Islamic finance corresponds to financial transactions complying with principles set forth by the sharia, notably the prohibition of speculative operations ("gharar"), interest-bearing loans ("riba"), uncertainty on sales ("mayssir"), and investments in certain sectors such as weapons, alcohol and tobacco, or casinos ("haram"). The main principle under Islamic finance is that the transaction must be backed on to tangible assets and then tied to the real economy. In order to be part of this $ 500 - 700 billion worldwide market, French authorities has decided to promote the development of Islamic financial transactions since July 2007, through progressive adaptation of the French civil, financial and tax regulations. Of course, certain Islamic financial transactions had already been carried out in France prior to 2007, mainly in the real estate sector. However, their tax treatment was still uncertain. New tax administrative regulations have been published last Fepuary 2009 in order to clarify the French tax treatment of two types of Islamic finance transactions, i.e. the murabaha and sukuk bonds transactions.

- Tax treatment on murhaba transaction

Main characteristics of Murhaba transaction for French tax purpose.

A murabaha transaction is one whereby a financier (Bank or SpV) borrows funds and then purchases an asset from third party, which he then immediately resells to an investor (i.e. its client) at a price higher than the initial purchase price (i.e. interests and intermediary fee included). The sale price is paid by installments. The difference between the purchase price and the resale price (the profit margin generated by the financier) corresponds to the cost of financing the investor would have borne if he had purchased the asset directly on credit.

A murabaha transaction is in fact an asset financing technique through a purchase and resale transactions on real estate properties, securities, goods or inventories. The agreement must contain specific provisions set forth by the tax administrative regulations in order to qualify as murhaba transaction for French tax purpose.

(ii) Tax regime applicable

Normally the agreement between the financier and the investor qualifies as sale agreement from legal standpoint and the profit deriving from such sale is immediately taxable. However, according to French tax authorities the profit margin made by the financier is the remuneration of the differed payment granted to the investor from economical standpoint.

Such differed payment is treated with regard to most French taxes as interest and not as a capital gain. Therefore the taxation of the profit margin generated by the financier is spread out over the term of the differed payment (on straight line basis) provided that the agreement is properly drafted and specific accounting requirements are met. However, the portion of the profit margin remunerating intermediary services rendered by the financier is directly subject to tax.

In the case of profit margin paid by the French investor company to the financier located outside France, such payment is exempted from French withholding tax according to domestic tax rules provided that the conditions indicated above are met.

The tax administrative regulations have also confirmed the cases where capital gain taxes on the real estate purchase/resale transaction, registration duties, business license tax and VAT can be mitigated.

Tax treatment on sukuk and similar indexed financial transactions

Main characteristics of Sukuk transaction for French tax purpose A sukuk transaction is one whereby investors finance the purchase of an asset by means of profit-sharing financing. In a common type of sukuk transaction, a French group set up an SpV in order to purchase an asset, that purchase being financed through the issuance of sukuk bonds subscribed by investors and the SpV's parent company. The SpV then rents the asset to third party and benefits from put option granted by the parent company on this asset. The SpV transfers the asset to a fiduciary for management purpose. The fiduciary will remunerate the sukuk bonds holders, and might repay to the SpV the management fees paid the SpV (such as statutory audit fees for example). Sukuk bonds are repaid either in the course of the transaction on the basis of predetermined term or at their maturity. Therefore, on this type of transaction the return on the sukuk bonds is directly correlated to the return on the underlying asset leased, and there is a combination between the issuance of bonds and trust mechanism as the sukuk bonds holders are also the beneficiaries of the rights attached to the trust.

(ii) Similar indexed financial transactions for French tax purpose Such transactions correspond to debts securities and participating loans giving right to remun omar 1.1:zy