Taxation of Islamic finance
The differing approaches to Islamic finance around the world has resulted in a lack of consistency between countries in the tax treatment of Islamic products. On this page we provide a selection of articles, books and guides summarising the current position and highlight some of the contributions to the ongoing discussion.
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Taxation of Loan Relationships and Derivative Contracts
Brief chapter explaining Shari’a-compliant financing and the UK tax treatment of Islamic finance loan arrangements, including Murabaha, Musharaka, Modaraba, Wakala and Sukuk.
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Sharia-compliant investments and wealth management
Mastering Islamic Finance is a practical and accessible guide to Islamic finance that helps demystify the differences with conventional banking, enabling practitioners to develop Sharia compliant products for customers. Chapter 7, Sharia-compliant investments and wealth management, includes advice on islamic wills and tax-planning opportunities for Muslim clients in the UK (pages 141-145).
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The UK is one of a few jurisdictions to have accommodated Islamic finance transactions through legislation, with the Finance Acts in 2005 and 2007 introducing provisions for the tax treatment of products conforming to Sharia law. Below we highlight relevant items in the ICAEW Library print collection, followed by useful links to online articles, guides and other publications.
Articles and books
The ICAEW Library & Information Service holds a collection of articles and books that cover the taxation of Islamic finance in the UK – click on the links to see our catalogue record and holdings for each item. Please contact us if you would like to borrow a book or request a copy of an article.
Mosque or mammon?
T.Khalid, Taxation, 28 April 2016, pages 10-12
This article considers the legal and tax principles that are applicable to observant Muslims when passing their estates to the next generation. Shariah is important for Muslims who wish to adhere to Islamic principles, but the Shariah heirship principles are not efficient for inheritance tax purposes. The author covers options such as deeds of variation and giving bequests to a charity registered in the UK free of tax.
The Chancellor Guide to the Legal and Shari'a Aspects of Islamic Finance
H.Dar (Chancellor, 2009, 372 pages)
This title includes a chapter written by Mohammed Amin (former PwC Head of Islamic Finance in the UK) which covers the tax treatment of Islamic financial contracts, products and institutions. It includes a review of the UK tax legislation governing Islamic finance. An online edition of Chapter 5: Taxation of Islamic Financial Products is available from the author's website.
Taxation of loan relationships and derivative contracts
D.Southern (Bloomsbury Professional, 2017, 654 pages)
This book "offers comprehensive coverage of all aspects of the taxation of loan relationships and derivative contracts, with particular emphasis placed on providing worked examples and planning guidance." It includes a chapter on Islamic finance.
Tolley's Property taxation 2020-21
P.Beckett (LexisNexis, 2020, 1212 pages)
Chapter 20 on Islamic funding structures provides an overview of the UK tax law for Islamic finance. It includes information on basic methods of Islamic finance for real estate related transactions, the application of UK tax rules to Shariah-compliant real estate acquisition structures and AFIB rules for property-related sale and leaseback transactions.
Tolley's International taxation of corporate finance
J.Abrahamson (LexisNexis, 2014, 389 pages)
This book "introduces and discusses international tax issues relating to corporate finance, group treasury and banking operations." An excerpt from chapter 17 on Islamic banking is available on Tolley's website.
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Aligning the tax treatment of Islamic finance and conventional finance
A Chartered Institute of Taxation (CIOT) submission sent to HMRC in March 2018. It makes recommendations on how to amend UK tax legislation to achieve parity between the taxation of Islamic and conventional finance.
Islamic finance - why, how and the problems under UK tax law
Online presentation and accompanying notes on how the UK deals with the taxation of Islamic finance, delivered by Mohammed Amin for the Chartered Institute of Taxation (CIOT). Presented in May 2017.
Practice guide 69: Islamic financing
HM Land Registry government guidance on the registration requirements and stamp duty tax arrangements for certain types of Islamic financing arrangements used in the purchase of land. Updated March 2018.
Tax treatment of Shari'a finance
Article from international law firm Pinsent Masons on the tax treatment of Shari'a compliant finance in the UK. Published in May 2014.
UK taxation of Shariah compliant real estate refinancing
Mohammed Amin (formerly a Tax Partner at PwC) gives his viewpoint on the benefits of changing UK tax law to avoid penalising the Shariah compliant refinancing of appreciated real estate. Article published in May 2018.
Islamic Finance News: IFN Annual Guide 2021
This annual IFN journal guide looks at overall markets for Islamic finance, including individual market reports for several countries, some of which refer to tax incentives in operation.
The release of the Johnson Report in 2009 recommended that the impediments to Islamic finance transactions in Australia should be removed, asking the Board of Taxation to consider whether any legislation needed to be amended.
A summary of the Australian government's response to the Johnson report is available on the Board of Taxation website: Review of the Taxation Treatment of Islamic Finance Products. The Board initially released a discussion paper designed to facilitate stakeholder consultation - Review of the taxation treatment of Islamic finance in Australia (October 2010) - this reviewed the tax treatment of Islamic finance in Australia, with a look at the different approaches taken in the UK, Ireland, South Korea, France, Singapore, Malaysia and Indonesia.
Following consultation, a subsequent Review of the taxation treatment of Islamic finance: A report to the Assistant Treasurer was published by the Board in June 2011; this made recommendations designed to ensure that Australia's tax laws do not inhibit the development and provision of certain Islamic finance products.
In the 2016-17 Budget the government announced further changes to the tax laws to give asset-backed financing arrangements tax treatment consistent with conventional financing structures. These changes will apply from 1 July 2018. The changes pledged in the 2016-17 Budget are explained in Norton Rose Fulbright's 2016 article, Changes announced to support Islamic financing in Australia and in a December 2016 article for Islamic Finance News by Asad Anari, Australia awaits tax reforms for Islamic finance.
Toronto Financial Services Alliance (TFSA) and Thomson Reuters have published a Canada Islamic Finance Outlook 2016 report which looks at the potential for Islamic finance to develop in Canada. Taxation issues are discussed briefly in Chapter 3.
France has instituted a number of measures to attract Islamic funds in an effort to compete with the UK. These include rulings in February 2009 (Bulletin 7E/09) to clarify the tax regime for murabaha sales contracts and sukuk financial instruments.
Jean-Baptiste Santelli and Racha Wylde from law firm De Gaulle Fleurance & Associés cover the tax treatment of some Islamic finance transactions in France in an October 2020 article, Q&A: Islamic finance contracting concepts in France.
Republic of Ireland
The Specified Financial Transactions section of the Taxes Consolidation Act 1997 (as amended by subsequent Acts up to and including the Finance Act 2016) provides a regime to tax certain Islamic financial transactions in the same way as conventional financial transactions. The Part 8A: Specified financial transactions guidance notes provide additional guidance on interpreting the legislation.
The Irish tax Revenue has issued a Tax and Duty Manual on the tax treatment of Islamic financial transactions (reviewed October 2020). The guidelines in the manual do not introduce any new provisions for Islamic finance, but provide greater clarity on the tax treatment of Islamic finance transactions, including takaful, credit and deposit transactions and sukuk.
PWC's Tax Facts 2021 provides a quick overview (p.26) of how Irish tax law facilitates most Islamic finance transactions.
Turkey introduced tax concessions for all types of sukuk structures in August 2016 as part of its Law for Improvement of the Investment Environment (the 'Omnibus Bill'). White & Case LLP's 2016 article The sukuk experience in Turkey examines the regulatory reforms the Turkish government has made to encourage the Turkish sukuk market.
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