CTM76570 - Exchange differences: matching: net investment in overseas branch

Regulation 5 (9)(b) SI1994/3227 defines the net investment of a company in a branch as the value of the assets of that branch less the liabilities of the branch and any other liabilities owed by the company for the purposes of the trade or part trade carried on through the branch.

An election to match the net investment in an overseas branch may only be made where the company has made a valid election to compute the basic profits or losses of the trade (or part trade) carried on by the branch by reference to a currency other than sterling. (Local currency elections are dealt with in CTM76200 onwards.)

Where a valid local currency election has been made for the trade (or part trade) carried on through the branch then exchange differences on qualifying assets, liabilities and currency contracts held or owed for the purposes of that trade (or part trade) are calculated by reference to the local currency. This will include any amounts owed by the company and passed on to the branch via the head office account, provided the borrowings are for trading purposes.

When the accounts of the branch are consolidated into the company's accounts the exchange differences arising on the translation of the branch balance sheet items computed by reference to the company's local currency are taken to reserves and are not taken into account for tax purposes (see CTM76480). So, in many cases, a company will not need to make a matching election because the local currency election will ensure that exchange differences on trade assets, liabilities and currency contracts of the branch are not taken into account. Where, however, a branch has unremitted profits which are hedged by external borrowings at head office, the borrowing (or the relevant part) will not be subject to a local currency election because it is not owed for trade purposes. Here, a matching election is required to enable economic matching to be achieved. Companies may in practice make a matching election in respect of the net investment in the branch to be on the safe side. (See also the example at CTM76230.)