79A Matching of relevant foreign currency assets with foreign currency liabilities

Summary

This section provides for the matching of foreign currency exchange gains and losses on certain assets and liabilities of companies for capital gains tax purposes.

A company may acquire a shareholding in another company in a non-euro currency. Where they do so they can be exposed to the risk of exchange rate gains and losses. They can, however, protect themselves against exchange rate losses by borrowing the funds to make the investment in the same currency as that in which the investment is made. Where they do so, any exchange rate loss on the shares will be matched by a corresponding exchange rate gain on the borrowing and any exchange rate gain on the asset would be matched by a corresponding loss on the liability. However, it removes the risk of exchange rate losses.

This section allows a company to elect to match certain assets and liabilities for capital gains tax purposes. If an election is made, any gain on the asset concerned is reduced by a loss on the matched liability. Alternatively, if a loss arises on the asset, it will be reduced by any gain on the liability.

An election may be made where the asset concerned consists of shares in a trading company (or a holding company of a trading company) provided that, immediately after the investing company acquires the shares, it holds at least 25% of the share capital of the trading or holding company.

Details

Definitions

(1)(a) “foreign currency asset” is an asset of a company the consideration for which is denominated in a non-euro currency. The full amount of the consideration must be so denominated. An asset will not be a foreign currency asset for the purposes of the section if it is already taken into account as a “relevant monetary item” for the purposes of section 79. That section rolls all foreign currency gains and losses on “relevant monetary items” into the calculation of trading income for tax purposes.

“foreign currency liabilities” are liabilities of a company which are denominated in a non-euro currency. They include any liability other than a liability which is a “relevant monetary item” for the purposes of section 79.

“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.

(1)(b)(i) “relevant foreign currency assets” are the assets in respect of which relief under the section applies. A “relevant foreign currency asset” is a foreign currency asset that consists of shares held by one company in another company provided that, immediately after the acquisition of the shares, the investing company owns at least 25% of the share capital of the other company and the other company is a trading company or a holding company of a trading company.

Calculation of gains and losses on foreign currency liabilities

(1)(b)(iv) Rules are provided on how a gain or loss on a foreign currency liability is to be calculated. 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 €) is less than the amount required to discharge the liability (also expressed in €), then a loss arises. In an asset context, this compares with a situation where the sale price is less than original cost. Accordingly, in calculating whether a gain or 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.

Elections for matching treatment

(2)(a) A company can elect to have a specified foreign currency asset denominated in a non-euro currency matched with a specified corresponding foreign currency liability matched in the same non-euro currency.

(2)(b) An election must be made within 3 weeks of the acquisition of the asset.

Consequences of making an election for matching

(3) Where a company disposes of a relevant foreign currency asset that has been matched with a foreign currency liability, the foreign exchange losses or gains on the liability are to be offset against the foreign exchange gains or losses on the matched asset.

(3)(a) Where there is a foreign exchange loss on discharge of the liability, the consideration received by the company for the disposal of the asset is to be reduced by the amount of that loss – but only to the extent of any foreign exchange gain on the disposal of the asset.

(3)(b) Where there is a foreign exchange gain on discharge of the liability, the consideration received on disposal of the asset is to be increased by the amount of that gain – but only to the extent of any foreign exchange loss on disposal of the asset.

Miscellaneous

(1)(b)(ii) Where a company, which has matched a foreign currency asset with a foreign currency liability for the purposes of the new section, disposes of the asset but does not discharge the liability at the same time, the company will be treated as if it had discharged the liability at the time as it disposed of the asset. This will enable the appropriate matching relief to be applied.

(1)(b)(iii) Where a company elects to match a foreign currency asset with a foreign currency liability which was incurred earlier than the time at which the asset was acquired. In those circumstances, the company will be regarded as discharging that liability, and incurring a new liability, at the time of acquisition of the asset. This will enable the appropriate matching relief to be applied.

Relevant Date: Finance Act 2021