Sukuk under Turkish Law 2

On April 1, 2010, a communiqué (hereinafter referred to as the “Sukuk communiqué”) formed by the Capital Markets Board (SPK) was published in the Official Gazette and came into effect. The Sukuk communiqué includes provisions about certificates and Special Purpose Vehicle (SPV) instruments. These certificates are basically called “rent certificates” as the Sukuk communiqué is based on ijara Sukuk. The other structures may also be constructed under the Sukuk communiqué by way of analogy. The communiqué mainly aims to pave the way for Sukuk in Turkey.

It may well be argued that not only the scope of the structure, but also the liberty of the originator is relatively narrow in the Sukuk communiqué. For instance, the securities that have not been sold within the sales period may be sold in a years time, according to the conventional debt securities communiqué, while Sukuk that have not been sold within said period will be cancelled. SPK also has the right to scrutinize all the accounts and transactions of the originator and the SPV according to the Sukuk communiqué, while the first communiqué authorizes SPK to ask only for information and documents relating to debt securities and its financial situation.

It is difficult to understand why the originator would need to share information about all his or her accounts and transactions, including those which have no relation to the Sukuk issuance in question?

Most of the provisions in the Sukuk communiqué are expressly targeting investor protection. Obviously this is quite understandable; as we learned from the recent financial crisis that asset-backed securities may well be a trap for uninformed investors. However, I strongly believe that the originators also deserve some more attention in an undeveloped market in order to encourage corporations to issue capital markets instruments to bring the investor’s money to the market place.

Islamic finance, as a mode of financing which uses extraordinary ways to create known instruments, suffers from many tax provisions throughout the world. Islamic finance-friendly jurisdictions, such as the UK, have amended their tax laws in order to create an environment where instruments of Islamic finance are treated equally with conventional ones. This means that these instruments can still be competitive against similar conventional instruments in these jurisdictions. There is also much debate going on in countries like Germany and France about clearing up any obstacles in the way of Islamic finance.

Let us examine how the structure stipulated in the Sukuk communiqué works from a tax point of view. The originator sells the property to the SPV. There may be a tax burden for the gained value on the originator. The SPV rents the property back to the originator. The SPV will probably pay tax on its rental revenue, as it is ambiguous as to whether or not it will get any tax relief because of its payments to the investors. At the end of the rental period, the SPV shall sell the property back to the originator. If the SPV sells the property with the price it paid at the beginning, there will not be any tax burden on the parties, but then the tax authorities will be following the matter as it may not be in compliance with the arm’s length principle. And, so on and on…

There is no way that Sukuk can be competitive in an environment where there is a large tax burden on the originator. In these conditions, no corporation would be willing to issue Sukuk in order to raise debt from capital markets. One should remember that financing projects through bank credits, syndicated loans or conventional debt securities is still cheap.

I do strongly support SPK’s effort to bring innovative structures to Turkish financial markets. However, we obviously need to do some more thinking on these issues before moving ahead.

Berk Cektir http://www.berkcektir.av.tr/ The information provided here is intended to give basic legal information. You should get legal assistance from a licensed attorney at law while conducting legal transactions and not just rely on the information in this corner. http://www.todayszaman.com info@berkcektirlaw. Photo by photoexpress.com.

Category: Local