Sukuk

Product Operation

The Sukuk is similar to an obligation backed by an asset but is not in anyway a bond because it is not based on debt. It can be regarded as a commercial paper(1) which gives the investor a share of ownership in the underlying asset.

The issuer must identify the assets to be sold to investors by transferring it to an ad hoc basis.

Investors enjoy the usufruct of the assets in proportion to their investment and bear the credit risk of the issuer.

The Sukuk are therefore equity securities which have the following characteristics:

1. They are issued by pooled funds (Mutual funds) ;
2. They are based on hard assets that generate steady income and expectation;
3. They may be guaranteed or not by their originators;
4. Investors receive a fee equal to the income of the underlying assets;
5. The Sukuk These securities are issued by SPVs, often subsidiaries of banks or trusts called SPV;
6. Most Sukuk are issued in dollars;
7. The Sukuk differ from conventional bonds because they are based on tangible assets instead of being based on the debt;
8. There are about fourteen kinds of Sukuk(2) but the most used today are Sukuk Al Ijara based and sukuk al mucharaka on the lease.

Figure: Example of structuring of Sukuk Al Ijara (Source: Ahes Consulting)

In summary, Sukuk are based on underlying assets, a stable income, tradable and comply with the Shariah. They have characteristics similar to conventional bonds but are of certificates of ownership of assets while bonds represent the debt. Finally, Sukuk may be quoted or unquoted.

Regulatory aspects, legal and tax treatment in France

"The remuneration paid under" Sukuk"Or debt securities and indexed loans are deductible from taxable income under the same conditions as those for mortgage interest"(3).

Indeed, Sukuk be treated by the administration as debt and therefore its income as interest.

Moreover, "wages paid by corporations held by non-residents' Sukuk"Or debt securities and indexed loans are exempt from withholding tax in France."