTakaful arrangement, are to be treated as taxable income. Whether the income is on the trading account will depend on the facts and circumstances of the case.

The Revenue Service confirmed the deductibility of expenses incurred by a Takaful company or a ReTakaful company for management, marketing, and claims and commissions should be treated in the same way as such expenses were incurred by a conventional insurance or a reinsurance company with the same level of activity. Similarly, the deductibility of a contribution payment paid to a Takaful or a ReTakaful company is to be treated in the same way as an insurance or reinsurance premium for a conventional insurance policy or a reinsurance arrangement.

The provisions of sections 76 to 83 of the Taxes Consolidation Act 1997 apply in respect of the taxation of a Takaful or a ReTakaful arrangement as if such arrangements were conventional insurance or reinsurance arrangements respectively. In addition, the taxation of a Family (Life) Takaful company, which is an assurance company within the meaning of section 730A TCA 1997, and its members (policyholders) is to be determined under Chapters 4 and 5 of Part 26 of the Taxes Consolidation Act 1997. In this regard, an amount paid by an insured person is to be treated in the same way a payment under a conventional life assurance policy is. Similarly, a maturity or claim amount paid by a Family (Life) Takaful company is to be treated in the same way a claim or maturity payment under a conventional life assurance policy is.

As there are no existing Family (Life) Takaful arrangements in Ireland, the provisions relating to the taxation of old basis business should not apply to the Family (Life) Takaful arrangements.

Under the VAT Act 1972, Takaful (General and Family (Life)) and ReTakaful arrangements are exempt from VAT under paragraph (xi) of the First Schedule to the Act. But a liability to stamp duty under the Stamp Duties Consolidation Act (SDCA) 1999 will arise in relation to policies of insurance or policies of life insurance issued under Takaful (General and Family (Life)) and ReTakaful arrangements where the risk is located in Ireland.