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 sharia-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 sharia-compliant insurance company in Europe was established in Luxembourg and, in 2002, Luxembourg was the first European stock exchange to list a sukuk.
Luxembourg offers a variety of attractive fund structures for sharia-compliant investment vehicles. The majority of funds domiciled in Luxembourg are UCITS funds, which are allowed to market their shares freely in all EU Member States and are accepted in many non-European countries. This is especially the case in Asia, Latin America and increasingly in the Middle East. This makes Luxembourg the ideal location for the domiciliation of sharia-compliant funds intended for international distribution to retail or institutional investors. In addition, more flexible structures such as the Specialised Investment Fund (SIF) or the Reserved Alternative Investment Fund (RAIF), which allow for a wide variety of different investment strategies, can be used for sharia-compliant private equity, property or other alternative investment schemes mainly aimed at institutional or high net worth investors. These structures, used either for sharia-compliant funds or for conventional funds, have proven highly successful with Middle Eastern investors. The specificities of the SICAR as venture capital investment vehicle makes it well suited for Islamic finance investments in and through Luxembourg.
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 CSSF note published in May 2011 concluded that no specific legislation was required for sharia-compliant investment funds, since Luxembourg’s current law contained no obstacles to it. The CSSF also noted that the role of a shariah board would have to be described in each relevant fund’s prospectus.