INTM209060 - Controlled Foreign Companies: Computation of Chargeable Profits and Creditable Tax

Foreign exchange and currency account

The assumption of United Kingdom residence in ICTA88/SCH24/PARA1 brings the overseas company within the foreign exchange gains and losses provisions of the Finance Acts. For accounting periods beginning on or after the 16 March 2005 rules on computing profits or losses where the functional currency is not in sterling can be found at FA93/S92 to S92E.

FA93/S92 requires an overseas company to compute profits and losses in its functional currency for an accounting period. The functional currency is the currency of the primary economic environment in which the company operates. A currency will only be recognised as a company’s functional currency if it is in accordance with GAAP to use that currency. Profits or losses should then be converted to sterling at the appropriate exchange rate. It is sterling that will then be the base currency for computing chargeable profits or losses to be carried forward.

The application of the legislation at FA93/S92 was introduced by FA2005 replacing existing legislation at ICTA88/S747A. For accounting periods beginning before 16 March 2005 the general rule was that chargeable profits were computed in the currency of account and that this currency should continue to be used for all future periods. Further guidance on foreign exchange and currency account for accounting periods beginning before 16 March 2005 can be found at INTM217060