Recently France has been taking pro-active steps to promote Islamic finance. Changes and announcements relate to the listing of Sukuk in France, the tax treatment of Islamic finance transactions and, to a lesser extent, reforms regarding fiducie.

For over 30 years Norton Rose Group has been involved in documenting and advising on a wide variety of financings arranged for the benefit of Islamic investors. We work as global practice group with teams dedicated to Islamic finance in most of our offices, especially in Bahrain, Dubai, London, Singapore and Paris.


France has proven it is keen to encourage, in a real and tangible way, the development of Islamic finance. Unsurprisingly, the key motivation is that the English Government has been working hard to encourage the successful development of an Islamic finance sector in the UK.

Strong signals were given to the market by the French Government and the Senate with, in particular, the organisation of a round table of various market players on 14 May 2008. Recent months have also seen enormous work by practitioners to identify hurdles to the development of lslamic finance products in France, in particular within the Europlace think tank.

As a result of these efforts, both the French Ministry of Economy, Industry and Employment and the Autorité des marchés financiers (AMF), the French financial markets regulatory authority, announced on 2 July 2008 significant tax and regulatory changes aimed at boosting Islamic finance in France.

These changes relate to the listing of Sukuk in France, the tax treatment of Islamic finance transactions and, to a lesser extent, reforms regarding fiducie (French trust).

Clarifications as to the legal and transparency requirements for the listing of Sukuk in France

On 2 July 2008, the AMF published a statement regarding the listing of Sukuk on a French regulated market. Symbolically, it was published simultaneously in French, English and Arabic. With this statement, the AMF acknowledges that Sukuk issues may be structured either as asset-based (where the credit risk of the bond is linked to one or several entities) or asset-backed (when the bonds are linked to the performance of the underlying assets) and sets out for each type of Sukuk the level of disclosure required in the prospectus.

The AMF’s objective is to ensure that prospectuses are prepared in accordance with European laws and regulations, in particular with the Commission Regulation (EU) no. 809/2004 of 29 April 2004 implementing Directive 2003/71/EC (the Prospectus Regulation). Issuers are required to inform the AMF when filing a draft prospectus of the type of Sukuk being listed and the relevant annexes of the Prospectus Regulation with which they are complying.

The AMF emphasises that compliance of a bond issue with Shari’ah rules does not fall within its ambit and that it is for issuers to document in their prospectus the information which is relevant for their targeted investors, including appropriate details of the Shari’ah board involved in the transaction.

Clarifications as to the tax treatment of Islamic finance transactions in France

Currently, Shari’ah compliant transactions that take place in France are mainly based on Murabaha transactions in the context of property acquisitions. To avoid registration duty being paid twice (on acquisition and then on resale), most, if not all, transactions rely on the application of the merchant dealer regime, which is a professional statute according to which a company may buy properties or shares in real estate companies in order to resell them, the acquisition being exempt from registration duties. However, the use of this regime does not provide all the security that it should, since merchant dealers are required to perform at least two operations of purchase and sale with a speculative intention which is difficult to accommodate in Islamic finance. A softening of the regime would therefore be very useful.

Although several Murabaha transactions have already been implemented in France, their wider development would also be encouraged by a clarification of their tax treatment as far as direct taxes are concerned: the merchant dealer receives a margin that is similar to interest in nature and the purchaser pays a margin that is similar to interest, but confirmation of such treatment by the French tax authorities would be welcome by practitioners.

Similarly, a clarification of the tax treatment of the profit generated by the Sukuk at the level of the issuer and the subscriber would be welcome.

To address these issues, the French Ministry of Economy, Industry and Employment announced, as a follow up to the works carried out by Europlace, that the French tax administration was ready to confirm the “interest” nature of the profit margin for Sukuk and the softening of the merchant dealer regime allowing and securing Murabaha transactions for real estate, through rulings that would be granted on a first come first served basis, it being provided that those of the rulings obtained which are made publicly available by the tax administration are then enforceable against said administration by every taxpayer in the same position.

Trends of reforms regarding fiducie (French trust)

In February 2007, the law1 creating fiducie was enacted and was intended to bridge the gap in French law created by the absence of the Anglo-American concept of trust. This law, which was expected to provide an adequate tool for banking transactions in general and Islamic finance in particular, contained significant restrictions on the manner in which a fiducie can be created and the identity of both the constituent and the fiduciary. In August 2008, a law which renders the framework more flexible was enacted (loi de modernisation de l’économie2). Subject to forthcoming implementing regulations, both natural persons and legal entities, irrespective of their submission to corporate income tax, will be allowed to constitute a fiducie. With this new law, lawyers will be allowed to act as fiduciaries. The reform also grants to parties to a fiducie greater rights to organise contractually the replacement of the fiduciary and the end of the fiducie. In addition, some clarifications have been brought to the conditions for the transfer of commercial real estate and receivables to a fiduciary. Further amendments are expected in this area.