Luxembourg: Sovereign Sukuk setbacks

The increasing number of recent sovereign and corporate Sukuk issuances in the Islamic world has not remained
unnoticed in Europe. Both the UK and Luxembourg have announced the issuance of sovereign Sukuk in a move
to boost their Islamic fi nance credentials and to welcome further investments from the Islamic world. BISHR
SHIBLAQ explores the status of the Luxembourg bid.

In October 2013, addressing the World
Islamic Economic Forum (WIEF)
meeting in London, the prime minister
of the UK, David Cameron, announced
the plan to issue a UK sovereign Sukuk
with an estimate value of GBP200
million (US$330 million), indicating a
2014-15 time frame for the issuance. It
has been rumored for many years that
the Luxembourg government could
issue sovereign Sukuk and in January
this year, the government also presented
a bill to parliament to allow the
securitization of assets for a proposed
Sukuk of EUR200 million (US$275
million).

Luxembourg’s bill on sovereign Sukuk
is a challenge to UK’s att empt to be the
fi rst European country to issue Islamic
debt instrument. While the UK Treasury
has not yet identifi ed the underlying
assets for its structure issuance, the
Luxembourg bill identifi es three prime
real estate assets to underpin the Islamic
bond, including the two towers of the
Gate of Europe (Porte de l’Europe) on
the Kirchberg Plateau, which is the main
fi nancial district and seat of the European
Union bodies in Luxembourg.

Recently, the Luxembourg bill was
scrutinized by the Council of State
(Conseild’Etat), a body which advises
the national legislature, the Chamber
of Deputies. Aft er expressing its full
support to the strategy followed by the
Luxembourg government to diversify
and reinforce its position as a leading
non-Muslim fi nancial center, the Council
of State nevertheless raised issues
concerning the economic rationale for
issuing Sukuk, the need for greater
clarity on the tax treatment, and listed
several issues not addressed in the bill
and relating to the Luxembourg law.

The Council of State requested a
“convincing explanation” on why
sovereign Sukuk could be considered a
more appropriate fi nancing instrument
than a conventional bond, referring to
the additional costs of establishing a
Shariah board to oversee the transaction’s
compliance with the Islamic principles.

As Luxembourg is an ‘AAA’-rated
country with a stable outlook, as recently
confi rmed by rating agencies, it is
able to issue a conventional bond at a
signifi cantly lower cost than Sukuk.
Moreover, the Council of State argued
that the transfer of assets required to
issue a Sukuk will inevitably trigger
tax liabilities, which would entail more
costs when compared to conventional
bonds. However, the Luxembourg tax
authorities have already clarifi ed the tax
treatment of Islamic fi nance transactions
in circulars dating back to 2010, where
Sukuk is analyzed as a debt instrument
from a Luxemburg tax perspective,
providing hence a similar tax treatment
to that of conventional bonds.

A Sukuk
issuance
should not only be
a marketing tool,
but should make
economical sense in
Luxembourg, the UK
or any other country
wishing to issue an
Islamic financial
debt instrument

On a diff erent note, the Council of
State pointed out the need to clarify
the purpose of the funds raised by the
Sukuk issuance. The link between Sukuk
and legislative requirements of public
spending is missing according to the
Council of State.
Finally, the Council of State raised
questions on who will be entitled to

buy the Sukuk. Only Muslim investors
or institutional investors or also
Luxembourg individuals would be
allowed to buy? Will there be a banking
syndicate in the classical sense or will the
mode of marketing be diff erent? What
are the ‘coupons’?

According to the Council of State, the
answers to these questions do not aff ect
the regularity of the bill from a legislative
perspective. Nevertheless, given the
innovative character of the proposal, they
need to be addressed.
The questions raised by the Luxembourg
Council of State underlined both the
progress which Islamic fi nance has
accomplished in winning acceptance in
European markets, and the challenges
which it still faces. The issues that need
to be addressed are valid. A Sukuk
issuance should not only be a marketing
tool, but should make economical sense
in Luxembourg, the UK or any other
country wishing to issue an Islamic

financial debt instrument.
Bishr Shiblaq is the head of Dubai
Representative Offi ce for Arendt &
Medernach — Avocats. He can be contacted
at bishr.shiblaq@arendt.com.