Tax treatment

6
Tax Treatment on
Islamic Finance 
in Malaysia
Islamic Finance Transactions
Commonly, Islamic financial transactions involve the following:
Islamic Financial Transactions
Sale-based 
Principles
Profit-sharing 
Principles
Lease-based 
Principles
Fee-based 
Principles
Free-of-
charge 
Principles
 Supporting 
Contract / 
Security
Bai (Sales)
Bai-Salam
Istisna
Debt-based 
financing
• 
BBA
• 
Murabahah
Equity-based 
financing
• 
Mudarabah
• 
Musharakah
Debt-based 
financing
Ijarah 
(leasing)
• 
Operating
• 
Financial
• 
Wakalah 
(agency)
• 
Jualah 
(commission)
• 
Qard 
Hassan
• 
Kafalah
• 
Rahnu
• 
Hiwalah
The above diagram is generally some common types of Islamic finance contract. For a contract
1
to 
be Shariah-compliant or to be considered as Islamic finance contract, it must have the following four 
features of which to some extent may vary from those of conventional contracts:
1. 
There are at least two parties in an Islamic contract;
2. There is offer and acceptance by both parties (i.e. seller or buyer or vice versa) on the purpose 
and terms of the contract;
3. 
The purpose of the contract must not be haram (forbidden) or offensive to Shariah; and
4. The subject of the contract must change hands upon completion of the contract.
BBA, Murabahah and Ijarah are the most common type of debt-based financing contract whereas 
Mudarabah and Musharakah are the equity-based financing contract which are less popular as the 
former is in a way similar with the conventional financing and due to familiarity.
A Mudarabah financing contract is where the bank only provides capital to the lender for a project 
based on a profit-sharing ratio. If profits are generated, the profits are distributed according to the 
pre-agreed profit-sharing ratio whereas, any losses are entirely absorbed by the bank. Under a 
Musharakah financing contract, the bank and the lender will become joint-venture partners where 
both parties will contribute capital and decide on a profit-sharing agreement.
In our Malaysia jurisdiction, the Islamic finance services that are available would be savings/
transactional accounts, consumer finance, corporate finance, investment banking, corporate sukuk 
issuances, sovereign sukuk issuances, fund management, securities trading, takaful, retakaful, and 
co-operatives and/or savings institutions.
1 
A contract is an agreement between two or more parties that creates an obligation to do or not to do 
any particular thing. It is legally-enforceable by the law where the agreement was made and upon fulfilment of 
certain conditions.

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