Budget removes tax hurdles for Islamic debt

By Cecilia Valente

LONDON (Reuters) - The government will change its current tax regime to facilitate Islamic-debt issuance and encourage the growth of London as an Islamic finance hub, the government said on Wednesday.

The budget 2009 report envisaged changes to the stamp duty land tax, provision of relief from tax on capital gains and capital allowance rules to remove fiscal penalties to UK companies willing to issue sukuks, or Islamic bonds.

The treasury said in the budget report that the three measures were part of the "ongoing drive to promote the UK as a centre for Islamic finance." The changes will come into effect by the end of the third quarter and end a regime which would have double-taxed the transactions needed to set up a sukuk.

A sukuk, unlike a mainstream bond, is not based on interest payments. Investors instead receive returns achieved on the underlying asset made available by the debt issuer. The global sukuk market thrived in 2007 but has since stalled. It is expected to recover partially this year.

The UK has already made the most significant changes to accommodate Islamic finance in Europe and hosts five Islamic banks and one insurer. France is mounting a challenge though and plans to launch the continent's first corporate sukuk this year.

ENCOURAGEMENT

The UK hosts sukuk listings but is yet to issue them, mainly because of the tax hurdles, said Norton Rose lawyers Davide Barzilai and Angela Savin. They said the changes are expected to encourage UK corporates to use sukuk to tap new investors.

"We have been waiting and lobbying for these (changes). Now it is down to commercial forces, hopefully the economy is in a sufficient state to attract this sort of product," Barzilai said.