Revenue Note for Guidance
Part 8A provides a regime to tax certain Islamic financial transactions in the same way as conventional financial transactions.
The term Islamic finance refers to financial transactions that are consistent with the principles of Islamic law (Shari’a). One of the main principles of Islamic finance is that the payment and receipt of interest (riba) is forbidden. Islamic financial transactions are typically backed by, or based on, an identifiable and tangible underlying asset, and involve risk sharing between the investor and the investee.
To facilitate commercial transactions, Islamic financial structures have been devised that comply with the basic principles of Shari’a law. These products meet the same economic needs as conventional financial products by using familiar legal structures in an alternative way (insofar as debt is concerned) to achieve the financing objectives.
Part 8A provides for the tax treatment of certain credit sale, deposit and investment transactions (referred to in the legislation as “specified financial transactions”) which achieve the same economic result in substance as comparable conventional products. Although designed to cover certain Shari’a compliant structures, the legislation applies to any financing arrangement falling within the meaning of the term “specified financial transaction” regardless of whether the arrangement is, in fact, Shari’a compliant.
Effectively, the provisions treat the return arising on a specified financial transaction as interest for tax purposes and apply all relevant tax legislation pertaining to interest to that return. The legislation does not change the nature of the financial arrangements. It seeks to provide a level playing field for tax between certain types of economically equivalent, but differently structured, finance arrangements.
This is the interpretation Chapter for this Part.
This section is concerned with the interpretation of certain words and expressions used in Chapter 1.
(1) “assets” are given the same meaning as in section 532.
“charges on income” are given the same meaning as in section 243.
“credit return” is the return payable to the finance undertaking in respect of a credit transaction and is equivalent to interest on a conventional loan.
(a) The credit return in the case of a credit sale or loan falling within paragraphs (a) and (b) respectively of the definition of “credit transaction” is the excess of the amount paid or payable by the borrower over the amount paid by the finance undertaking for the asset.
(b) In case of a mortgage type transaction (paragraph (c) of the definition of “credit transactions”), the “credit return” is the excess of the consideration paid or payable to the finance undertaking by the borrower (including any consideration paid or payable for the use of the asset) over the amount paid by the financial institution for the asset.
“credit transaction” defines the credit transactions which are covered by this Part.
(a) Paragraph (a) deals with credit sale arrangements whereby a financial undertaking acquires an asset for the purpose of entering into a credit transaction and disposes of the full interest in that asset to a person (hereafter referred to as the borrower) where-
(b) Paragraph (b) covers loans or other transactions whereby a finance undertaking acquires an asset and –
(c) Paragraph (c) covers mortgage type transactions under which—
where-
“deposit transaction” – the definition of “deposit transaction” is designed to cater for transactions equivalent to the standard deposit transactions covered in the legislation dealing with deposit interest retention tax (DIRT – Chapter 4 of Part 8). There are two conditions to be fulfilled in order to qualify for the treatment. These are:
“finance company” is defined as a company whose income consists wholly or mainly of either or both of the following:
“financial institution” is given the same meaning as in section 891B.
“finance undertaking” is defined as either a finance company or a financial institution.
“investment certificates” must meet four conditions as follows:
“investment return” this is the amount which would be equivalent to the interest on a conventional bond and means-
“investment transaction” is defined as a transaction whereby a person acquires an investment certificate and receives an investment return. It is designed to cover both acquisitions from the original issuer and acquisitions on the secondary market.
“loan” is defined as any loan, advance or other arrangement by virtue of which interest is payable.
“owner” is defined as the person who would be entitled, if the securities were redeemed at that time, by the issuer, to the proceeds of the redemption.
“public” is defined as individuals generally, companies generally or individuals and companies generally.
“qualifying company” is the company that issues the investment certificates. In order to qualify as such it must-
“relevant deposit” is given the same meaning as in section 256.
“relevant deposit taker” is given the same meaning as in section 256.
“relevant interest” is given the same meaning as in section 256.
“specified financial transaction” is defined as a “credit transaction”, a “deposit transaction” or an “investment transaction” and requires that the terms of these transactions must be such as would reasonably have been expected if the parties to the transaction were independent parties acting at arms length.
“specified person” is given the same meaning as in section 110, as if a reference to a “specified person” in section 110:
The definition of “specified person” was inserted by section 24 Finance Act 2013 and ensures that in order for a certificates issued, on or after the 1st January 2013, to qualify as an “investment certificate”, the certificate cannot be issued to:
(2) References to “consideration” are to be construed as follows:
Relevant Date: Finance Act 2019