Introduction to Islamic financing and tax
Introduction to Islamic financing and tax

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Introduction to Islamic financing and tax
  • What is Shari'ah compliant financing?
  • UK direct tax—alternative finance arrangement rules
  • Alternative finance arrangement rules are not confined to Islamic financing
  • Stamp taxes
  • Alternative investment bonds (sukuk) and stamp tax
  • Scottish land
  • UK VAT

What is Shari'ah compliant financing?

Shari'ah compliant financing arrangements, also known as Islamic financing arrangements, are designed to comply with Shari'ah or Islamic law, which is a legal system based on the religion of Islam.

To comply with Shari'ah law, Islamic financing arrangements must adhere to a number of principles, the key ones being:

  1. sharing of profit and risk—there must be some element of risk in any investment in order to be able to receive the benefit of a profit

  2. prohibition on interest—money must not on its own create more money

  3. prohibition on uncertainty—to ensure that no party has an unfair advantage over another

  4. prohibition on speculation—profit should be made through hard work and effort, not purely by chance

  5. no unjust enrichment, and

  6. prohibition on dealing in forbidden commodities, such as pork and alcohol

For more information on the sources and key principles of Shari'ah law, see:

  1. Practice Note: Sources of Shari'ah— law

  2. Practice Note: Key principles of Islamic finance

UK direct tax—alternative finance arrangement rules

Islamic financing is structured differently to conventional financing because it has to adhere to the key principles of Shari'ah compliant financing, such as not giving rise to interest. This may mean, for instance, that the relevant asset for which financing is obtained is transferred numerous times instead of just once had conventional financing been