Commentary

A1.303 Arrangements giving rise to profit share return

Administration and compliance

A1.303 Arrangements giving rise to profit share return

A1.303 Arrangements giving rise to profit share return

A finance arrangement can, as an alternative to payment of interest, be structured as a person investing money on behalf of another with a view to making a profit which is shared between the two parties. This is the second type of arrangements dealt with in the legislation. FA 2005 enacted the provisions1 for what is now (after FA 2006) called a 'deposit', while FA 2006 also introduced a new category, 'profit share agency'2, referred to in Islamic Finance as 'wakala'. The key commercial distinction is that in the case of a deposit, the financial institution is legally indebted to the depositor, with consequent credit risk for the depositor in the event of the financial institution's insolvency. In the case of a profit share agency, the financial institution is acting as the investor's agent3. This reduces the investor's risk from the insolvency of the financial institution, replacing it with the commercial risk of the underlying investment.

Alternative finance arrangements that fall within ITA 2007, ss 564E or 564F, CTA 2009, ss 505 or 506 may

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