The Finance Bill 2010 contains provisions to facilitate finance transactions in Ireland that comply with the principles of Shari’a Law. This is a very welcome move to attract investment from the Islamic world and to increase the attractiveness Ireland’s financial services centre as a base for development of financial products for sale to Middle Eastern and other Islamic investors. This is an area which the Irish authorities have been seeking to encourage. Already the Financial Regulator has a special division authorising Islamic fund structures and the Irish Revenue Commissioners have been negotiating double taxation treaties with Saudi Arabia, Kuwait, UAE and Egypt. Treaties are already in place with Pakistan, Bahrain and Malaysia.

The term “Islamic finance” describes any transaction which complies with the principles of Shari’a law, which law specifically forbids the making or receiving of interest payments. The changes introduced in the Finance Bill extend the tax treatment applicable to conventional finance transactions to Shari’a finance transactions by treating a return (e.g. a profit or gain) on any product defined as a “specified finance transaction” as interest for the purposes of the Taxes Consolidation Act, 1997. The types of transactions covered by the Finance Bill include credit transactions, deposit transactions and investment transactions. For example, in relation to investment transactions, a Sukuk transaction can be entered into (which is broadly equivalent to a bond issuance), whereby the investors acquire a share in the underlying assets (unlike traditional finance transactions) and receive a return on the performance of those assets by way of a premium or profit share as opposed to an interest payment. This payment, under the new provisions as set out in the Finance Bill, can now be treated as “interest” for tax purposes, which enables it to be treated as deductible for tax purposes, and can avail of the relevant stamp duty and withholding tax exemptions.

As a consequence of the above amendments, Irish banks and other financial service promoters will be in a position to further develop their financial investment product base through the issuance of Shari’a compliant products.

For more information in relation to these new developments, please contact your usual contact in the Tax Department of ALG.