1. 2011 Tax Reform in Japan to encourage the issuance of Japanese version of Sukuk al Ijara Mr. ● ● ● ● ●, Esq. City-Yuwa Partners, Tokyo http://www.city-yuwa.com July 2011

2. General In 2011 Tax Reform, “Asset Liquidation Law” has been amended to encourage the issuance of Sukuk al Ijara. Originally “Asset Liquidation Law” was enacted exclusively for asset securitizations and has been widely used for the securitization of receivables and real estates, which is “asset backed transaction”. “Asset Liquidation Law” was amended so that the Law can be used for Sukuk al Ijara, which is “asset based transaction”. “Tax Special Measurement Law” was also amended to provide certain tax advantages to Sukuk al Ijara issued pursuant to the amended “Asset Liquidation Law”.

3. The issues solved by the new legislation The bonds cannot be used for Islamic finance because of prohibition of Riba. Certain types of the trusts are subject to corporate taxation. However, the tax is imposed on the trust level and the investors’ level (double taxation) (cf: General principle: A beneficiary is a tax payer in respect of the income from the trust.) The withholding tax on the distribution from the trust makes the Japanese version of Sukuk unattractive to Islamic investors. The tax on the real estate transaction makes the transaction expensive.

4. “Special Bond Type Beneficial Interest”-New concept “Special Bond Type Beneficial Interest” has been introduced into the “Asset Liquidation Law”. It is a type of the beneficial Interests in a trust created in accordance with “Asset Liquidation Law” If certain requirements are met, “Specific Bond Type Beneficial Interest (or trust certificate)” is treated as if it is a bond.

5. ④ Purchase Price Structure of Sūkuk-al-Ijara under the 2011 Tax Reform of Japan Specified Purpose Trust (SPT) [Note 1] ① Sukuk (Bond Type Trust Certificate) Originator ① Entrustment of Asset ③ Rent Islamic Investors (Non resident, foreign corporation without any permanent establishment in Japan) ② Ijara ④ Repurchase pursuant to Undertaking [Note 3] ④ Repayment Islamic Investor Transfer Price [Note 4] Real Estate ③ Periodic distribution ① Trust Certificate [Note 2]

6. [Note 1] Periodic Distribution is deductible even if Sukuk are offered outside Japan (General rule of “Asset Liquidation Law) In order to be qualified for the deduction of the amount of the distribution for the purpose of the corporate tax in the trust level, more than 50 % of the securities must be offered to domestic investors and more than 90 percent of the retained earnings must be distributed. (Exemption for “Bond Type Beneficial Interest) Exempted from the requirement of more than 50% of the securities being offered in the domestic market.→Advantage for the trust issuing Sukuk to foreign investors

7. [Note 2] Exemption from tax imposed on the transfer of the real estates (General) In Japan, the transfer of a real estate is subject to the Registration Tax (or fee) (1.3% of price) and the Real Estate Acquisition Tax (currently 3% of value) (Purchase undertaking at the time of redemption of Sukuk) Registration Tax and Real Estate Acquisition Tax will be exempted when the real estate is repurchased by the Originator.

8. [Note 3] Equal treatment with bonds-distribution and redemption (General rule) In the case of the “trust subject to corporate taxation”, there is a double taxation in the trust level and the investor level. (Treated as if shares) (Sukuk investors) Exemption from the withholding tax on the interests and the profit from redemption. (Treated as if bonds)

9. [Note 4]Exempt of income tax with respect to the transfer of sukuk In general, if the trust asset is a real estate, the income from the transfer of the beneficial interest in a “trust subject to corporate taxation” will be deemed as the domestic source income and included in the income for the tax purpose. However, under the 2011 Tax Reform, the income from the transfer of the beneficial interest in the “Special Bond Type Trust Certificate” will be excluded from the taxable income.

10. Issues to be discussed(1) Only applicable to Sukuk al Ijara. In particular the Sukuk assets are real estates. Different from the Sukuk issued in other jurisdictions, the declaration of trust is not used. (cf: The Trust Law (general law) has a Japanese version of the declaration of trust.) The definition of Bond type Beneficial Interest - fix amount or libor + ●% - is sharia compliant? The principal amount is redeemed only at the final distribution. – Restriction on the structures.

11. Issues to be discussed(2) The restriction on the trust assets. Mudaraba interest or Musharaka interest are not allowed to be entrusted under “Asset Liquidation Law”. (cf: The Trust Law (general law) permits.) → The new legislation is not applicable to Mudaraba Sukuk, Musharaka Sukuk. The investors (beneficiaries) do not have a voting right in respect of the management of the trust, except the termination of the trust, the approval of the accounting and the change of the trust proposed by the trustee. – Not attractive to Islamic investors?

12. Thank you Mr. ● ● ● ● ●, Esq. City-Yuwa Partners http://www.city-yuwa.com/english/index.html 2-2, Marunouchi 2-Chome, Marunouchi-Mitsui Bldg. Chiyoda-ku, Tokyo Japan Tel: 81-(03)-6212-5583 E-mail: ● ● ● ● ●@city-yuwa.com