The Euro and Tax - Technical Tax Issues

Extract from Tax Briefing 31

Companies with non-IR£ functional currency

Section 402 Taxes Consolidation Act 1997 provides that companies which have a functional currency other than Irish pounds can compute their capital allowances and loss relief in that non-Irish currency. The Section sets out how to deal with a situation where a company changes its functional currency and essentially ensures that total allowances or losses to be given cannot exceed the amount of capital expenditure or original losses, expressed in the new functional currency at the exchange rate pertaining at the time the expenditure was incurred or the loss arose.

Some companies will have a balance of capital allowances or a balance of losses forward in their non-Irish functional currency as at 1 January 1999. If that is a currency of a euro-participating State, those balances will be converted to euros on 1 January, 1999 - as will the functional currency of the company. Paragraph 5 of Schedule 2 Finance Act 1998 amends Section 402 Taxes Consolidation Act 1997 to cater for the introduction of the euro. It provides that a change in functional currency brought about solely by the introduction of the euro shall not be treated as a change in functional currency for the purposes of Section 402. The balance of capital allowances or losses should, therefore, be converted to euro by use of the conversion rate between the euro and the original functional currency.

Where, on or after 1 January 1999, a company changes its functional currency from a non-euro currency to the euro, capital expenditure incurred prior to 1 January 1999 or allowances computed by reference to such capital expenditure is, under Paragraph 5, to be expressed in terms of Irish pounds using the exchange rate pertaining at the date the expenditure was incurred. These Irish pound amounts should then be converted to euro using the fixed conversion rate between the Irish pound and the euro. The same treatment applies in respect of pre - 1 January 1999 losses.

Paragraph 5 ensures that the total capital allowances granted or to be granted (or losses allowed or to be allowed) is equal to the amount of the capital expenditure (or original loss) measured in Irish pounds at the date the expenditure was incurred (or the loss arose)