Luxembourg is a prime location for an Islamic Finance center in Europe. As a diversified financial center providing a full range of products, Luxembourg is the dominating cross-border hub for investment funds and the largest wealth management center in the Eurozone (Schengen Area).
The Grand Duchy of Luxembourg is the leading non-Muslim domicile for Sharia-compliant investment funds and globally the fourth Islamic fund center, ranked by the number of Islamic funds established in the market.
Luxembourg’s favorable regulatory, legal, and tax framework aids the set-up, administration, and cross-border distribution of Islamic funds and boosts its growth.
Strong links with several other countries
Luxembourg’s financial services industry, regulators, and supervisory authorities have embraced an international proactive approach, as illustrated for example, by:
Promotional activities: Luxembourg organizations regularly organize multinational roadshows to facilitate the Luxembourg financial center, its products, and services, as well as to update industry professionals on relevant industry developments.
The Luxembourg Supervisory Authority for the Financial Sector (CSSF), has signed co-operation agreements, so-called Memoranda of Understanding (MoUs), with several supervisory authorities such as the Dubai Financial Services Authority, the Securities Commission Malaysia, the Central Bank of Bahrain, the Qatar Financial Centre Regulation Authority and the Egyptian Financial Supervisory Authority.
The Grand Duchy of Luxembourg furthermore benefits from a double tax treaty network with many Middle Eastern and Southeast Asian markets given its strong role as an investment hub for Islamic companies and individuals.
Evolving interest in Islamic finance
Islamic finance has originated as an effective tool for financing development worldwide, including in non-Muslim countries. It is also one of the fastest-growing areas of the global financial services industry.
The principal differentiators between Islamic finance and conventional finance include the following:
- In Islamic finance, interest is prohibited.
- Investing in some activities considered haram is likewise prohibited.
- Risk and profit must be shared equally between parties to a transaction
- Sharia prohibits any form of speculation or gambling, which is called maisir.
- Transactions must be asset-based or asset-backed
- The rules of Islamic finance ban participation in contracts with excessive risk and/or uncertainty.
Generally, Islamic financial products are regarded as an alternative to conventional financial products and are considered to be a form of socially responsible or ethical investing.
The Grand-Duchy of Luxembourg is also a suitable place for listing sustainable securities and is accordingly well equipped to support growth in green Sukuk listing globally.
Fulfilling Sharia compliance in Luxembourg
Luxembourg’s position as the dominating center for internationally distributed investment funds, blended with the financial center’s expertise in Islamic finance, makes the country an excellent location for the creation and administration of Sharia-compliant investment vehicles.
Adaptable structures such as the Specialised Investment Fund (SIF) or the Reserved Alternative Investment Fund (RAIF), which enable a wide assortment of different investment strategies, can be used for Shariah-compliant private equity, property, or other alternative investment schemes.
Also, the particularities of the SICAR as a venture capital investment vehicle make it well-fitted for Islamic finance investments in and through Luxembourg. On the other hand, Luxembourg’s securitization vehicles provide a flexible and tax-neutral regime for financial products. One of the driving factors behind the popularity of Luxembourg SVs among Islamic investors is the vast range of eligible assets which can be securitized. Luxembourg SVs have also been used in several Murabahah and Ijarah structures.
Luxembourg investment vehicles vary from regulated to unregulated. And from a regulatory perspective, the CSSF will seek to assure that all appropriate Luxembourg legal and regulatory requirements are complied with for regulated and/or listed entities. As long as investments of a regulated fund adhere to the applicable laws and regulations, the CSSF does not place any condition on a fund concerning the compatibility of its investments with Sharia.
Framework for Islamic finance
Luxembourg gives a wide range of investment vehicles that are either completely subject to taxation but profiting from tax exemptions or deductions in line with European legislation or tax-exempt and liable to annual subscription tax imposed on the net asset value. Luxembourg’s tax regime is one of Europe’s most promising for business in line with the standards of the Organisation for Economic Co-operation Development. An important factor in this respect is its vast network of DTTs, including DTTs signed with several countries active in the area of Islamic finance.
The Luxembourg standard VAT rate of 17% is the lowest standard rate in the EU.
Embracing tax transparency while ensuring personal data data
Over the years, Luxembourg has modified to a tax environment where primary considerations are transparency and exchange of information, as well as the alignment of taxation with monetary substance and value creation. Luxembourg was rated as largely compliant since the standard of transparency and exchange of information were fully implemented. Also, Luxembourg adopted several measures to implement tax transparency in line with international standards, e.g., United States Foreign Account Tax Compliance Act provisions, and the Implementation of the EU Anti-Tax Avoidance Directive.
Simultaneously, the insurance of personal data has been enhanced by the application of the EU General Data Protection Regulation.
When looking for options for Islamic investors in Europe, Luxembourg always comes to mind. The Grand-Duchy of Luxembourg has shown enthusiasm for innovation over the past years, not only by improving Islamic finance services but also by attracting financial technology businesses to bring new products and services to the market.
For detailed information on how to set up your Islamic investment fund in Luxembourg, let’s go ahead together and contact your Damalion expert now.
