Keywords

1 Introduction

Over the last decade, Irish authorities have taken certain accommodative measures to clarify and legislate for Islamic finance activity under Irish law. When discussing the introduction of guidance and legislative amendments aimed at accommodating Islamic finance in Ireland, the Irish Department of Finance (the Department of Finance) outlined certain “opportunities” for Ireland that could arise from this accommodation: (a) encouraging investment into Ireland in the form of wholesale Islamic finance activity and the establishment of Islamic financial institutions; (b) the provision of ethical investment opportunities for Irish investors; and (c) the opportunity for Muslims to participate in the financial sector in a manner that is consistent with their religious beliefs.Footnote 1 Such statements suggest that the Irish government’s focus of accommodation is on both retail and wholesale Islamic finance activity. In line with this, the legislative amendments and guidance introduced in Ireland cover financing structures that could be used in retail and in wholesale Islamic finance transactions.

Notwithstanding the Irish government’s generally favourable approach to Islamic finance, there remain gaps in the legislative regime applicable to Islamic finance activity in Ireland, particularly at a retail level. As a result, issues surrounding the regulation of Islamic finance activity and institutions, as well as questions of consumer protection, remain unaddressed. At the same time, while the Republic of Ireland’s Muslim population of just over 63,000 people increased by 28.9 per cent between 2011 and 2016,Footnote 2 it nevertheless remains small, potentially impacting on short-term demand for domestic retail Islamic finance products and services.

Nevertheless, steps taken to date by the Irish government to accommodate Islamic finance activity are to be welcomed and they go some way towards positioning Ireland as an economy in which Islamic finance activity is encouraged. This chapter will consider some of the specifics of Irish law that are relevant to Islamic finance. It will outline the approach to accommodating Islamic finance taken by the Irish government and the applicable legislative and regulatory framework. It will then discuss the current position under Irish law of three Islamic finance products: ṣukūk; Islamic investment funds; and Islamic mortgage alternatives.

2 Legislative and Regulatory Framework

Islamic finance transactions offered in global financial markets are often structured to comply with the financial principles of Islamic Law, while at the same time replicating the economic substance of conventional interest-based finance products. The economic result of these Islamic finance transactions is, therefore, similar to conventional finance products; the methodology and legal structure used to achieve this result are distinct.Footnote 3 In countries that have not introduced legislative frameworks dealing specifically with Islamic finance transactions, these transactions may be subject to regulatory and tax laws based on their legal structure, rather than their economic substance. Islamic finance participants could, therefore, be taxed and regulated differently to participants in conventional finance transactions. Where the purpose of an Islamic finance product is to replicate the economic substance of conventional finance products in a sharī’ahFootnote 4-compliant manner,Footnote 5 differing (and often less favourable) regulatory and tax treatment may make these products less attractive or potentially unviable. In light of this, some jurisdictions have introduced legislative and institutional reforms to establish a more level playing field in the regulation and taxation of certain Islamic finance products and their conventional alternatives.Footnote 6

In October 2009, the Irish Revenue Commissioners (the Revenue) published a Tax Briefing focused on Islamic finance (the 2009 Tax Briefing).Footnote 7 The 2009 Tax Briefing did not introduce any legislative amendments into Ireland’s tax laws, but rather confirmed that three Islamic finance products—Takāful (Islamic insurance), ijārah (Islamic leasing), and Islamic investment funds—would be subject to the same tax regimes as conventional insurance, leasing, and investment funds, respectively.Footnote 8 Shortly after the publication of the 2009 Tax Briefing, the Finance Act 2010 was enacted introducing amendments to Ireland’s existing tax laws (that is, the Taxes Consolidation Act 1997 (the TCA 1997)Footnote 9 and the Stamp Duties Consolidation Act 1999 (the SDCA 1999)Footnote 10). These amendments were designed to facilitate greater equality of tax treatment between certain Islamic and conventional finance products in Ireland.Footnote 11

S39 and s137 of the Finance Act 2010 deal with “specified financial transactions”Footnote 12 and insert Part 8AFootnote 13 into the TCA 1997 and s85AFootnote 14 into the SDCA 1999, respectively. While Part 8A TCA 1997 and s85A SDCA 1999 do not refer to Islamic finance explicitly, the stated aim of these sections is to “extend tax treatment applicable to conventional finance transactions to Shari’a compliant or Islamic financial products which achieve the same economic result in substance as comparable conventional products”.Footnote 15 This absence of reference to religious compliance in the legislation means that any finance transaction that fulfils the relevant criteria could technically fall within Part 8A TCA 1997 and s85A SDCA 1999. However, in order to benefit from the tax treatment in Part 8A TCA 1997, market participants must positively elect for their transaction to be treated as a specified financial transaction.Footnote 16

As a result of amendments to Ireland’s existing tax laws, three Islamic finance structures are now addressed in the TCA 1997: “deposit transactions” (Islamic deposits); “credit transactions” (Islamic financing transactions—covering murābaha and diminishing mushāraka ); and “investment transactions” (ṣukūk).Footnote 17 Subsequent Finance Acts have introduced clarifications to Part 8A TCA 1997;Footnote 18 however, the scope of the accommodations has remained unchanged since they were introduced by the Finance Act 2010.

Unlike the UK government’s accommodation of Islamic finance, where both the tax and regulatory aspects of Islamic finance transactions have been addressed under English law, in Ireland the focus of accommodation has been on the taxation of these transactions. The regulation of Islamic finance transactions and the institutions that engage in Islamic finance activity has not been the subject of tailored accommodation under Irish law.Footnote 19 As a result, the Central Bank of Ireland (the Central Bank), as Ireland’s financial conduct and prudential regulator, must continue to apply existing regulatory rules to Islamic finance activity and institutions in Ireland. Reflecting this, there has been limited provision of Islamic finance products by Irish-registered entities and no Islamic banks have been established in Ireland.

Particularly in the years following the Finance Act 2010, a small body of academic and industry commentary centred on Islamic finance in Ireland has developed with a number of academicFootnote 20 and industryFootnote 21 articles and thesesFootnote 22 written on aspects of Islamic finance in Ireland. The focus of this commentary has rested largely on issues of law, regulation, and tax and, reflecting the trend in Islamic finance in Ireland, has focused principally on wholesale finance transactions and products.

3 Islamic Finance Structures

3.1 Ṣukūk

ṢukūkFootnote 23 are one of the more high-profile forms of contemporary Islamic financing. Within Ireland, the primary growth of the ṣukūk market has been seen in the increasing number of ṣukūk programmes and issuances of ṣukūk certificates that are listed on the Irish Stock Exchange plc, trading as Euronext Dublin (Euronext Dublin).Footnote 24 Since the first issuance of ṣukūk certificates was listed on Euronext Dublin in 2006,Footnote 25 Ireland has become a key jurisdiction for ṣukūk listings.Footnote 26

When listed on Euronext Dublin, ṣukūk certificates can be admitted to trading on the regulated or unregulated market. In both cases, the process for approval and listing of these ṣukūk certificates is identical to that used for conventional bonds and applies to ṣukūk issued by Irish or by non-Irish incorporated entities.

In the case of ṣukūk certificates that are admitted to trading on Ireland’s regulated market (the Main Securities Market), the underlying prospectus must be approved by the Central Bank, as the competent authority under Directive 2003/71/EC (as amended, the Prospectus Directive). As is the case for bonds admitted to trading on the Main Securities Market, these ṣukūk prospectuses must comply with the requirements of the Prospectus Directive and reflect the same investor protection legends and disclosure standards as other regulated market prospectuses.Footnote 27 Once the prospectus is approved, the ṣukūk certificates that are issued are admitted to the official list of Euronext Dublin and to trading on the Main Securities Market.Footnote 28 Such ṣukūk certificates then benefit from the same passporting rights as regulated market bonds.Footnote 29

For unregulated market ṣukūk listings, the Central Bank does not approve the underlying offering document (often referred to in the unregulated context as a “listing particulars”). Ṣukūk certificates issued pursuant to such listing particulars are listed on the official list of Euronext Dublin but are admitted to trading on Ireland’s unregulated market (the Global Exchange Market).Footnote 30 As is the case for bonds admitted to trading on the Global Exchange Market, the listing particulars for unregulated market ṣukūk are not subject to the Prospectus Directive.

3.1.1 Regulation of Ṣukūk Under Irish Law

The Central Bank has taken a relatively pragmatic approach to the regulation of ṣukūk issuances under Irish law. With respect to reviewing and approving regulated market ṣukūk prospectuses, the Central Bank has consistently treated these prospectuses as analogous to prospectuses used for bond issuances and has not sought to impose any additional registration or regulatory requirements on ṣukūk issuers. As such, the Central Bank has approved ṣukūk offering documents as “prospectuses” (in the context of a standalone issuance)Footnote 31 or “base prospectuses” (in the context of a ṣukūk programme)Footnote 32 for the purposes of the Prospectus Directive in the same way that it approves bond offering documents. The Central Bank has also stated that it will generally require the disclosure in regulated market ṣukūk prospectuses to adhere to the requirements set by Annexes IXFootnote 33 and XIIIFootnote 34 of the Prospectus Regulation (Commission Regulation 809/2004, as amended), each of which relates to debt securities.Footnote 35 While the Central Bank has noted that the requirement that ṣukūk prospectuses comply with the same disclosure standards as bond prospectuses does not indicate “any judgement as to whether [ṣukūk] are debt instruments”,Footnote 36 the nature of the disclosure required represents a strong indication that the Irish authorities will look to exercise a level of regulatory oversight over ṣukūk certificates that is analogous to their oversight over bonds. Consistent with this, at listing and admission to trading stage, Euronext Dublin has adopted an approach that aligns the treatment of ṣukūk certificates with bonds. As a result, the ṣukūk certificates issued by Ṣukūk Funding (No. 3) Limited,Footnote 37 CBB International Ṣukūk Company 5 S.P.C.,Footnote 38 and Saudi Electricity Global Ṣukūk Company 3Footnote 39 (by way of example) have all been approved by Euronext Dublin for listing and admission to trading under the category of “debt security”.Footnote 40

The Irish authorities’ approach of applying the same regulatory treatment to economically comparable ṣukūk certificates and bonds reflects the dominance in the ṣukūk market of ṣukūk structures that operate in substance like conventional debt securities. The entry into force of the Alternative Investment Fund Managers Directive (Directive 2011/61/EU) as implemented in Ireland through the European Union (Alternative Investment Fund Managers) Regulations 2013Footnote 41 (as amended, the AIFM Regulations) does, however, raise some uncertainty as to the regulatory treatment of any special purpose vehicle (SPV) that operates as an issuer and trustee in a ṣukūk issuance.Footnote 42 An “alternative investment fund” (or AIF) is defined in the AIFM Regulations as “a collective investment undertaking, … which (a) raises capital from a number of investors, with a view to investing it in accordance with a defined investment policy for the benefit of those investors…”.Footnote 43 An Alternative Investment Fund Manager (AIFM) cannot manage an AIF unless it is authorised to do so and complies with conditions attached to such authorisation.Footnote 44 As contemporary ṣukūk structures often involve a separately incorporated SPV issuer that uses the proceeds of an issuance of ṣukūk certificates to purchase income-generating assets from the entity ultimately looking to raise funds (referred to in this chapter as the “originator”), such SPV issuers could arguably fall within the scope of the AIFM Regulations. This would result in the imposition of onerous authorisation and disclosure requirements over and above those applying to conventional vanilla bond issuers.

Irish regulatory authorities have not confirmed that ṣukūk SPV issuers will not be caught by the AIFM Regulations. The Central Bank has, however, suggested that a financial vehicle engaged “solely in activities where economic participation is by way of debt or other corresponding instruments which do not provide ownership rights in the financial vehicle as are provided by the sale of units or shares”Footnote 45 will not be required to register as an AIF in the absence of further guidance by the European Securities and Markets Authority (ESMA). In practice, in order for ṣukūk certificates offered to investors in Ireland to benefit from the same tax and regulatory treatment as bonds, they must reflect the same economic substance as those bonds and so operate like an “economic participation … by way of debt”. While ṣukūk certificates may represent a holder’s ownership interest in underlying assets, returns paid to holders of ṣukūk certificates are often based on a pre-agreed repayment profile with no recourse to the underlying assets on default. To the extent ṣukūk certificates offered in Ireland are economically comparable to bonds, therefore, an SPV issuing those ṣukūk certificates should not be regarded as an AIFM. However, without further guidance from the Central Bank, this remains an area of regulatory uncertainty for ṣukūk in Ireland.

3.1.2 Taxation of Ṣukūk Under Irish Law

The focus of legislative accommodation of ṣukūk in Ireland has been with respect to tax. This accommodation was driven by the fact that structural differences between bonds and ṣukūk raised uncertainty as to whether ṣukūk returns would be treated by Irish tax law as fully taxable profit distributions or as equivalent to interest payable on a bond, which is tax deductible.Footnote 46 The amendments to Ireland’s tax laws introduced by the Finance Act 2010 sought to address this distinction by incorporating s267R into the TCA 1997. S267R TCA 1997 applies to “investment certificates”, which are certificates that are a financial liability of the issuing entity, establish an investor’s claim over the rights and obligations represented by the certificate and entitle the investor to an amount equivalent to a share in the profits or losses derived from underlying assets.Footnote 47 Such investment certificates produce an “investment return” representing periodic payments of profit derived from the underlying assets and any excess amounts payable on redemption of the certificates.Footnote 48 Though religiously neutral in its terminology,Footnote 49 s267R TCA 1997 is designed to accommodate ṣukūk certificates issued by Irish-incorporated entities.Footnote 50

S267R TCA 1997 provides that “the Tax ActsFootnote 51 shall apply to an investment return as if that investment return were interest on a security”.Footnote 52 In order to ensure that only “investment returns” that are economically comparable to interest (as opposed to taxable distributions) are treated as interest, s267R TCA 1997 is explicitly subject to s130 TCA 1997.Footnote 53 S130 TCA 1997 covers “matters to be treated as distributions” and defines a “distribution” as any payment by a company the level of which is “dependent on the results of the company’s business or any part of the company’s business”.Footnote 54 As such, while investment certificates may represent a holder’s right to “share in the profits or losses derived from”Footnote 55 underlying assets, only where the investment returns constitute periodic payments of profit derived from those assets, and such investment returns are not dependent on the results of the issuer’s business, will they be treated by Irish tax law as equivalent to interest payable on a bond.Footnote 56 This approach was most recently confirmed in the November 2018 update of the Tax and Duty Manual (Part 08A-01-01)Footnote 57 in which the Revenue confirmed that “[i]n general, Revenue will not regard the return as being dependent on the results of the business”Footnote 58 as long as the amount of the expected return equates in substance to a commercial return on an investment, the return is determined at the outset of the transaction, it is equivalent to the rate of interest, and it is not altered during the course of the transaction except where such alteration follows interest rates.Footnote 59

Stamp duty burdens imposed on ṣukūk issuances in Ireland have also, in part, been alleviated by s137 of the Finance Act 2010 through the incorporation of s85A into the SDCA 1999. S85A SDCA 1999 brings the stamp duty treatment of ṣukūk certificates in line with that of bonds by providing that stamp duty is not chargeable on the issue, transfer, or redemption of investment certificates.Footnote 60 However, s85A SDCA 1999 only relieves stamp duty liability that would otherwise apply to ṣukūk certificates themselves, not the assets underpinning those ṣukūk certificates. As some ṣukūk transactions based on real property may involve multiple transfers of that property (from the originator to the issuer (on behalf of holders of the ṣukūk certificates) at the time the ṣukūk certificates are issued and then back to the originator on redemption of the ṣukūk certificates), ṣukūk issuances may result in multiple impositions of stamp duty. Unlike the UK, where this double stamp duty charge has been specifically addressed,Footnote 61 Irish tax reforms have not yet addressed this aspect of ṣukūk issuances. This may put certain ṣukūk transactions at a financial disadvantage as compared to conventional bonds.Footnote 62

Ireland’s position as a venue for the listing and admission to trading of international ṣukūk continues to strengthen with Ireland being chosen as the listing venue for a number of market leading ṣukūk issuances over the last five years.Footnote 63 A sensible approach to regulatory oversight and a partially tailored tax regime highlight the Irish government’s interest in encouraging the issue and listing of ṣukūk in Ireland. Unlike the UK, however, which has seen engagement with the ṣukūk market by UK-based entities,Footnote 64 the domestic market in ṣukūk originated in Ireland has been slower to develop.Footnote 65 Some remaining tax issues and uncertainty with respect to certain regulatory aspects of contemporary ṣukūk may continue to impact on the further development of this market in Ireland.

3.2 Islamic Investment Funds

Islamic investment funds represent a strong segment of the global Islamic finance market.Footnote 66 Like conventional investment funds, these funds are structured to spread investment risk and protect returns through the pooling of investor capital. Islamic investment funds do not, however, invest in haram or forbidden industries and business.

3.2.1 Regulation of Islamic Investment Funds Under Irish Law

Ireland has sought to benefit from the global growth in Islamic investment funds and this sector has witnessed considerable development in Ireland over the last decade.Footnote 67 Reflecting this, the Central Bank has authorised a number of Irish-domiciled investment companies offering Islamic investment funds. In 2003, Oasis Global Management Company (Ireland) Limited received approval from the Central Bank for the establishment of the Oasis Crescent Global Investment Fund (Ireland) plc investment company. This investment company, which is stated to be “managed in accordance with Shari’ah principles”,Footnote 68 is authorised in Ireland as an undertaking for collective investment in transferable securities (UCITS) pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011.Footnote 69 More recently, the Central Bank has authorised the establishment of CIMB-Principal Islamic Asset Management (Ireland) Plc as a UCITS.Footnote 70 This was the first Malaysian-based Islamic investment fund platform to be domiciled in IrelandFootnote 71 and it has since gone on to establish two Islamic sub-funds, the Islamic ASEAN Equity Fund (launched in 2012) and the Global Ṣukūk Fund (launched in 2016), both of which have shares listed on Euronext Dublin.

In authorising Islamic investment companies and the funds that they offer, the Central Bank has adopted a “no special treatment” approach to this authorisation. These companies have so far been authorised as one of the two main categories of funds in Ireland, UCITS or Alternative Investment Funds, in the same authorisation process as conventional funds.Footnote 72 This classification determines to whom the funds can be promoted and the applicable regulatory regime. Islamic investment funds in Ireland are, therefore, required to meet the same regulatory and disclosure standards as comparable conventional investment funds. In practice, this has resulted in Islamic investment funds providing disclosure on the types of investments that are prohibited by the fund’s investment objectives, the process applied to cleanse any non-Islamic returns, and details of the sharī’ah supervisory board’s role (to the extent one is appointed).Footnote 73

While the Central Bank will require Islamic investment funds to provide adequate disclosure to investors, it will not look to determine whether the activities of an Islamic investment fund are carried out in accordance with Islamic legal principles, nor will it require the appointment of a sharī’ah supervisory board.Footnote 74 Nevertheless, the Central Bank has acknowledged the role of these sharī’ah supervisory boards in Islamic finance transactions. In doing so, the Central Bank has set out three principles guiding its on-going interaction with sharī’ah supervisory boards in Islamic investment funds. First, the Central Bank has confirmed that it would not be appropriate for it to adopt a view on the quality of a sharī’ah supervisory board or their suitability to make the judgements they make. Second, it is not for the Central Bank to verify any claim that an Islamic finance transaction is sharī’ah-compliant or that it has been approved by a sharī’ah supervisory board. Finally, the Central Bank will not subject Islamic investment funds to surveillance in order to check on-going compliance with the terms of any sharī’ah supervisory board’s approval.Footnote 75 The Central Bank’s approach to sharī’ah supervisory boards aligns with its treatment of Islamic investment funds generally and reflects the fact that a secular regulator is not in a position to determine matters of religious compliance.

3.2.2 Taxation of Islamic Investment Funds Under Irish Law

Ireland’s favourable tax environment for investment funds also applies to funds offered by Irish-incorporated Islamic investment funds.Footnote 76 Islamic investment funds were not dealt with specifically in the Finance Act 2010; however, the 2009 Tax Briefing confirmed that Islamic investment funds would be subject to the same tax regime as conventional investment funds.Footnote 77 As a result, if an Islamic investment fund is structured so that it falls within Chapter 1A, Part 27 of the TCA 1997,Footnote 78 a gross-roll-up tax regime will be applied eliminating annual tax on the profits of the fund but requiring the fund to deduct and account for tax when unit holders are paid.Footnote 79 Such withholding does not apply in circumstances where as a result of an exemption (such as non-Irish residence) the amounts are to be paid gross.Footnote 80 As such, for both Islamic and conventional investment funds, there is no withholding tax on distributions made to non-Irish resident unit-holdersFootnote 81 or unit-holders classified as exempt Irish domiciled entities.Footnote 82 Like a conventional investment fund, no stamp duty liability arises on the issuance or redemption of units in an Islamic investment fund.Footnote 83

The existence of a straightforward, favourable tax regime that does not distinguish between Islamic and conventional investment funds represents a significant advantage for Islamic investment funds in Ireland.Footnote 84 From a regulatory and tax standpoint, therefore, parity of treatment between Islamic and conventional investment funds and their investors has to date required no tailored modification of Ireland’s existing laws. Reflecting this, the Islamic investment funds industry in Ireland already represents a defined sector of Ireland’s financial market.

3.3 Islamic Mortgage Alternatives

A number of Islamic mortgage alternatives have been developed by the contemporary Islamic finance industry based on contractual forms that do not involve the payment of interest. These instruments may be structured on the basis of a murābaḥa contract (sale of the property to the customer with the purchase price paid on a deferred and marked-up basis),Footnote 85 an ijārah wa-iqtina contract (lease of the property to the customer ultimately resulting in a transfer of the property’s title to the customer),Footnote 86 or a diminishing mushāraka contract (shared ownership of the property between a financial institution and customer, lease of that property to the customer and ultimately a transfer of the property’s title to the customer).Footnote 87 In each case, the economic substance of the relevant Islamic mortgage alternative is consistent with an interest-based mortgage, while structurally they are distinguishable from their conventional alternatives.

3.3.1 Regulation of Islamic Mortgage Alternatives Under Irish Law

In Ireland, consumer protection in the context of mortgages is established in the Consumer Credit Act 1995 (the CCA 1995).Footnote 88 The CCA 1995 defines a “housing loan” as including “an agreement for credit [or refinancing credit] on the security of a mortgage of a freehold or leasehold estate or interest in land”Footnote 89 for the purpose of the construction, improvement or purchase of a house, and a mortgage is defined as including a charge.Footnote 90 In order to ensure Ireland’s consumer protection regime applies to Islamic mortgage alternatives, the structures developed by the Islamic finance industry must be brought within the existing regulatory regime. In the case of murābaḥa -based mortgage alternatives, this would seem to be a relatively straightforward process, as these structures involve the transfer of property to the customer who then repays the purchase price over a period of time and grants a charge over the property to the financial institution.Footnote 91 Ijārah wa-iqtina - and diminishing mushāraka -based mortgage alternatives, on the other hand, raise more difficulties. In both of these arrangements, the financial institution assumes full or partial ownership of the property for the duration of the transaction. Only at maturity of the financing arrangement will title to the property be transferred to the customer in full. As such, structurally there is no credit extended to the customer and, as the financial institution maintains all or some ownership interest in the property, there is limited scope for the customer to charge the property in favour of that financial institution.Footnote 92 It is arguable, therefore, that other than in the case of structures based on a murābaḥa contract, Islamic mortgage alternatives fall outside of Ireland’s consumer protection regime. UK authorities faced a similar issue, which they addressed by the creation of a new category of regulated activity relating to “Home Purchase Plans”Footnote 93 and by amending the Financial Conduct Authority’s “Mortgage and Home Finance: Conduct of Business Sourcebook” (MCOB) to cover Islamic mortgage alternatives.Footnote 94 This extended the disclosure, treatment of arrears, repossessions, and responsible lendingFootnote 95 provisions of MCOB to sharī’ah-compliant finance activity.

Lack of regulatory clarity in Ireland, particularly when compared with the regulatory changes introduced in the UK, may lead to inconsistent regulation of Islamic and conventional home financing products and uncertainty as to who is authorised to offer these products in Ireland.

3.3.2 Taxation of Islamic Mortgage Alternatives Under Irish Law

The amendments to the TCA 1997 that were introduced by s39 of the Finance Act 2010 provided some legislative accommodation in terms of the taxation of Islamic mortgage alternatives. Following the Finance Act 2010, the TCA 1997 now provides for a number of “credit transactions” that are structurally similar to murābaḥaFootnote 96 and diminishing mushārakaFootnote 97 transactions.Footnote 98 As long as certain conditions are met, the provisions of Part 8A TCA 1997 seek to treat these credit transactions as if they establish a loan relationship between a financial institution and a customer. Pursuant to s267O TCA 1997, therefore, the return payable to a financial institution pursuant to a credit transaction shall be treated for the purposes of the Tax Acts as if it were interest paid or payable on a loan and chargeable to tax accordingly.Footnote 99 The financial institution’s return will not be treated for the purposes of the Tax Acts as expenditure on an asset.Footnote 100

The amendments introduced by the Finance Act 2010 seek to bring these credit transactions within Irish tax law applying to loans and interest where the structure of such credit transactions would otherwise have precluded them from being treated as such. The returns paid to a financial institution pursuant to a credit transaction will now be taxed and relieved as if they were interest payments made pursuant to a conventional mortgage. This approach reflects similar accommodations introduced in UK tax law.Footnote 101

The taxation of Islamic mortgage alternatives in Ireland has not, however, been brought completely in line with the corresponding tax framework applying to interest-based mortgages. One of the obstacles preventing comparable taxation is the multiple impositions of stamp duty liability with respect to Islamic mortgage alternatives. Each of the three forms of Islamic mortgage alternative technically involves at least two sales of the underlying property, the first when the financial institution acquires ownership of the property from the original vendor and the second when it transfers ownership of that property to the customer.Footnote 102 This two stage transfer may result in a double imposition of stamp duty.Footnote 103 UK authorities addressed this issue early in their legislative accommodation of Islamic finance transactions by eliminating the double stamp duty land tax imposed on murābaḥa transactionsFootnote 104 in 2003 and diminishing mushāraka and ijārah wa-iqtina transactions in 2005.Footnote 105 As such, as is the case for conventional mortgages, there is now only one imposition of stamp duty land tax on Islamic mortgage alternatives in the UK.Footnote 106 In the absence of clarity with respect to the stamp duty position of Islamic mortgage alternatives in Ireland, these instruments could potentially be prohibitively expensive.

4 Conclusion

Over the last decade, the Islamic finance sector has matured and diversified. While its growth globally has perhaps not quite aligned with the lofty expectations of its early proponents, Islamic finance nevertheless represents an identifiable sector of the global financial market and offers market participants an alternative means of accessing financing and investment opportunities.

In Ireland, positive steps have been taken to legislate for, and to clarify the legal treatment of, certain Islamic finance products. These accommodative measures reflect an amenable attitude towards Islamic finance activity amongst Irish government authorities and follow similar accommodations introduced in other Western countries. In practice, however, the perceptible growth of the Islamic finance industry in Ireland today has generally taken place outside of these legislative accommodations, with only limited domestic Islamic finance activity. Ireland has increasingly become a jurisdiction for the approval and listing of ṣukūk certificates and programmes. The issuers of these instruments have to date generally not been Irish-incorporated entities, but are instead international entities that are not subject to the accommodative provisions of Ireland’s tax laws. As such, growth in this sector has been largely unaffected by the legislative reforms introduced by the Finance Act 2010. Equally, while the number of Irish-domiciled Islamic investment funds has grown in recent years, this market sector has again developed without the need for legislative accommodation.

Since the Finance Act 2010, there have been limited further legislative amendments to accommodate Islamic finance within Irish law. Rather than a lack of support for Islamic finance amongst Irish authorities, however, this arguably suggests that market demand is not yet significant enough to justify further accommodation. The generally pragmatic and accommodative attitude of the Irish authorities to date indicates that, should the market require them, further accommodations may be introduced to build on those already laid down by the Finance Act 2010.