Revenue Note for Guidance

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Revenue Note for Guidance

PART 8A

SPECIFIED FINANCIAL TRANSACTIONS

Overview

Part 8A provides a regime to tax certain Islamic financial transactions in the same way as conventional financial transactions.

The term Islamic finance refers to financial transactions that are consistent with the principles of Islamic law (Shari’a). One of the main principles of Islamic finance is that the payment and receipt of interest (riba) is forbidden. Islamic financial transactions are typically backed by, or based on, an identifiable and tangible underlying asset, and involve risk sharing between the investor and the investee.

To facilitate commercial transactions, Islamic financial structures have been devised that comply with the basic principles of Shari’a law. These products meet the same economic needs as conventional financial products by using familiar legal structures in an alternative way (insofar as debt is concerned) to achieve the financing objectives.

Part 8A provides for the tax treatment of certain credit sale, deposit and investment transactions (referred to in the legislation as “specified financial transactions”) which achieve the same economic result in substance as comparable conventional products. Although designed to cover certain Shari’a compliant structures, the legislation applies to any financing arrangement falling within the meaning of the term “specified financial transaction” regardless of whether the arrangement is, in fact, Shari’a compliant.

Effectively, the provisions treat the return arising on a specified financial transaction as interest for tax purposes and apply all relevant tax legislation pertaining to interest to that return. The legislation does not change the nature of the financial arrangements. It seeks to provide a level playing field for tax between certain types of economically equivalent, but differently structured, finance arrangements.

CHAPTER 1

Interpretation

Overview

This is the interpretation Chapter for this Part.

267N Interpretation

Summary

This section is concerned with the interpretation of certain words and expressions used in Chapter 1.

Details

Definitions

(1) “assets” are given the same meaning as in section 532.

“charges on income” are given the same meaning as in section 243.

“credit return” is the return payable to the finance undertaking in respect of a credit transaction and is equivalent to interest on a conventional loan.

(a) The credit return in the case of a credit sale or loan falling within paragraphs (a) and (b) respectively of the definition of “credit transaction” is the excess of the amount paid or payable by the borrower over the amount paid by the finance undertaking for the asset.

(b) In case of a mortgage type transaction (paragraph (c) of the definition of “credit transactions”), the “credit return” is the excess of the consideration paid or payable to the finance undertaking by the borrower (including any consideration paid or payable for the use of the asset) over the amount paid by the financial institution for the asset.

“credit transaction” defines the credit transactions which are covered by this Part.

(a) Paragraph (a) deals with credit sale arrangements whereby a financial undertaking acquires an asset for the purpose of entering into a credit transaction and disposes of the full interest in that asset to a person (hereafter referred to as the borrower) where-

  1. (a)(i) all or part of the consideration paid by the borrower exceeds the amount paid or payable by the finance undertaking for the asset,
  2. (a)(ii) all or part of the consideration due from the borrower is not required to be paid until a date later than the date of the disposal, and
  3. (a)(iii) the excess of the amounts paid or payable by the borrower over the consideration paid or payable by the finance undertaking for the asset is equivalent to the return on a loan of money at interest.

(b) Paragraph (b) covers loans or other transactions whereby a finance undertaking acquires an asset and –

  1. (b)(i) immediately disposes of that asset to the borrower at a marked up price,
  2. (b)(ii) the borrower immediately disposes of the asset for a price which is at least 95 per cent of the price paid or payable by the finance undertaking for the asset (this generates cash for the borrower),
  3. (b)(iii) all or part of the consideration for the acquisition of the asset by the borrower is not required to be paid by the borrower until a date later than the date of the purchase of the asset, and
  4. (b)(iv) the excess of the amount paid or payable to the finance undertaking by the borrower in respect of the asset is equivalent to the return on a loan of money at interest.

(c) Paragraph (c) covers mortgage type transactions under which—

  1. (c)(i) a finance undertaking and another person jointly acquire an asset (i.e. this would apply to new purchases), or
  2. (c)(ii) a finance undertaking acquires an asset from the borrower in circumstances where the borrower retains an interest in the asset (i.e. a refinance transaction),

where-

  1. (c)(I) the borrower-
    • (c)(I)(A) has exclusive use of the asset immediately (in the case of a new purchase) or retains exclusive use immediately (in a case where he already owned the asset),
    • (c)(I)(B) is exclusively entitled to any income, profit or gain from the asset (including increases in its value), and
    • (c)(I)(C) agrees to make payments to the finance undertaking amounting to the sum of the amount paid or payable by that undertaking for the asset and any other consideration paid for the use of the asset,
  2. (c)(II) the excess of the amount paid or payable (including rent or other amounts payable for the use of the asset) by the borrower to the finance undertaking over the amount paid by the finance undertaking for the asset equates in substance to the return on a loan of money at interest, and
  3. (c)(III) the finance undertaking’s interest in the asset passes either immediately or by the end of a specified period to the borrower for a consideration which exceeds the consideration paid by the finance undertaking for the asset.

“deposit transaction” – the definition of “deposit transaction” is designed to cater for transactions equivalent to the standard deposit transactions covered in the legislation dealing with deposit interest retention tax (DIRT – Chapter 4 of Part 8). There are two conditions to be fulfilled in order to qualify for the treatment. These are:

  1. (a) a sum of money must be deposited with a relevant deposit taker (as defined for DIRT purposes) on terms on which it or any part of it may be repaid either on demand or in circumstances agreed by or on behalf of the person making the deposit and the relevant deposit taker, and
  2. (b) the relevant deposit taker must make or credit a series of payments to the depositor from profits resulting from the use of the money deposited and in proportion to the money deposited.

“finance company” is defined as a company whose income consists wholly or mainly of either or both of the following:

  • income from leasing of plant and machinery
  • income from the carrying on of specified financial transactions

“financial institution” is given the same meaning as in section 891B.

“finance undertaking” is defined as either a finance company or a financial institution.

“investment certificates” must meet four conditions as follows:

  • (a) paragraph (a) requires that the certificates be issued to a person in order to establish the claim of that person over the rights and obligations represented by the certificate. Essentially this means that the certificate evidences the investors rights to a share in the ownership of the underlying assets;
  • (b) paragraph (b) requires that the certificate should entitle the owner to an amount which is equivalent to a share in the profits or losses derived from the underlying asset and which is in proportion to the number of certificates owned;
  • (c) paragraph (c) requires that the certificates be issued to a person who is not a “specified person”;
  • (d) paragraph (d) requires that the certificates should be treated as a financial liability of the issuing company in the accounts;

“investment return” this is the amount which would be equivalent to the interest on a conventional bond and means-

  1. (a) the excess of the consideration paid by the qualifying company on redemption of an investment certificate over the consideration paid in respect of the certificate by the beneficial owner to whom it was first issued, and
  2. (b) any other periodic payments made by the issuing company from profits or gains derived from the underlying asset.

“investment transaction” is defined as a transaction whereby a person acquires an investment certificate and receives an investment return. It is designed to cover both acquisitions from the original issuer and acquisitions on the secondary market.

“loan” is defined as any loan, advance or other arrangement by virtue of which interest is payable.

“owner” is defined as the person who would be entitled, if the securities were redeemed at that time, by the issuer, to the proceeds of the redemption.

“public” is defined as individuals generally, companies generally or individuals and companies generally.

“qualifying company” is the company that issues the investment certificates. In order to qualify as such it must-

  1. (a) be resident in the State,
  2. (b) issue “investment certificates” and
  3. (c) redeem the certificates after a specified period of time.

“relevant deposit” is given the same meaning as in section 256.

“relevant deposit taker” is given the same meaning as in section 256.

“relevant interest” is given the same meaning as in section 256.

“specified financial transaction” is defined as a “credit transaction”, a “deposit transaction” or an “investment transaction” and requires that the terms of these transactions must be such as would reasonably have been expected if the parties to the transaction were independent parties acting at arms length.

“specified person” is given the same meaning as in section 110, as if a reference to a “specified person” in section 110:

  1. to a qualifying company included a reference to a qualifying company within the meaning of section 267N and
  2. to qualifying assets was a reference to assets within the meaning of section 267N.

The definition of “specified person” was inserted by section 24 Finance Act 2013 and ensures that in order for a certificates issued, on or after the 1st January 2013, to qualify as an “investment certificate”, the certificate cannot be issued to:

  1. a company—
    1. that controls directly or indirectly the issuing company, or
    2. that is controlled directly or indirectly by the issuing company, or
    3. (c) that is controlled by a third company which also directly or indirectly controls the issuing company
      or
  2. a person, who provided assets or received loans from the issuing company where the total value of the loans or assets represents not less than 75% of the total assets of the issuing company.

(2) References to “consideration” are to be construed as follows:

  • (2)(a) in paragraph (a) references to consideration paid or payable by a borrower or a finance undertaking are to be construed as a reference to the aggregate of amounts paid or payable by the borrower or finance undertaking, as the case may be,
  • (2)(b) in paragraph (b) references to consideration paid or payable are not to include any amount in respect of which a borrower or a finance undertaking may claim —
    • (2)(b)(i) a deduction under Chapter 1 of Part 8 of the Value-Added Tax Consolidation Act 2010, or
    • (2)(b)(ii) a refund of value-added tax under an order under section 103 of that Act,
  • (2)(c) in paragraph (c) references to consideration paid or payable are not to include any amount chargeable by a finance undertaking in respect of fees, charges or similar payments.

Relevant Date: Finance Act 2021