CFM9350 - Taxing forex: bringing into account: disposal of loan relationship asset

Disposal of loan relationship

A company may invest in a foreign entity through a long-term loan which is intended to fulfil an equity function. Where exchange gains or losses on such a 'permanent as equity' loan are accounted for through reserves, they are not recognised for tax purposes until the company ceases to be a party to the loan relationship ( CFM9340).

Where this has occurred, REG13, SI2002/1970 provides that when the loan relationship is disposed of, any net exchange gain or loss is brought into account as a loan relationship debit or credit in the year in which the disposal occurs. Disposal includes repayment of the loan, or any other transaction that wholly or partly extinguishes the debt.

The net gain or loss to be brought into account is calculated by aggregating all the exchange gains and losses on the loan which have been taken to reserves, and so have not previously been recognised for tax purposes. See CFM9350a for an example.