Structuring Islamic real estate investments
Transcription
Structuring Islamic real estate investments
Décembre 2011 22 AGEFI Luxembourg Fonds/Bourse Structuring Islamic real estate investments through Luxembourg By Oliver R. HOOR (picture) and Pierre KREEMER, KPMG Luxembourg * R eal estate is the preferred asset class of many Islamic investors, and European located properties seem to be more and more in their focus. For tax efficiency purposes, these investments are commonly structured through real estate investment vehicles established in a tax efficient jurisdiction such as Luxembourg. The present article provides an overview of real estate in Islamic asset management and the Luxembourg vehicles that may be used for such investments. 1. Introduction With assets recently exceeding the USD 1 trillion threshold and an impressive annual growth rate of approximately 15%, Islamic finance continues to grow from a niche to a main-stream mode of finance. Given Luxembourg’s position as one of the leading international financial centres, it is not surprising that part of this growth has taken place in Luxembourg which is now seen as an emerging global hub for Islamic finance. The growth of Islamic finance in Luxembourg is to a large extent driven by investments of Middle East investors(1) into European real estate. Islamic investors appear to focus on the same locations as conventional investors. Within Europe investments are predominantly made in the UK, France and Germany; Eastern European locations including Russia, however, increasingly attract the investors‘ attention. The structuring of Sharia-compliant real estate investments is challenging since all transactions must adhere to the principles set out under Islamic law. Accordingly, great care must be taken in structuring the investment vehicles and financial transactions to ensure they operate in compliance with Sharia precepts. Although the selection of the optimal investment structure depends on several factors, maximum tax efficiency is usually a key consideration. As one of the leading European domicile for vehicles investing in international real estate, Luxembourg is perfectly equipped to address the dynamic needs of Islamic finance investments in and through Europe. Also the Luxembourg Government is confident that many interesting opportunities are made available by Islamic finance and particularly keen to place Luxembourg as a partner of choice for Islamic finance transactions in Europe. This article is based on a comprehensive article entitled “Luxembourg: Une localization de choix pour structure des investissements immobiliers conformes à la Sharia” that has been released by Legitech in October 2011.(2) 2. Real Estate in Islamic Asset Management The pervasive presence of real estate investment throughout the Islamic finance spectrum is in particular linked to the strong preference of investing in productive tangible assets and the fact that, cycles aside, property prices always go up eventually. The objectives sought by conventional and Islamic investors have much common ground: capital preservation, yield maximisation, a balance between liquidity and profitability, and so on. However, in contrast to conventional investments, a key characteristic of Islamic real estate investments is that they must be structured, quite naturally, in a Sharia-compliant manner. In light of the above, the structuring of each Islamic real estate investment (and especially the financing instruments used) must be tailored to each individual case having regard to, inter alia, the location of the real estate assets, the tax profile of the investor and any specific requirements from a Sharia perspective that are analysed in the following sections. Real estate covers a wide range of assets including, inter alia, residential properties, office buildings, warehouses, shopping centres, hospitals and various types of infrastructure projects(3). The challenges faced when selecting real estate assets for investments should in principle be no different from those faced in conventional finance; i.e. maximizing the return and reducing the portfolio risk through a diversification strategy (for example, through investing into different real estate sectors and geographical areas). However, in addition to the concerns involved in the asset selection of conventional investors, Islamic investors must screen the use of the properties by their tenants beforehand in order to ensure compliance with Sharia principles. Notably, as long as the property itself is used for halal (permissible) business activity, it has the potential to form part of a Shariacompliant structure.(4) 3. Structuring real estate investments through Luxembourg The possibilities to structure real estate investments through Luxembourg, be it in the form of a real estate fund or on a stand-alone basis, are manifold. The choice of a real estate vehicle will generally depend on the type of funding that needs to be raised(5), the proposed investor base, the type of investments to be made and any specific tax consideration. While Islamic finance structuring in non-Islamic jurisdictions must abide by all of the traditional limitations of Sharia law, it generally faces the additional challenge of operating in legal and regulatory environments unaccustomed for Islamic finance techniques. The compatibility of the Luxembourg legal framework with Islamic finance requirements for the implementation of Sharia compliant products is in this context of major importance.(6) Furthermore, in contrast to many other Western jurisdictions, the Luxembourg tax treatment of business transactions is based less on their legal characteristics than on their economic reality (i.e. substance over form approach). Therefore, many Islamic finance techniques may be realized in a very tax-efficient manner. Major steps have been taken by Luxembourg in recent times to elevate its status to that of a global hub for Islamic finance including the issuance of a tax circular(7) describing the major principles of Islamic finance and the tax treatment of Islamic finance techniques.(8) Crucially, many Islamic finance techniques may be realized in a very tax-efficient manner. For example, financing instruments may be structured via a direct link to a particular asset or investment portfolio, bearing variable yield depending on the income deriving from the asset and participating in the business risk of the borrower as required by the Sharia. Unlike many other jurisdictions, yield paid on pure income or profit participating financing instruments may be deductible for Luxembourg tax purposes and not subject to Luxembourg withholding tax, irrespective of the status or residence of the recipient. Key to Islamic investors is the possibility to obtain advance certainty on the Luxembourg tax treatment of their investments from the Luxembourg tax authorities. The most common Luxembourg vehicles for structuring Sharia-compliant real estate investments are the following: - The Luxembourg holding company (“SOPARFI”) The SOPARFI (“société de participation financière“) is a fully taxable Luxembourg company benefiting from an extensive and flexible participation exemption regime, an ever-expending tax treaty network and EU Directives. Considering that Luxembourg companies may be tax efficiently financed with asset-linked (or profit participating) financing instruments, a Luxembourg company may also be used as an investment vehicle for a Sharia-compliant real estate fund established in Luxembourg or an offshore jurisdiction. - The Luxembourg Venture Capital Vehicle (“SICAR”) Investors Asset-linked instrument (financing activity) Asset-linked instrument (holding activity) LuxCo Sharia-compliant financing instrument Bank PropCo Commodity Murabaha Real estate properties The SICAR (“société d’investissement en capital à risqué”) is a semi-regulated venture capital investment vehicle with the principal object of investing in risk-bearing assets issued by domestic and foreign enterprises. With the Sharia encouraging risk-taking and prohibiting interest, un-leveraged venture capital funds are ideal tools for making investments in an Islamic manner. In view of the simplified application of company law, limited regulatory supervision and favourable tax rules (such as tax exemption of qualifying income and dividend withholding tax exemption), the SICAR is tailored for Islamic finance investments in and via Luxembourg. 4. Conclusion - The Specialized Investment Fund (“SIF”) The SIF (“Fonds d'Investissement Spécialisé”) is designed as a classic investment fund collecting funds from a closed circle of experienced investors. The SIF is subject to registration and ongoing supervision by the Commission de Surveillance du Secteur Financier (CSSF)(9) and can be implemented in contractual form (FCP(10)) or in corporate form (SICAV(11)/SICAF(12)) structured either as a single fund or an umbrella fund.(13) The SIF is reserved to qualified investors, including institutional, professional and other “wellinformed” investors(14). As such, investor protection is downgraded and the SIF enjoys far more flexibility than other regulated funds (i.e. UCITS(15) funds). The SIF may further invest in any type of asset and therefore be used for any type of funds, such as Islamic real estate funds or private equity funds.(16) Considering the endless possibilities offered by the SIF and the flexibility of its legal framework, it is an ideal vehicle for structuring Sharia-compliant investments in a very tax-efficient manner. Islamic Bank There is no denying that real estate is an attractive asset class for Islamic investors wishing to manage their wealth in accordance with Sharia principles. For many Middle East investors pursuing an international strategy to diversify their investment portfolios, European real estate represents an exciting opportunity. Tax efficiency is clearly a key factor when structuring investments. As direct investment into European real estate may not be optimal from a tax perspective, investments are commonly structured through an investment vehicle established in an intermediary location. Here, Luxembourg, with its wide tax treaty network and access to EU Directives, provides for a magnitude of tax planning opportunities. In light of the above, it is not surprising that the growth of Islamic finance in Luxembourg has primarily been driven by real estate investments. The flexibility and tax efficiency offered by Luxembourg’s Sharia-compliant investment structures remains unsurpassed and provides for a level playing field between conventional and Sharia-compliant transactions - cementing Luxembourg’s role as an emerging hub for Islamic finance. Investors * Oliver R. HOOR is a Senior Manager (Expert Comptable and Steuerberater/Conseiller Fiscal Allemande) and Pierre KREEMER is a Tax Partner (Leader of the Real Estate & Infrastructure Tax Group) with KPMG Luxembourg. The authors may be contacted at: [email protected] and [email protected] Fund (SIF) Asset-linked instrument (financing activity) Asset-linked instrument (holding activity) LuxCo Sharia-compliant financing instrument Bank PropCo Sharia-compliant external debt Real estate properties - The Family Wealth Management Vehicle (“SPF”) The SPF (“société de gestion de patrimoine familial”) is an investment vehicle with a privileged tax regime aimed at individuals for the purpose of passively holding shares or other investments. The SPF is undoubtedly the ideal investment vehicle for family offices or wealthy Islamic individuals willing to pool their European based investments in an extremely tax-efficient manner. The SPF takes the legal form of a Luxembourg company but may only perform private wealth management activities including holding, management and disposal of financial assets. The SPF may hold any kind of financial instruments, be it shares in (real estate) companies, units in Sharia-compliant real estate funds and securities such as Sukuk. Importantly, real estate may only be held indirectly via a Luxembourg company (SOPARFI). - Securitization vehicle (“SV”) The Luxembourg SV may be used to acquire or assume, directly or indirectly, risks attached to claims, other assets (e.g. commodities) or commitments that were assumed by third parties. Considering its exceedingly broad scope, the Luxembourg SV is compatible with many Sharia-compliant securitisation transactions and may be listed on the Luxembourg stock exchange. The authors wish to thank Oliver KIRK for his assistance. 1) Investments are predominantly be made by institutional investors, sovereign wealth funds and high net wealth individuals. 2) Cet article souligne les spécificités des investissments immobiliers conformes à la Sharia et analyse, avec une attention particulière portée sur les investisseurs du Moyent-Orient, comment ces investissements peuvent être structurés à travers le Luxembourg d’une manière fiscalement efficiente. 3) For example, solar power plants and wind parks. 4) The properties should not be used for haram activities such as liquor production, conventional banking or casinos; see Section 2.2. 5) The internationally recognized Luxembourg Stock Exchange provides for an attractive international listing marketplace for shares and a wide range of securities such as Sukuk. 6) See Philippe Neefs and Oliver R. Hoor, „Islamic Finance in Luxembourg“, Tax Notes International, 30 March 2009, Tax Analysts. 7) Circular L.G.-A No. 55 of 12 January 2010. 8) On 17 June 2010, Luxembourg's indirect tax administration, responsible for value added tax (VAT), registration duty and other indirect taxes, issued a second circular (Circular No. 749) outlining the indirect tax and VAT treatment of murabaha and ijara structures. 9) The Luxembourg banking and finance supervisory body. 10) A Fond commun de placement (FCP) is a mutual funds established by contract. It is a co-ownership of assets that does not have any legal personality of its own and is created and managed by a Luxembourg management company. 11) The Société d’investissement à capital variable (SICAV) is an investment company with variable share capital. 12) The Société d’investissement à capital fixe (SICAF) is an investment company with fixed capital. 13) Where the fund is organized as an umbrella structure, the entire investment vehicle consists of one or more compartments. These compartments may, for example, differ in their investment policy, distribution policy or type of target investor. 14) Any other investor who confirmed in writing his adhesion to the status of a “well-informed” investor and who (i) either invests a minimum of EUR 125,000 in the SIF or (ii) who has an appraisal from an EU bank, an investment firm or a management company certifying that they have the appropriate expertise, experience and knowledge to adequately understand the investment made in the fund. This gives sophisticated investors, including high net worth individuals, access to the flexible and tax attractive regime of SIFs. 15) Undertakings for collective investment in transferable securities (UCITS). 16) A SIF may, for example, invest into Sharia-compliant real estate, real estate companies or investment funds and other long-term real estate related interests such as long-term leases. Analyse de Brandywine, filiale de Legg Mason Le dollar américain est désormais la seule véritable monnaie «refuge» L e dollar américain va profiter de plus en plus du mouvement de fuite vers la qualité car l’attrait d’autres monnaies «refuges» se dissipe, affirme Jack McIntyre, gérant chez Brandywine Global, filiale de Legg Mason. Actuellement, Brandywine Global surpondère le dollar américain, le préférant à d’autres devises jouissant du statut de valeur refuge telles que le yen japonais ou encore le franc suisse. «Notre surpondération du dollar américain est une position tactique,» explique-t-il. «Nous sommes conscients des problèmes fondamentaux du billet vert et nous ne sommes pas certains que les EtatsUnis aient la volonté de les résoudre aujourd’hui. Toutefois, lorsque l’aversion au risque prévaut sur les marchés mondiaux, le dollar américain bénéficie du mouvement de fuite vers la qualité. C’est égale- ment le cas pour le yen, mais la question d’une nouvelle intervention des autorités nippones sur leur monnaie se pose bel et bien. La dernière chose dont a besoin le Japon est une monnaie forte ; aux cours actuels du yen, les entreprises exerçant dans l’Archipel font déjà face à des coûts prohibitifs.» Par ailleurs, la Banque nationale suisse ayant récemment décidé de fixer un plafond d’appréciation du franc suisse face à l’euro, Jack McIntyre doute que la monnaie helvétique puisse continuer à profiter de son statut de devise refuge. «Compte tenu de la menace de nouvelles interventions de la BNS, nous pensons que le dollar sera le bénéficiaire par défaut des périodes de tensions sur les marchés,» déclare-t-il. Ce scénario serait notamment fragilisé en cas de nouvelles mesures d’assouplissement quantitatif (QE) aux Etats-Unis, lesquelles éroderaient la valeur du billet vert. Jack McIntyre affirme cependant ne pas avoir d’inquiétudes en la matière ; selon lui, un nouveau QE ne suivrait pas la même approche que les deux précédents. «L’Opération Twist, par exemple, consiste à réinvestir le produit des ventes réalisées sur la partie courte de la courbe des rendements dans des achats d’obligations d’échéance lointaine – au bénéfice de la partie longue de la courbe. Si elle ne soutient pas nécessairement le dollar, elle ne lui nuit pas non plus, à la différence d’autres mesures passées de relance monétaire,» souligne le gérant. Si les programmes d’assouplissement quantitatif créent un environnement baissier pour le dollar, ils n’ont pas été non plus particulièrement propices aux bons du Trésor», note Jack McIntyre. «Cela semble aller contre nature, dans le sens où l’on s’attendrait à ce que la Fed, en achetant des bons du Trésor, soutienne ce marché, mais dans cet environnement les emprunts d’Etat américains ne se sont pas bien comportés,» observe-t-il. «C’est seulement lorsque le marché a perçu la fin de l’assouplissement quantitatif que l’environnement est devenu favorable aux bons du Trésor. Durant les trois dernières années, les périodes hors QE ont été clairement plus bénéfiques aux obligations.» Néanmoins, compte tenu des difficultés que rencontre l’économie américaine et des mesures de réduction du déficit budgétaire qui s’annoncent, le gérant estime que la Fed veillera à combattre la menace de la déflation. «Il est donc peu probable que les Etats-Unis connaissent le même sort que le Japon, parce que la Fed a tiré les leçons des erreurs commises dans le passé par l’Archipel,» affirme-t-il. «Nous savons que les Etats-Unis vont devoir réduire leurs dépenses et augmenter leurs impôts. Ces mesures peuvent être déflationnistes et je pense que la Fed fera tout pour empêcher que de telles pressions pèsent sur l’économie américaine. Nos portefeuilles obligataires mondiaux ont surpondéré la duration des bons du Trésor durant la majeure partie de 2011, ce qui a contribué à la performance. Toutefois, les Etats-Unis semblant de plus en plus en voie d’éviter une récession, et l’Europe paraissant en mesure d’empêcher la répétition d’un scénario “à la Lehman”, nous avons récemment réduit l’exposition de nos portefeuilles aux obligations de qualité supérieure,» indique Jack McIntyre.