79B Matching of foreign currency assets with certain foreign currency share capital

Summary

This section enables a company with a foreign currency asset to match that asset for tax purposes with redeemable share capital denominated in the same currency.

Where a financial services company makes a loan in a foreign currency, the company will be exposed to the risk of losses arising from movements in the exchange rate of the currency concerned. Sometimes such a company will protect itself from that risk by issuing redeemable share capital denominated in the same currency so that any foreign exchange gain or loss on the loan will be matched by a corresponding foreign exchange loss or gain on the share capital.

Where a company protects itself this way, it may not achieve neutrality in tax terms. This is because any gain or loss on the loan would be taken into account in calculating its trading income for tax purposes. However, the corresponding loss or gain on the share capital would be ignored for such purposes. Depending on the movement in the currencies concerned, this could result in the company getting a tax advantage or suffering a tax disadvantage.

The section allows the company to opt to match the loan and share capital for tax purposes but it must opt within 3 weeks of acquiring the loan. The section thus provides tax neutrality for such a transaction for both the company concerned and the Exchequer.

Details

Definitions

(1)(a) “foreign currency asset” is an asset of a company the consideration for which is denominated in a currency other than the functional currency of the company. The full amount of the consideration must be so denominated. Also, any gain on the disposal of the asset must be taken into account in computing the company’s trading income for it to be a foreign currency asset.

“functional currency” is, in general, the currency of the primary economic environment in which the company operates.

“relevant foreign currency liability” is a liability of a company which is denominated in a currency other than the functional currency of the company and which arises from redeemable share capital issued by the company. It does not include any liability which is a “relevant monetary item” for the purposes of section 79. Under that section foreign currency gains and losses on “relevant monetary items” are taken into account in the calculation of trading income.

“rate of exchange” has the meaning assigned to it in section 79, i.e. the rate at which 2 currencies might reasonably be expected to be exchanged by persons dealing at arm’s length.

Application

(1)(b)(i) A company that has matched a foreign currency asset with a relevant foreign currency liability for the purposes of the section and which then disposes of the asset but does not discharge the liability at the same time, is treated as if it had discharged the liability at the same time as it disposed of the asset. This enables the appropriate matching relief to be applied.

(1)(b)(ii) A company that elects to match a foreign currency asset with a relevant foreign currency liability incurred earlier than the time at which the asset was acquired is regarded as discharging that liability, and incurring a new liability, at the time of acquisition of the asset. This enables the appropriate matching relief to be applied.

(1)(b)(iii) The method of how a gain or loss on a relevant foreign currency liability is calculated is set out. This is necessary because, in the normal course, liabilities are outside the scope of capital gains tax. A gain or loss on a liability is to be calculated by comparing the amount given to discharge the liability with the liability incurred in the first place. If the liability originally incurred (expressed in euro) is less than the amount required to discharge the liability (also expressed in euro), then a loss arises. In an asset context, this compares with the sale price being less than original cost. Accordingly, in calculating whether a gain of loss arises on a liability the liability originally incurred is equated with the sale price of an asset and the amount required to discharge the liability is equated with the cost price of an asset.

Entitlement to elect for matching treatment

(2) A company can elect to have a specified foreign currency asset denominated in a currency other than the functional currency of the company, matched with a specified corresponding relevant foreign currency liability in the same currency. That election must be made within 3 weeks of the acquisition of the asset.

Disposals of assets that have been matched

(3) Where a company elects to match a relevant foreign currency asset with a relevant foreign currency liability, the foreign exchange losses or gains on the liability whether realised or unrealised are to be taken into account in computing the company’s trading income.

Relevant Date: Finance Act 2019