New circular on Islamic finance – Indirect tax treatment of Murabaha and Ijara agreements

New circular on Islamic finance – Indirect tax treatment of Murabaha and Ijara agreements

As mentioned in our previous legal alert, the Luxembourg tax authorities have issued on 12 January 2010 a circular in relation to direct taxes applicable to Murabaha agreements and Sukuk transactions.
On  17 June 2010, the Luxembourg indirect tax authorities (L’Administration de l’Enregistrement et des Domaines) have issued a circular (circular n°749, hereafter referred to as the “Circular”) providing guidance regarding the registration duties (i.e. real estate transfer taxes) and certain VAT aspects applicable to Murabaha and Ijara transactions in relation to Luxembourg real estate.

General background

Murabaha is a kind of sale with a deferred payment where the seller expressly mentions the cost he has incurred on the assets to be sold and sells it to another person by adding some mark-up / margin thereon which is previously known to the buyer.
In general, there are two agreements in a Murabaha financing: First, the purchase by a Luxembourg special purpose vehicle (“SPV”) of the real estate asset on request of the Islamic investor and secondly the sale by the SPV of the real estate asset to the Islamic investor with an agreed margin (mark-up) and paid by the Islamic investor to the SPV on a deferred payment basis. 

Registration duties

The Circular clarifies that a purchase and resale of a real estate asset is liable to registration duties based on the acquisition costs and not on the resale price. The difference between the acquisition price and the resale price (mark-up in a Murabaha transaction) will be considered as interest for  Luxembourg tax purposes and therefore not be subject to registration duties.
The above treatment is only possible if the following three conditions are met:

  1. The Islamic investor (buyer under the second sale agreement) must take possession of the real estate asset immediately after the second sale;
  2. The second sale agreement must be completed within 10 days after the first sale agreement; and
  3. The first sale agreement must mention a clause that the purchase is realized under a Murabaha agreement and a copy of the Murabaha agreement (i.e. the second sale agreement) must be attached to the first sale agreement.

The Circular furthermore also confirmed that the disposal of shares of a company with substantial real estate assets are not subject to registration duties.

VAT aspects

The circular confirmed that SPVs created under Murabaha or Ijara agreements are subject to VAT. Any real estate transaction under such Sharia compliant financial instruments may however benefit from VAT exemption under article 44 §1 f) and g) of the VAT law. However, if all persons to the transaction are VAT taxpayers, they may opt for the application of VAT on the transfer or lease of the real estate asset.


This Circular provides clarity and more security in real estate transactions (and more in particular in relation to real estate transfer taxes and VAT issues) involving Sharia compliant instruments (such as Murabaha and Ijara). It furthermore confirms Luxembourg’s commitment to Islamic finance and to become a global hub for Islamic finance in Europe.