Luxembourg’s Economy and the Acceptance of the Islamic Finance System

TEHRAN (ICNA) – Luxembourg is known globally for establishing mutual funds and a cross-border real estate system.

However, Luxembourg was soon recognized as an important player in Islamic finance, able to attract many investors from the Middle East.

Much of Luxembourg’s economy is dependent on services, particularly banking and financial services, making Luxembourg the most important private banking center in the Eurozone. Luxembourg’s economy is very similar to that of Germany and shows a degree of economic prosperity that is very rare among industrial democracies.

Over the past four decades, Luxembourg’s economic system has made great efforts to respond to various players in the market, including those who wish to use the Islamic finance system. In this regard, Luxembourg has become the third largest center for Islamic funds in the world after Saudi Arabia and Malaysia, in order of the number of Islamic funds.

According to the Luxembourg Association of the Investment Fund Industry (ALFI), as of December 2021, the net amount of Sharia-compliant funds in Luxembourg was 6,825.9 million euros. Although there is no specific tax framework to regulate Islamic financial transactions in Luxembourg, the Luxembourg tax authorities have clarified their position on Islamic financial services, in particular Luxembourg’s direct and indirect tax behavior in Murabaha.

In Luxembourg, Sharia-financed investment funds are generally set up within the general legal framework of Luxembourg, as there is no specific legal regime to regulate Islamic funds and Islamic financial services. Therefore, from a regulatory point of view, there is no specific distinction between Shariah-compliant mutual funds and any other type of investment fund. This means that a wide range of Sharia-compliant financial instruments is available to asset managers and investors, as in theory any investment vehicle in Luxembourg can be used to operate almost any Sharia-compliant fund.

An investment fund in this country can take the form of a corporation or a contract. The selection of the appropriate investment structure depends mainly on the investment policy, investors and the level of organization.

Luxembourg's economy, receiving an Islamic financial insurance system

Luxembourg’s legal framework has proven to be flexible and innovative enough to meet the requirements of Islamic finance professionals. Over the years, Luxembourg has become an attractive financial center for Islamic financial transactions, thanks to strong government support and an innovative legal framework. For example, the Luxembourg Securities Law of March 22, 2004 shows that due to the nature of asset-backed sukuk, the country’s economic system is an ideal tool for creating sukuk issuance structures.

Indeed, under Luxembourg’s securities law, it is easy to set up sukuk issuance platforms using several identical securities, each associated with a different asset type or group. Thus, a Luxembourgish issuer of securities can in fact issue sukuk at several levels.

The wide range and flexibility enjoyed by the various fund institutions make it possible to establish investment structures that comply with Islamic financial Sharia.

LuxSE was the first European stock exchange to list sukuk in 2002. The sukuk was issued by the Malaysian government, followed by other independent sukuk issuers and companies from Malaysia, Saudi Arabia, UAE, Pakistan, South Africa, Qatar and Turkey.

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