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Asset-Backed Securities and Islamic Finance - International Law Office

International Law Office

Securitisation & Structured Finance - France

Asset-Backed Securities and Islamic Finance

August 18 2009

The government is looking to enhance Islamic finance in France and more specifically the issue of sukuk (Islamic asset-backed securities) under French law. To this end, the National Assembly will shortly examine a draft law that would amend the trust (fiducie) regime.

France has already taken steps in favour of Islamic finance - the stock exchange regulator has published a recommendation on the listing of sukuk on Euronext Paris regarding the set-up and distribution in France of Islamic financial products, such as Sharia-compliant collective investment schemes. The French tax authorities have published a tax instruction on the tax neutrality of murabaha transactions.

Practitioners believe that the issue of sukuk can best be resolved by the use of a French trust structure. However, contrary to UK law, French law makes no distinction between legal ownership and beneficial ownership. Such distinction is necessary in order for a sukuk issued through a trust to be Sharia compliant.

It is therefore proposed to amend the Civil Code in order for the beneficiary to be granted beneficial and equitable ownership of the assets (ie, the fiduciary would benefit from the legal ownership of the fiduciary assets, while the beneficiary would benefit from the economic ownership of the same assets). Such fiduciary ownership would be a new type of ownership under French law and not a traditional ownership as contemplated by the Civil Code.

The proposal has been adopted by the Senate and is pending consideration by the National Assembly following the summer break.

For further information on this topic please contact Philip Boys at Lovells LLP by telephone (+33 1 53 67 47 47), fax (+33 1 53 67 47 48) or email (philip.boys@lovells.com). The Lovells website can be accessed at www.lovells.com.

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