The conflict between the
Shari’a and conventional
business and finance laws – a
practitioner’s perspective
Richard T de Belder
Partner
Denton Wilde Sapte LLP
London
1
Agenda
1.
2.
3.
4.
5.
6.
7.
8.
9.
Introduction
Choice of law
Riba
Islamic finance calculation of returns
Default rate interest
Taxation issues
Doing business issues
Regulatory issues with Sukuk
Registration requirements
2
2
Choice of law
• A conventional choice of law
• Shari’a Supervisory Boards
• Contractual variations:
• This Agreement shall be governed by and construed in
accordance with the laws of *, except where their laws conflict
with the Shari’a, where the latter shall prevail.
• Recent Variation
• This Agreement shall be governed by the provisions of the
laws of * to the extent their laws do not conflict with the
Shari’a, where the Sharia shall apply. The interpretation of
the Shari’a shall be conclusively decided by the Shari’a
Supervisory Board of *.
3
3
Choice of law C’td…
• Problems with these clauses
• Some English decisions – the Symphony
Gems and Beximco judgments
• An Abu Dhabi judgment
4
4
Riba
• Definition
• References to interest in many Middle Eastern
jurisdictions
• Grounds used to justify
• UAE Constitutional Bench decision
5
5
Islamic Finance calculation of returns
• How calculated – by reference to a
conventional benchmark
• No current Shari’a compliant alternative
• Justifications used
6
6
Default rate interest
• Laws and practice only refer to conventional
interest
• Initial exclusions of such provisions in Islamic
Finance transactions – the results
• Current practice – compensation/late payment
amounts; donated to charity.
7
7
Taxation issues
• Tax laws not enacted to take into account Islamic
Finance structures which are dictated by the need to
be Shari’a compliant
• Relevant taxes:
•
•
•
•
Documentary taxes;
Taxation of returns and taxation of Sukuk;
Taxes on transfer of assets;
Value added taxes and sales taxes
• Documentary taxes
• Shari’a requirements regarding an asset transfer
• Ijara and Murabaha structures – two transfers of title – impact
of documentary taxes such as stamp duty land tax
• UK changes
8
8
Taxation issues C’td…
• Taxation of returns and of Sukuk
• Interest can be deducted in calculating taxable
profits
• Islamic Finance returns such as profit/variable
returns not deductible
• Effect – Islamic financial institutions could be
taxable on entire profit/variable return
• UK tax law changes to deal with murabaha,
diminishing musharika and sukuk
9
9
Taxation issues C’td…
• Taxation of transfers of assets
• Issues arise due to requirement for Islamic
financers or investors to have an ownership interest
– assets being transferred at beginning and end of
a transaction
• Issues also if the customer transfers an asset as its
contribution to a Musharaka
• Transfers can trigger capital gains tax
• UK Government has amended legislation, although
there are still issues.
10 10
Taxation issues C’td…
• VAT and sales taxes
• Due to Shari’a requirement for ownership interests,
transfers of assets can lead to a VAT charge
• Conventional financial services are basically VAT
exempt
11 11
Regulatory issues with Sukuk
• What is a Sukuk?
• Treated as “collective investment schemes”
• Adverse impact when compared with
conventional bonds – i.e., requirements
surrounding “establishing, operating and
winding up” a collective investment scheme
12 12
Registration requirements
• Shari’a position on a sale/transfer of an asset
• Statutory requirements to register
• Impact on non-registration:
• Third parties
• Void
• Bankruptcy issues
13 13
Doing business issues
• Nature of Islamic finance products leads to creation of
particular entities
• Do these entities need to be licences and comply with
other “doing business” requirements?
• Problem areas:
• Nationality limits
• Annual accounts and filings
• Approval of Central Bank and other regulatory bodies
• Need to have physical offices, employees etc…
14 14
An example of conventional laws being
used to accommodate Shari’a requirements
• Differences relating to Sukuk compared with
conventional bonds
• Ownership issues
• Current solution – common law trust; legal and
beneficial ownership interests.
15 15
Laws relating to financial institutions
• Banking laws usually geared for conventional banks
• Prohibited activities often those that an Islamic finance
institution needs to engage in:
• Partnerships
• Joint ventures
• Owning real estate not directly connected to its business
• Trading activities
• The UAE example
16 16
The conflict between the
Shari’a and conventional
business and finance laws – a
practitioner’s perspective
Richard T de Belder
Partner
Denton Wilde Sapte LLP
London
7994351
17