LONDON: The French government has overhauled its tax laws to facilitate Islamic financial transactions such as Murabaha (cost-plus-financing) used primarily in commodity finance; and for Sukuk (Islamic bonds). This move has been on the cards since the summer of 2008 when Paris announced that it had started its tax neutrality review to facilitate Islamic financial products.
Islamic bankers in the Middle East and in Southeast Asia have welcomed the French initiative, especially after the disappointment of the postponement of a UK debut sovereign Sukuk issuance announced by the UK Treasury last November. Judging by the series of Islamic finance conferences held in Paris over the last few months, including a recent seminar by the Kuala Lumpur-based Islamic Financial Services Board (IFSB), whose mandate is to set prudential and supervisory standards for the global Islamic finance industry, France could overtake the UK in pushing the Islamic finance agenda in the European Union. France under President Nicolas Sarkozy is promoting Islamic finance for several reasons. These include financial inclusion policies to give access to its Muslim population to financial products according to their faith. France is also keen to attract Islamic investment both at home and through joint ventures in third countries. Islamic finance could also be attractive to French corporates and all those interested in ethical finance.
The changes in the French tax laws pertain to the Murabaha tax regime, relating to taxation of the financier’s profit; to real estate sales; to local business taxation and minimum tax contribution; and to the taxation of Murabaha transactions. The other changes pertain to Sukuk and assimilated products, covering corporate income tax and tax treatment of non-residents; and tax arrangements in relation to value added tax (VAT). The changes in the tax laws bring the above Islamic financial products on par with equivalent conventional products thus ensuring equal tax treatment and a desire by the French authorities to ensure that Islamic financial products are not discriminated against in terms of taxation.
For example, according to the new law, in the Murabaha the financier’s profit from the deferment of payment granted to the purchaser is taken into account in the taxable result by spreading it evenly throughout the period during which payment is deferred. When the financier is not resident in France and his customer is a French legal person, this profit is exempt from withholding tax in France.
The French ambition is to become the other Islamic finance hub in Europe, in addition to London. According to Philippe Yvergniaux, the CEO of the Invest in France Agency (UK and Ireland), “the announcement is very significant in two ways. Firstly it allows France to develop the Islamic finance sector which is in itself important, but it also highlights yet another way that France has been re-inventing itself as a business-friendly destination for industry and professional services over recent years. Changes to the labor laws (which have effectively dismantled the 35-hour week); the most favorable R&D tax credit in Europe — these are just two measures of many that the government has introduced.”
France of course has a much larger Muslim population than the UK — estimated at up to seven million, which is three times the Muslim population of Britain and the largest Muslim population in Western Europe. It is also the gateway to the Francophone countries, many of which have meager or non-existent Islamic finance industries. As such it is ironic that a non-Muslim country such as France could spearhead the development of Islamic finance in several Muslim countries, especially those former colonies.
Indeed there are signs that this is already happening. In June 2008, French banking giant, Societe Generale (SocGen) through its joint venture with Mauritius Commercial Bank based in Reunion Islands, Banque Francaise Commerciale de L’ocean Indien (BFC), launched an Islamic liquidity investment scheme which was largely subscribed by local Reunion Islands HNWIs (high net worth individuals), corporates and institutional investors. This is the first such product to be offered in France and its territories. SocGen is no stranger to Islamic finance having structured several commodity funds through its Sogemin subsidiary in the past and a commodities-based hedge fund through FIMAT in 2006. Similarly, BNP Paribas is also very active in the Islamic finance industry especially in the Sukuk market in structuring products.
The opening up of France to Islamic finance augurs well for Saudi-French economic relations. Hitherto, Islamic banks have largely invested in French real estate portfolios especially in commercial property. According to official French statistics, France is the Kingdom’s sixth largest trading partner. Last year bilateral trade reached 4.2 billion euros, with Saudi exports to France totaling 2.9 billion euros and imports from France totaling 1.3 billion euros. However, France in 2008 was the third largest investor in Saudi Arabia with a total investment of $1.2 billion in 67 projects. At the same time, Saudi investment in France totaled SR2.6 billion in 2006.