Sukuk—investment bond arrangements and their UK direct tax treatment
Produced in partnership with Sarah Squires of Old Square Tax Chambers
Sukuk—investment bond arrangements and their UK direct tax treatment

The following Tax guidance note Produced in partnership with Sarah Squires of Old Square Tax Chambers provides comprehensive and up to date legal information covering:

  • Sukuk—investment bond arrangements and their UK direct tax treatment
  • What are sukuk?
  • UK direct tax rules applicable to sukuk
  • Conditions for sukuk to qualify as AFIB arrangements
  • Management condition
  • Corporation tax treatment—deemed loan relationship
  • Corporation tax treatment—disregarding trust relationship
  • AFIB arrangements and securitisations
  • Bond-issuer as financial institution
  • Collective investment schemes
  • more

Shari’a-compliant financing arrangements (also known as Islamic financing arrangements) can take a number of forms. The UK has introduced specific provisions known as the alternative finance arrangement rules to deal with the direct tax treatment of certain forms of Shari’a financing. The UK alternative finance arrangement rules are intended to allow Shari’a-compliant financing arrangements to be treated for UK direct tax purposes in the same way as an equivalent conventional financing arrangement. This treatment is dependent on the financing arrangements satisfying the relevant conditions set out in the legislation applicable to alternative finance arrangements. The rules currently cover five different types of financing arrangements.

The direct tax rules for alternative finance arrangements are not restricted to Islamic financing. Non-Shari’a arrangements could potentially fall within the scope of these rules.

One of the five forms of alternative financing arrangement provided for in UK tax legislation is investment bond arrangements, also known as alternative finance investment bond or AFIB arrangements. AFIB arrangements are the subject of this Practice Note. Sukuk, a form of Shari’a financing arrangement also referred to as Islamic bonds, may benefit from the UK tax treatment provided to AFIB arrangements if all the conditions are met.

This Practice Note is written on the assumption that the issuer and the bond-holders are companies within the charge to UK corporation tax, and outlines:

  1. how sukuk