Islamic banks never invest in pork, alcohol and tobacco

Russia's Finance Ministry is working on legal acts to sign an unusual investment agreement with the United Arab Emirates. Mutual investments will avoid taxation, whereas the Arabs will not have their profit taxed. However, the documents encourage only state-run corporations and funds.

The agreement between the government of the Russian Federation and the UAE "About taxation of the income from the investments of the contracting states and their financial and investment institutions" was signed in Abu-Dhabi on December 7, 2011. However, the information about the document has become available only recently.

Chechen President Ramzan Kadyrov visited Abu Dhabi, the largest and the most financially powerful emirate of the country, in November 2011. In February, Kadyrov had a meeting with the sheikhs of the UAE to discuss opportunities of Arab investments in the development of Chechnya. In February 2011, Russian Prime Minister Vladimir Putin ordered the Finance Ministry to prepare such an agreement, The Kommersant reports.

In accordance with the document, tax privileges will be guaranteed only to state economic agents of the two countries. The agreement indicated central banks and state-run pension funds, as well as central and regional governments and the organizations that they control. As for the UAE, it goes about the Investment Administration of Abu Dhabi and the Emirate Investment Administration.

The agreement stipulates income tax privileges in Russia, zero tax rates for dividend, percentage and income from the sale of property (save for real estate) and derivative instruments. Russian state-run companies will have guarantees of special terms for taxes on corporations and income in the UAE.

The signed agreement takes account of the laws of both countries. In particular, the Russian Finance Ministry supposedly could not sign the standard agreement to avoid double taxation because of the actual presence of the UAE on the Russian lists of offshores. That's why a special format for Arab partners was elaborated.

The agreement also takes account of the peculiarities of the so-called Islamic funding and Islamic bank system. The Islamic system does not practice the use of the borrowing rate of interest. Nevertheless, Islamic banks make money as they receive some sort of a bonus from borrowers. This bonus is not predetermined, whereas a client is not supposed to grant bail either. However, Islamic banks are very scrupulous when it comes to choosing borrowers. Unlike in the rest of the world, Shariah financiers will not work with speculative securities, such as futures and options - they do not buy and sell the rights for the parts of the future harvest and yet-unexctracted resources.

The norms of the Islamic banking do not allow any investments in the companies that deal with the production and sales of pork, alcohol and tobacco. Investments in the entertainment sector and financial structures that work on the basis of the borrowing rate of interest are banned too. Most investments are wired via the sovereign investment funds of the monarchies of the Persian Gulf.

The UAE delegation that visited Chechnya last year set the basic directions for Arab investments in the Russian region. The Arabs plan to invest in real estate and agriculture.

Vladimir Shabanov.

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Author`s name Dmitry Sudakov