CFM9347 - Taxing forex: bringing into account: exceptions to the basic rule

Exceptions to 'bringing back into account'

There are two exceptions to the basic rule in REG4, SI2002/1970(see CFM9346):

• Where the asset disposed of is a foreign business asset, no gain or loss is brought into charge. A foreign business asset is an asset of a branch, where the results of that branch have been consolidated using the closing rate/net investment method, so that exchange gains or losses have been taken to reserves (see CFM8026).
• Where the disposal is exempt under the substantial shareholding exemptions of TCGA92/SCH7AC, no gain or loss is brought into account. Many investments by UK companies in overseas entities will, in practice, take the form of substantial shareholdings.

Example

Apvoi Ltd is a UK company which trades as a grower, packer and wholesaler of salad vegetables. In its accounting period to 31 December 2003, it acquired for €11 million the entire share capital of Goedtomaten BV, a Dutch market gardening company. At the time, €11 million was worth £6.75 million. It financed the acquisition partly by a €9 million loan from a bank. Exchange gains and losses on the euro borrowing have been taken to reserves and offset against losses or gains on the shareholding.

On 1 September 2005, it sells the shares in Goedtomaten BV for £10 million. If the requirements for the substantial shareholdings exemption are satisfied, no chargeable gain arises on the shares. And you do not bring into account for tax purposes any net exchange gain or loss that has arisen on the associated borrowing up to 1 September 2005.

This provision for disposals of substantial shareholdings extends to disposals of assets related to shares, provided that the disposal qualifies for substantial shareholding exemption. An example of an asset related to shares would – for periods beginning before 1 January 2005 - be a security convertible into shares of the company concerned (provided that the convertible fell within FA96/S92 and was therefore not treated as a loan relationship).