Circular clarifies tax treatment of murabaha and ijara contracts
The Direction de l'Enregistrement et des Domaines (Luxembourg indirect tax authority) has published a Circular clarifying the tax treatment of two Islamic finance contracts.
Circular 749 of 17 June 2010 refers to murabaha, whereby an operator buys a property on behalf of a client in order to resell it to that client at a price augmented by a margin and costs, and the ijara, a leasing contract.
The Circular clarifies that a resale under these circumstances will be liable to droits d’enregistrement (tax) based on the price at which the operator bought the property, and not on the price at which he resold it to the client, providing certain conditions are met:
- the client must take immediate possession of the property;
- the delay between the purchase of the property and its resale to the client must not exceed ten days;
- the contract for the original purchase of the property must contain a clause stating that it is a murabaha and a copy of this must be attached to the notarial deed.
The Circular goes on to add special purpose vehicles created as murabaha and ijara are subject to VAT.