South Korea To Introduce Islamic Bond Tax Benefits

by Mary Swire, Tax-News.com, Hong Kong

01 October 2009

The South Korean government has announced that a tax exemption will be offered for revenues from Islamic bonds, starting in 2010.

The tax incentive is aimed at attracting Islamic funds, as it was said that the Islamic financial market has grown rapidly from only USD0.3bn in 2000 to some USD31bn in 2007. By tapping that market, the tax change is expected to improve corporate finances by broadening the sources of investment, as well as reducing dependence on the US and Europe for financing, thereby diversifying risk.

As interest is not allowed by Shari’ah law, earnings on Islamic bonds are taken as profit, which is subject to being taxed in South Korea. The tax so paid is said to be the equivalent of interest of between 1.3% and 3.4%. The government has therefore introduced a bill to offer the same tax incentives as are given to normal bonds - income and corporate tax exemptions for interest received on bonds denominated in foreign currencies.

The tax incentives will first be applied to two major Islamic bonds, Ijara Sukuk and Murabaha Sukuk. Withholding tax will be exempted for both Ijara Sukuk and Murabaha Sukuk, together with transfer, acquisition and registration tax exemptions for Ijara Sukuk, and value-added tax exemption for Murabaha Sukuk.

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