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.