Advantages And Expertise Of The Luxembourg Financial Sector in Setting Up Shariah Funds

According to the latest statistics, Luxembourg is the fifth largest domicile for Shariah-compliant investment funds ('Sharia Funds') worldwide and the first non-Muslim domicile. Its success is due to is structuring expertise and its track record in cross-border distribution. It is also due, in large part, to the flexibility of its legal and regulatory framework (which is designed to accommodate products from different traditions and thus does not require the implementation of any specific provision to host Shariah Funds). The only Islamic finance-specific Luxembourg provisions are two tax guidelines referred to hereinafter and a note issued by the Luxembourg regulator (the 'Commission de Surveillance du Secteur Financier') on sukuks.

Luxembourg offers a broad range of regulated or unregulated investment vehicles that may be structured in a Shariah-compliant manner. The choice between the regulated vehicles which include: (i) undertakings for collective investment in transferable securities ('UCITS'); (ii) so-called Part II funds; (iii) specialised investment funds ('SIFs'); and (iv) investment companies in risk capital ('SICAR'), mainly depends on the target investors and investment strategy.

UCITS and Part II Funds, for example, are the only vehicles that may be marketed to both retail and institutional investors (SIFs and SICARs being reserved to sophisticated investors). UCITS are also the only vehicles benefiting from a European passport, allowing their easy distribution throughout the European Union, as well as simplified registration and recognition in a number of countries worldwide. This situation will evolve from July 2013, with the introduction of another European passport (restricted to marketing to professional investors) for managers of SIFs, SICARs and Part II Funds, falling within the scope of Directive 2011/61/EU of the European Parliament and of the Council on Alternative Investment Fund Managers.

The most flexible vehicle in terms of investment policy is the SIF, which may invest in any kind of assets, provided that it does not invest more than 30% of its assets in securities of the same kind issued by the same issuer. This flexibility is important, as Shariah Funds have to combine the requirement pertaining to the relevant vehicle with Shariah principles. Whereas this is relatively unproblematic for SIFs and SICARs (contrary to Sifs, SICARs are not subject to any diversification rules but invest all their assets in risk...