Section 79B Taxes Consolidation Act 1997 - matching a foreign currency asset with redeemable share capital denominated in the same currency.

Proposed changes

Up to 31 December 2005, companies in possession of an IFSC license could avail of a Revenue practice that allowed the matching of a foreign currency asset with redeemable share capital denominated in the same currency. This practice ended for IFSC companies on 31 December 2005.

Section 62 of the Finance Act 2006 inserted a new section, section 79B, into the Taxes Consolidation Act 1997. Section 79B allows such treatment to all companies. The section enables any company that acquires a foreign currency asset to opt to match that asset for tax purposes with redeemable share capital denominated in the same currency. In such cases, the gain or loss on the redemption of the share capital will be taken into account in calculating taxable trading income, thus cancelling the loss or gain on the disposal of the asset. This is intended to provide tax neutrality for both the company and the Exchequer.

It has come to notice that the legislation does not provide such tax neutrality in all circumstances. The Minister for Finance intends to bring forward a number of legislative amendments in the Finance Bill 2007 to ensure that the provision operates as originally intended.

The proposed amendments will cater for the following circumstances:

1. Where movements in the value of share capital are taken into account on a “mark to market” basis

Section 79B provides neutrality only where the loan matures. Unrealised gains/losses brought to the profit and loss account as a result of fair valuing, or “marking to market”, of assets on an annual basis are not covered by the existing Section. The Minister proposes to allow the foreign exchange gains/losses arising from such fair valuing, or marking to market, of the loan to be matched with the corresponding loss/gain on the share capital.

2. Where the functional currency is a non-euro currency

Section 79B applies only to foreign currency assets where the functional currency of the company is a euro currency. As such it does not deal with situations where the functional currency of the company is a non-euro currency. The Minister proposes to amend the Section so it will also cater for companies with a non-euro functional currency that make loans or issue redeemable share capital in euro.

The effective date of the amendments will be the commencement date of the 2006 legislation (1 January 2006). In the meantime, and in anticipation of approval of the amendments, Revenue will operate the proposed extension on an administrative basis for those companies affected.

Transition to new arrangements

In order to avail of the provisions of Section 62, a company must opt for the matching treatment within 3 weeks of the acquisition of the asset. In the case of IFSC companies, this deadline obviously cannot be met in relation to assets which were on hands at 31 December 2005 and assets which were acquired prior to publication of the Finance Bill 2006 (2 February). In these cases, Revenue have agreed that the provision of Section 62, (including the proposed 2007 amendments) can apply where the IFSC company elects to match all foreign currency assets on hands up to 2 February 2006 with an equivalent amount of redeemable share capital denominated in the same currency. This election must be made on or before 15 December 2006.

Section 62 applies to all companies whether or not previously in possession of an IFSC license. It would not have been possible for companies to comply with the terms of the legislation in relation to assets acquired from the date of publication of the 2006 Bill to its enactment. Revenue is prepared to agree to Section 62 treatment where the company (whether IFSC or not) makes an election in respect of all relevant assets acquired on or after 1 January 2006 which are on hands at 1 December 2006. Again this election must be made on or before 15 December 2006.

It should be noted that any such election must be made in respect of all assets - a company will not be allowed to select particular assets for this treatment. In the future, a company may choose whether to make the election in respect of a particular asset. In these cases, the election must be made within the prescribed time limit. Where this might cause an administrative burden, Revenue is prepared to accept an election covering all future acquisitions of assets. In such cases, the election would remain in place and apply to all assets meeting the requirements of the legislation, unless formally withdrawn by the company. Where such a “blanket” election is withdrawn, the taxpayer must revert to electing on an asset by asset basis with the blanket election continuing to have effect for assets acquired up to the date of withdrawal.

In the case of short term assets which will be rolled over a number of times before disposal, Revenue has agreed to allow the election to be made within 3 weeks of the date the asset is first acquired. In such cases, where the financial terms have remained unaltered, Revenue agrees that there will be no need to re-elect each time the asset is rolled over.

If you have any queries on this Revenue e-Brief, please contact Marie Hurley, Direct Taxes Interpretation and International Division, Stamping Building, Dublin Castle, Dublin 2. Telephone 7024162 or email mhurley@revenue.ie.