Luxembourg’s traditional strengths and the financial centre’s growing expertise in Islamic finance make the country an ideal location for the domiciliation or the administration of Shariah-compliant investment vehicles.
Luxembourg has a long history in Islamic finance. It first appeared in the Grand-Duchy in 1978 with the arrival of the first Islamic finance institution to set up in a western country. Five years later, the first Shariah-compliant insurance company in Europe was established in Luxembourg and, in 2002, Luxembourg was the first European stock exchange to list a sukuk.
Islamic Finance has the full support of the Luxembourg authorities and financial establishment. In April 2008, the Minister of Finance set up a task force bringing together key parties in Islamic finance. Its mission: to look at how Islamic Finance can be further developed in Luxembourg. The Central Bank of Luxembourg became a member of the IFSB (Islamic Financial Services Board) in 2009. This makes the Central Bank of Luxembourg the first Central Bank of the European Union to become a member. Most leading financial institutions, law firms and audit companies have specialized teams in Islamic Finance. The IFBL offers a training program in Islamic Finance. In 2008, ALFI launched a working group focusing on the development of Luxembourg as a centre of excellence for Shariah compliant funds.
Luxembourg in the top 5 Islamic Funds domiciles worldwide
Luxembourg is rapidly becoming a hub for Shariah-compliant investment funds, with promoters keen to harness the country’s strengths and expertise in cross-border fund distribution. The figures speak for themselves: Ernst & Young’s Islamic Funds & Investments Report ranks Luxembourg fifth as a domicile for Shariah-compliant investment funds.
Well adapted fund structures
Luxembourg offers a variety of attractive fund structures for Shariah-compliant investment vehicles. The majority of funds domiciled in Luxembourg are UCITS funds. These funds are allowed to market their shares freely in all member states of the European Union and are increasingly accepted in many non-European countries. This is especially the case in Asia, Latin America and increasingly in the Middle East. For example, more than 600 Luxembourg funds are registered in Bahrain. This makes Luxembourg the ideal location for the domiciliation of Shariah-compliant funds intended for international distribution to retail or institutional investors.
In addition, more flexible structures such as the Specialised Investment Fund (SIF), which allows a wide variety of different investment strategies, can be used for Shariah-compliant private equity, property or other alternative investment schemes mainly aimed at institutional or high net worth investors. SIFs used either for Shariah compliant funds or for conventional funds, have proven to be highly successful with Middle Eastern investors.
The SICAR is a venture capital investment vehicle. The specificities of the SICAR makes it well suited for Islamic finance investments in and through Luxembourg.
Tax and regulatory framework
On 12 January 2010, the Luxembourg tax authorities issued a circular which describes both the major principles of Islamic finance and their tax treatment. In June 2010, a circular from the indirect tax authority clarified treatment of murabaha and ijara contracts.
A note published in May 2011 by the CSSF concluded that no specific legislation was required for Shariah-compliant investment funds, since Luxembourg’s current law contains no obstacles to it. The CSSF also noted that the role of the Shariah Board would have to be described in each fund’s prospectus.
ALFI collection of best practices
ALFI's collection of best practices published in December 2012, provides in-depth information and guidance on the legal framework, the fund set-up process, administration, custody and depository bank services for Islamic funds in Luxembourg. It also gives a high level indication of whether Islamic finance instruments are compatible with Luxembourg UCITS laws and should enable service providers who are already active in this field to align themselves with greater consistency and provide guidance to new entrants as to all the areas that need to be considered.