The Exchange Gains and Losses (Alternative Method of Calculation of Gain or Loss) Regulations 1994

Gains and losses accruing as regards matched liabilities to be found by the alternative method of calculation

5.—(1) This regulation applies in any case where—

(a) a liability is owed by a company, and

(b) the liability is eligible to be matched with an asset on a day which falls within an accrual period for that liability, and

(c) an election made under regulation 10 is in effect for that day matching the liability (wholly or in part) with an eligible asset held by the company;

and in this regulation “the current period” means that accrual period.

(2) In any case where this regulation applies, then, subject to paragraph (3) below—

(a) the amount of the initial exchange gain or initial exchange loss which, apart from this regulation, would accrue to the company for the current period as respects the liability shall be found in accordance with the alternative method of calculation, and

(b) the accrued amount for each day in that period during which the liability and asset are matched shall—

(i) if the whole of the liability is matched, be reduced to nil, or

(ii) if only a proportion of the liability is matched, be reduced by a corresponding proportion.

(3) If in any case where this regulation applies—

(a) at any time during the current period there is a major change in the extent to which the liability is matched, and

(b) there is a significant change in the rate of exchange relevant to the computation of the accrued amounts during the current period, and

(c) that time is not (disregarding this regulation) a translation time as respects the liability,

then the initial exchange gain or loss as respects the liability for the current period shall be calculated, in accordance with paragraph (2) above, as if that time were a translation time (but not so as to create more than one accrual period) so that separate calculations are made for different parts of the period.

(4) A liability (not being a duty under a currency contract) is eligible to be matched with an asset if—

(a) the liability does not represent either—

(i) a duty to settle under a debt in respect of goods or services supplied to the company in the ordinary course of its trade, or

(ii) accrued interest, and

(b) the nominal currency of the liability is such that borrowing in that currency could reasonably be expected to eliminate or substantially reduce the economic risk of holding the asset which is attributable to fluctuations in exchange rates.

• Where the asset is matched in part only, references in this paragraph to the asset are to the part matched.

(5) In the case of a liability which is a duty under a currency contract, the liability is eligible to be matched with an asset if the second currency to which it relates is such that the company could by entering into that contract reasonably expect to eliminate or substantially reduce the economic risk of holding the asset which is attributable to fluctuations in exchange rates.

Where the asset is matched in part only, references in this paragraph to the asset are to the part matched.

(6) An asset held by a company is an eligible asset at any time if at that time—

(a) it is shares in a company which is not resident in the United Kingdom, but this sub-paragraph only applies if at the time the election is made the company is an associated company of the company making the election; or

(b) it is shares in a company which—

(i) is resident in the United Kingdom, and

(ii) has made a local currency election and is entitled, by virtue of that election, to have the basic profits and losses of a trade, or part of a trade, which it carries on in the United Kingdom computed in a currency other than sterling, and

(iii) is a 90 per cent. subsidiary (within the meaning of paragraph (7) below) of the company making the election; or

(c) it is a debt on a security which under the terms of issue can be converted into or exchanged for shares falling within sub-paragraph (a) or (b) above; or

(d) it is the company’s net investment in a branch outside the United Kingdom through which the company carries on a trade or part of a trade and the company has made a local currency election and is entitled, by virtue of that election, to have the basic profits and losses of that trade or that part computed in a currency other than sterling; or

(e) it is a ship or an aircraft.

(7) For the purposes of paragraph (6) above—

(a) “shares” includes stock but does not include any asset which is a qualifying asset, and

(b) a company is a 90 per cent. subsidiary of another company if it is a 90 per cent. subsidiary of that other within the meaning of section 838 of the Taxes Act or would be if “directly or indirectly” were substituted for “directly” in subsection (1)(c) of that section.

(8) An asset held by a company is also an eligible asset at any time (whether or not it also falls within any provision of paragraph (6)) if at that time—

(a) a gain accruing on the disposal of the asset by a person resident in the United Kingdom would be a chargeable gain, and

(b) the asset—

(i) is not a qualifying asset, and

(ii) is held by a branch of the company outside the United Kingdom through which the company carries on a trade or part of a trade and the company is not entitled to have the basic profits and losses of that trade or that part computed in a currency other than sterling by virtue of a local currency election.

(9) For the purposes of paragraphs (6) and (8) above—

(a) a company is an associated company of another if that other directly controls 20 per cent. or more of the voting power in the company;

(b) the net investment of a company in a branch is 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.