Saudi-Luxembourg cooperation in Islamic finance
From left to right: Reinhardt Krafft (LuxGlobal), Mohammed H. Al-Soaib (Al-Soaib Law Firm), Claude Zimmer (LuxGlobal), Jochen Hundt (Al-Soaib Law Firm) and Marc Theisen (TheisenLaw/LuxGlobal).
Published: Apr 5, 2010 00:25 Updated: Apr 12, 2010 01:08
The signing in Alkhobar of a strategic cooperation and alliance agreement between Saudi Arabia's Mohammed Hamad Al-Soaib Law Firm and the Luxembourg-based Lux Global Trust Services and Theisen Advocates recently is set to increase the use of the Duchy as a trust and tax domicile for Saudi investment products; investment vehicles such as special purpose vehicles (SPVs) used in the issuance of sukuk for instance; and the registration of investment funds, especially for UCITs (Undertakings for Collective Investment Trusts) of which Luxembourg is the world leader.
The agreement specifically alludes to cooperation in the Islamic finance space and products, especially investment funds and sukuk, in addition to capitalizing on the Duchy's tax regime for international transactions. Luxembourg is also marketing itself as the location of choice for sukuk and investment fund listings on the Luxembourg Stock Exchange (LSE). According to Luxembourg for Finance (LFF), to date there are 15 sukuk with a combined value of $5.5 billion listed at the LSE, including the $600 million Malaysia Global Sukuk, the first international sovereign sukuk to be issued in 2002, the Dubai Global Sukuk, the Pakistan International Sukuk, the Qatar Global Sukuk, and the Petronas EMAS Sukuk. At the same time, there are 42 Shariah-compliant funds currently listed on the LSE.
Under the agreement, the parties have now established a taxation and Islamic finance practice in Al-Soaib's Alkhobar office to serve clients across the Saudi Arabia and in Bahrain. "The aim," explained Marc Theisen, founder and senior partner at Theisen Advocates, "is to establish Luxembourg as a center for Islamic finance expertise in the long-term, especially in matters relating to Shariah-compliant investment vehicles and cross-border taxation.
"This strategic alliance has an excellent fit combining the experience of Mohammed Hamad Al-Soaib Law Firm in the conventional finance and Islamic banking field in the Kingdom with the fund structuring, trust services and tax expertise of Theisen Advocates and Lux Global Trust Services. We are not only exploring opportunities in existing business but also opportunities in new areas such as the oil, gas and petrochemical sectors and of course in Islamic finance and capital markets products, both for corporates and clients in the Eastern Province and the rest of the Kingdom and the GCC region."
The agreement brings together some of the most experienced operators in Luxembourg financial structuring, tax, trust and legal services with counterparts in Saudi Arabia. Reinhard Krafft of Lux of Global Trust Services, for instance, is a former director at Dresdner Luxemburg and Claude Zimmer, a prominent international tax adviser and member of the board of the Banque Centrale du Luxembourg (the central bank). Marc Theisen has nearly 30 years of experience and his firm has developed an Islamic finance consultation capacity and further specializes in construction, urban planning, PPP and real estate.
According to Theisen, together the team brings expertise in financial engineering and trust services, which hitherto is unavailable in the Eastern Province.
Mohammed Hamad Al-Soaib is a Saudi commercial litigation specialist. Jochen Hundt, a German lawyer, joined his firm in 1999 to head the newly established international section, which today boasts a client base of more than 250 companies, mostly from the European Union. The "World Finance" magazine, in its "2010 Legal Awards" awarded the firm the title "Best corporate and commercial team, Saudi Arabia."
One area which both firms and the alliance are targeting is sukuk issuance and listings. In January 2010, the Luxembourg tax authority published a new tax circular on the treatment of a whole range of Islamic finance products including Murabaha, Musharaka, Mudarabah, Istisna, Ijarah, Ijraha wa Ikitina and sukuk. The circular confirmed the classification of sukuk as debt for Luxembourg tax purposes. Consequently, yield payments under the sukuk are treated under domestic tax law as deductible interest expenses at the level of the paying entity. In contrast to many other jurisdictions, the circular confirms that no Luxembourg withholding tax is levied on yield payments.
"The Luxemburg legal framework provides a variety of different investment vehicles suitable for the issuance of sukuk. The Luxemburg Securitization Law is also very innovative and may particularly be suitable for Musharaka or Mudaraba or Ijara Sukuk structures using a Luxembourg SPV where the sukuk is linked to an underlying Shariah-compliant asset or contract. Luxembourg is also tax-efficient for such products and has double taxation treaties with many countries including those in the GCC region," explained Theisen.
The parties have already had meetings with a number of potential new clients including Islamic banks in the Kingdom and companies in the oil, gas and petrochemical sectors. Several Saudi companies have issued sukuk including SABIC (Saudi Basic Industries Corp.), SEC (Saudi Electricity Co.), Dar Al-Arkan Real Estate Development (DAAR) and Saudi Hollandi Bank. While most have been local private and public issuances, some have been international offerings. But only one has been cross-listed on the Luxembourg Stock Exchange.
To Islamic investors Luxembourg offers a diversification of asset quality, a wide range of asset classes, tax efficient structures, a world wide recognized brand in UCITS with easy distribution in the 27 European Union countries, and high recognition in Asia. Tax advantages include no liability to Luxemburg tax on profit or income, no liability to Luxemburg withholding tax for dividends, no wealth tax, no double stamp duty to be paid on equivalent Shariah-compliant structures especially in real estate transactions.
Luxembourg over the last few years has been slowly working toward establishing itself as an Islamic finance hub. Indeed, the Duchy has been the laboratory for Islamic finance in Europe since the late 1970s and early 1980s, way before London. In November 2009 the Duchy became and remains the first and only European country to become an associate member of the Islamic Financial Services Board (IFSB), the prudential standard setting body for global Islamic finance.
To further boost its Islamic finance credentials, Luxembourg recently signed double tax treaties with the United Arab Emirates, Qatar, Kuwait and Bahrain. This is in addition to 56 existing tax treaties that include several Islamic countries. On Jan. 12, 2010 Luxembourg for Finance (LFF) also signed memoranda of understanding with Bahrain and the Dubai International Financial Center to foster strong existing business relationship and further enhance bilateral cooperation and wide-ranging industry development, including in Islamic finance. The Luxembourg Stock Exchange and Bursa Malaysia, the national stock exchange in Malaysia, similarly signed a memorandum of understanding (MoU) in February 2010 to cooperate in the field of funds and sukuk listings, especially in dual listings.
Yves Mersch, governor of Banque Centrale du Luxembourg, is very positive about Islamic finance and the potential role it can play toward contributing to global financial stability and to financial inclusion in the EU. Likewise, Guy Heintz, director of contributions (Tax Administration) of Luxembourg, during an Islamic finance seminar in March 2010 at the University of Luxembourg, echoed this proactive stance by stressing that neutrality and equality is the basis for all financial products, including Shariah-compliant ones. He confirmed that "Shariah-compliant products such as Murabaha and Sukuk are no longer considered to be at a disadvantage when compared with conventional banking products and systems found in Luxembourg."
Elie Flatter of the Prudential Supervision of Liquidity Risk Department at Banque Centrale du Luxembourg also revealed that the central bank is keen to develop a Shariah-compliant money market in the Duchy. "We are a member of the IFSB Working Group entrusted with a task of preparing the guiding principles on liquidity risk management. We are in the process of identifying instruments, practices and solutions for managing liquidity in a Shariah-compliant manner," explained Flatter.
Although the target market is corporates, financial institutions, government entities such as sovereign wealth funds and high net worth individuals, the Duchy is also ideally located to serve the European Union's estimated 38 million Muslims.
Indeed, Gov. Mersch, one of the most proactive European central bankers as far as Islamic financial inclusion is concerned, recently urged his fellow European regulators to "become more familiar with the principles and practices specific to Islamic finance in order to make appropriate supervisory and regulatory judgments" and maintained that the current needs of Europe's 38 million plus Muslims and those interested in faith-based ethical finance have "not yet appropriately been addressed by the conventional banking offering."
In April last year, the government set up a multi-disciplinary task force charged with identifying obstacles to the development of Islamic finance in Luxembourg and ways to support its growth. Working groups on Islamic finance were also formed by the Luxembourg Investment Fund Association (ALFI) and Luxembourg for Finance (LFF).
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