For many Gulf families, a European structure is only usable if it can be operated in a way that is consistent with their principles. That requirement is not an obstacle to a well-designed Dutch holding; it is a design parameter, and one that is far easier to accommodate when it is built in from the start than retrofitted later. The families who run into difficulty are the ones who assemble a conventional structure first and discover the incompatibility when the first financing or investment is proposed.
The two points of friction
Sharia-compatible structuring meets conventional European finance at two places: the way debt is treated, and the nature of the underlying investments. Interest-bearing debt, the default of European real estate and corporate finance, requires an alternative. And investments into sectors or instruments that are not permissible have to be screened out at the level of the holding rather than discovered afterwards. Both are solvable, and both are cheaper to solve in the structure than in the transaction.
Financing without conventional interest
The established Islamic finance techniques, in which return is generated through a share of profit, a lease, or a cost-plus sale rather than through interest, are well understood by the European institutions that offer them and entirely compatible with a Dutch holding. What matters is that the ownership layer is designed to hold the asset in the form these techniques require, since some of them involve the financier taking a real interest in the asset for a period. A holding built assuming a conventional mortgage may not accommodate a diminishing partnership without restructuring, and restructuring a live financing is expensive.
The principle is a parameter, not a problem. Designed in from the first day it costs nothing; discovered at the first transaction it costs a restructuring.
The tax analysis still has to work
A structure that is compatible with the family’s principles but ignores the tax position solves one problem and creates another. The return generated through a lease or a profit share still has to be characterised for Dutch and treaty purposes, the deductibility of payments still has to be established, and the participation exemption still governs how gains and distributions move up the chain, as we set out in our note on the participation exemption. The point is that these two requirements, compatibility and tax efficiency, are not in tension. A good structure satisfies both, and a structure that satisfies only one has not been finished.
Governance and screening
Where the family intends the holding to make ongoing investments rather than to hold a single asset, the compatibility requirement becomes a governance question: who decides what is permissible, on what standard, and how is that decision recorded. Building a screening standard into the holding’s governance, and the capacity to apply it, means the structure can operate over years without each investment becoming a fresh debate. This connects to the wider governance design we cover in our note on how family offices use Dutch BVs and stichtingen.
Substance remains the foundation
None of this displaces the requirement for genuine substance. A Sharia-compatible holding is still a holding, and a holding without resident directors, real decision-making and a genuine presence in the Netherlands is as fragile as any other paper structure. The requirements are the same as for any serious holding, set out in our note on Dutch substance requirements, and they are the foundation on which both the compatibility and the tax position rest.
Montclare runs a dedicated Middle East desk, structuring the corporate, tax and holding architecture for groups and families entering Europe through the Netherlands. Our services are set out on our services page.
This article is informational and does not constitute tax or legal advice. The treatment of any structure depends on its facts and on the law of each jurisdiction involved. Each engagement is subject to scope and applicable regulation.