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Legislation will be introduced to establish the UK tax treatment of
alternative finance investment bonds. The main target is listed “sukuk”
arrangements. These are economically similar to debt securities, but do not
carry any right to interest. Accordingly, they satisfy the Shari’a law
prohibition on paying or receiving interest. Sukuk arrangements allow assets
to be held for the benefit of investors in certificates issued by a company.
They are somewhat similar to collective investment schemes and, to put the
tax treatment beyond doubt, the tax rules relating to collective investment
schemes are specifically dis-applied where sukuk fall within the scope of
the rules for alternative finance investment bonds.
The rules provide that amounts paid by the issuer in respect of alternative
finance investment bonds are deductible for corporation tax purposes under
the loan relationships rules. They are taxable as interest, where the holder
is subject to income tax; and as a profit under the loan relationships
rules, where the holder is subject to corporation tax. Where part of the
return is in the nature of discount, it will be taxed as discount for income
tax purposes. Where the holder is not a company, gains arising on a disposal
of the bonds will be chargeable to capital gains tax, except where they are
treated by the rules as QCBs. Where the holder is a company, such gains will
be taxed under the loan relationships rules. Convertible and exchangeable
alternative investment bonds will be taxed in the same way as conventional
convertible and exchangeable securities.
The measures take effect for corporation tax purposes from 1 April 2007; and
will apply to profits or losses arising on or after that date for existing
arrangements. For income tax purposes, the measures take effect from 6 April
2007; and will apply to amounts received or paid on or after that date in
relation to arrangements entered into before that date.
This initiative builds upon the measures introduced in 2005 and 2006, and
extends the range of Islamic financial products where specific tax rules
have been defined to clarify the UK tax treatment. The legislation also
makes a small amendment to FA2005, s.49A (alternative finance arrangements
involving a profit share agency) to remedy a technical defect.
Our view
The legislation
addressing sukuk is the latest addition to the suite of rules that give
certainty to the taxation of Islamic financial products. These reforms
are to be applauded. They are intended to meet the financial needs of
the Muslim community as well as, increasingly, non-Muslim
investors. From a capital markets perspective, they enhance the
international competitiveness of the City in the Islamic finance
market. Before the reform, there was uncertainty regarding the capital
gains, income tax and capital allowances treatment of alternative
finance investment bonds. The treatment is now clarified and potential
tax disadvantages eliminated. |
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