188体育

鈥楻easonable commercial return鈥�

Additional payments under the sukuk arrangements (which will include both 鈥榠nterest鈥� and 鈥榙iscount鈥�) must not exceed a reasonable commercial return on a loan of the capital. Where the return is not fixed at the outset, it is the maximum possible amount of the additional payments that must be considered.

Thus, in the example above, the issue terms of the sukuk impose no upper limit on the amount of the periodic distributions - a sukuk holder subscribing 拢100 may, in a year, get back 拢20 or even 拢200 if the bull sires particularly valuable calves (although equally, they could get nothing). The maximum return is clearly in excess of a reasonable commercial return on a loan of 拢100, and the sukuk would therefore not be an alternative finance investment bond within the legislation.

In applying the 鈥榬easonable commercial return鈥� test, the sukuk should be compared to a hypothetical loan on similar terms and carrying similar risks. For example, a conventional security convertible into shares will normally carry a lower rate of interest because the conversion right has a value. The return on an 鈥榚xchangeable鈥� or 鈥榗onvertible鈥� sukuk should be measured against the return on an equivalent exchangeable or convertible debt security.

However, investment in a sukuk will generally carry a slightly greater risk than investment in a conventional security, because investors have recourse only to the 鈥榖ond assets鈥� - they cannot sue the issuing company for return of their capital. So the 鈥榬easonable commercial return鈥� for a sukuk is likely to be higher than the return were the same company to issue a conventional security.

As with any financial instrument, the pricing of sukuk will depend on the issuer鈥檚 view of the market at the time of issue, and 鈥榬easonable commercial return鈥� may vary within quite a wide range. HMRC staff should bear in mind that the purpose of the test is to exclude sukuk where the return is blatantly above what would be reasonable and commercial for a debt security, or where the return is linked to profits.