In a welcome development, the Irish tax authorities recently published guidance in its October 2009 Tax Briefing (the “Briefing”) on the Irish tax treatment of certain Islamic financial transactions. The Briefing clarifies that certain Islamic financial products will be taxed in Ireland in a similar manner to traditional financial products.

The Briefing states that Shari’a-compliant investment funds will be taxed in Ireland in the same manner as conventional investment funds. In this regard, the Briefing merely confirms what has already been acknowledged in the domestic funds market, as many Shari’a-compliant investment funds have already been established in Ireland and benefit from Ireland’s favourable tax regime. Under this regime, funds operate in a tax neutral environment and international investors can earn their return on a gross roll-up basis without deduction of Irish tax. Ireland is a centre of excellence for international investment funds and has already become the jurisdiction of choice for many investment funds marketed to Islamic investors.

The Briefing also confirms that Ijarah transactions (which are similar to leasing and hire purchase arrangements) will be taxed in Ireland in the same manner as conventional leasing transactions. As a result, Ijarah contracts which are similar to operating leases (where the owner retains the burden of wear and tear) will be taxed in the same way as conventional operating leases under which the owner is generally taxed on its gross rentals (in line with accounting treatment) and will usually be entitled to a tax depreciation charge. Ijarah contracts which are similar to finance leases (eg an Ijarah Muntahia Bittamleek) will be taxed as finance leases so that the element of the rental receipts which represents income is taxable when received by the lessor (in line with accounting treatment). Ijarah contracts can typically provide that the lessee must make charitable payments (as opposed to paying interest) where rental receipts become overdue and the Briefing confirms that such payments will generally be deductible. Ireland is a leading jurisdiction for cross border leasing transactions and particularly aircraft leasing. This pre-eminence is due, in part, to Ireland’s wide network of double tax treaties, its low corporate tax rate and its straightforward leasing rules. The clarification of the Irish tax treatment of Ijarah contracts is a helpful development for Ireland’s leasing industry.

Finally, the Briefing confirms that Takaful and ReTakaful arrangements will be taxed in Ireland in the same way as conventional insurance and reinsurance activities.

In a parallel step, aimed at developing Ireland’s position as a centre for Islamic finance, Ireland is currently negotiating double tax treaties with a number of Middle Eastern countries. Ireland has recently completed negotiations for new double tax treaties with Kuwait, Saudi Arabia and the United Arab Emirates and these treaties are expected to be signed shortly. A new double tax treaty was agreed with Bahrain on 29 October 2009. These treaties will further enhance Ireland’s position in targeting Middle Eastern and Islamic investors.