Islamic banking ‘made in Germany’: Safe investment opportunities

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1. IFN COUNTRY /SECTOR CORRESPONDENT Islamic banking ‘made in Germany’: Safe investment opportunities GERMANY By Ahmet Kudsi Arslan Germany’s Islamic banking sector is dynamically starting the second half of 2019 with an ongoing development process with regards to products and services by KT Bank, the only fullyfledged bank with an Islamic business model in the country. Islamic finance products are highly sought-after in the Muslim community, yet it can also be reported that there is a steadily increasing interest from non-Muslim, German customers. These customers are interested in socially responsible investments and have discovered not only the ethical qualities of Islamic banking, but also the top conditions and excellent profitability of the provided investment opportunities. A product that currently serves as a very popular long-term investment for retail clients is the KT Fixed-Term Deposit Account that has been set up in cooperation with a fintech entity. Islamic banking ‘made in Germany’ — this investment plan not only provides clients with excellent conditions, and guaranteed return for the full term, generated by a commodity trade, but it also grants an environment of ultimate safety. As the bank holds a full license under German law for the provision of a deposit and credit business, it is also a member of the German Banks Compensation Scheme which secures clients’ deposits up to EUR100,000 (US$112,245). Clients choose terms running between three and 60 months and enjoy utmost flexibility concerning the investment sum to be put into the fixed-term deposit account, with an amount starting at EUR1,000 (US$1,122.45). Parallel to the further development of products and services, the sector continued its awareness campaign in the corporate and business community, with KT Bank promoting Islamic banking at various events like the 7th German– Turkish Business Day in Dusseldorf and the 38th assembly of Turkish banks in Frankfurt. Ahmet Kudsi Arslan is the chairman of the management board at KT Bank. He can be contacted at kudsi.arslan@kt-bank.de. No double dipping on real estate transfer tax LAW By Dr Nicolas Bremer A German court has ruled that Islamic financing of real estate acquisitions shall not trigger multiple taxation. While the market share of Islamic finance still remains strongest in predominantly Muslim jurisdictions, some of the global growth we have seen in the industry stems from Islamic finance transactions conducted in countries where Islam holds less influence. Traditionally, London has been the most active Islamic finance hub in the western world. While this is in part due to the relevance of London as an international financial center, England and Wales were also quicker than other jurisdictions to adopt Islamic finance-friendly laws. For instance, England and Wales introduced legislation amending the duty and tax regime governing the transfer of real estate ownership to accommodate Islamic finance structures in real estate transactions. In a recent decision, the higher regional court (Oberlandesgericht) of Hamm, Germany, took a similar approach, finding that while an Islamic financing structure of an acquisition of German real estate could be seen as including multiple transfer acts, it should not © trigger multiple real estate transfer tax (RETT) payments. Considering that — depending on the German federal state (Bundesland) the property is located in — RETT rates can be as high as 6.5%, this decision is a welcome clarification of the German RETT regime that has the potential to entice real estate investors seeking Shariah compliant financing to put their money into the German market. The court case in Hamm concerned the RETT exposure of a real estate transaction financed by Germany’s first and only Islamic bank, KT Bank. In the relevant transaction, the bank had employed a model whereby the borrower and the bank formed an SPV which acquired the property. Consequently, the bank sold its shares in the SPV to the borrower under a debt deferral agreement with a surcharge — a Musharakah financing. The problem with such a structure is that from a German RETT law perspective, it could be argued that the property is sold twice; once when the borrower and the bank acquire the property through their SPV, and again when the borrower acquires 100% of the shares in the SPV. This is due to the fact that under German law, RETT is triggered not only if a property is directly acquired but also if 90% or more of the share capital in a 20 corporate entity holding real estate is acquired. Thus, it could be argued that RETT is triggered twice. The higher regional court of Hamm, however, now argues that the temporary participation of the bank in the transaction is immaterial from a RETT perspective — particularly since the bank was not even included in the application for registration of ownership in the land register. Therefore, the court found that from a RETT perspective, only one transfer of ownership took place and thus RETT could only be charged once. This significant verdict opens up the German real estate market for Islamic finance institutions by providing certainty for investors and private individuals seeking to acquire real property in Germany using Shariah compliant financing. While further legislative reforms are needed for Germany to be considered a competitive jurisdiction for Islamic finance, the looming Brexit date in the next quarter and the possible immediate exclusion of UK-based financial institutions from the continent is prompting the financial center of Frankfurt to take a greater interest in the European Islamic finance market. Dr Nicolas Bremer is a partner at Alexander & Partner. He can be contacted at nb@ alexander-partner.com. 10th July 2019