(Sept. 3, 2009) The French Ministry of the Economy recently clarified the tax treatment of two of the main Islamic finance instruments used in France: Murabaha and Sukuk. The term Islamic finance covers all financial transactions and financial products complying with Sharia principles that prohibit, among other activities, charging interest, trading in unethical goods and services (alcohol, tobacco, gambling), and allowing excessive uncertainty in contracts. (Ministère de l'Economie, Qu'est-ce que la finance islamique, Centre de Documentation Economie- Finances, updated July 28, 2009, available at http://www.minefe.gouv.fr/directions_services/cedef/qr/banque.htm.)
The tax regime of these two instruments is set forth in an instruction published in the Official Bulletin of Taxation (Instruction 4FE/09, Bulletin Officiel des Impôts, No. 22, Feb. 25, 2009, available at http://www11.minefi.gouv.fr/boi/boi2009/4fepub/textes/4fe09/4fe09.pdf.) The instruction provides the regime applicable to the various types of taxes due.
Murabaha is defined as a sales contract under which a seller sells goods to a financial institution that resells them to an end user at a deferred price that includes a profit margin. This arrangement allows the financial institution to avoid charging interest, which is prohibited under Sharia law.
Sukuk and other similar financial instruments are certificates that represent for the investor a proportionate ownership in an underlying asset or pool of assets. The investor is entitled to a share of the revenues and proceeds.
In a recent speech, the Ministry of Economy, Christine Lagarde, stated that she wishes France to pursue “its effort to develop Islamic finance.” She announced that her Ministry will shortly publish an additional tax instruction permitting development of two other financial products: Ijarah and Istinah. In the next few months, she will propose a legislative reform aimed at creating a new vehicle to facilitate the issues of Sukuk. (Discours de Christine Lagarde, Finance Islamique France, July 2, 2009, available at http://www.financeislamiquefrance.fr/useruploads/files/Discours_Europlac