The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) Regulations 2004

Exchange gains or losses arising from liabilities or assets hedging shares etc. U.K.

3.—(1) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a liability representing a loan relationship of the company which is matched with the whole or part of any shares, ships or aircraft.

(2) This regulation does not apply if movements in the fair value of any shares, ships or aircraft which are an asset falling within regulation 3(1) are brought into account by the company in computing, for the purposes of corporation tax, the profits of a trade carried on by it which consists of or includes dealing in shares, ships or aircraft.

(3) Shares, ships or aircraft are matched with a liability if any of the following conditions are satisfied.

Condition 1

The condition is that for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a) exchange gains and losses on the shares, ships or aircraft were taken to a reserve; and

(b) set off there against exchange gains and losses on the liability.

Condition 2

The condition is that for the accounting period, the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the liability is the hedging instrument.

Condition 3

The condition is that the currency in which the liability is expressed is such that the company could, by entering into that liability, reasonably expect to eliminate or substantially reduce the economic risk of holding the asset, or part of the asset, which is attributable to fluctuations in exchange rates.

(4) If condition 3 applies, a liability is matched with an asset only to the extent that the carrying value of the liability at the time when the liability is entered into does not exceed the unmatched carrying value of the asset at that time.

(5) For the purposes of section 84A(3A) of the Finance Act 1996 there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to an asset representing a loan relationship of the company which is matched with the whole or part of any share capital of the company.

(6) An asset is matched with share capital if for the accounting period of the company immediately preceding the first accounting period to which these Regulations apply—

(a) exchange gains and losses on the asset were taken to a reserve; and

(b) set off there against exchange gains and losses on the share capital.

(7) In this regulation—

“carrying value” means, in relation to a liability, the value as shown in the company’s accounts of that liability; and

“unmatched carrying value” means, in relation to an asset, an amount equal to the value as shown in the company’s accounts to the extent that that amount has not previously been matched in accordance with this regulation or regulation 4.

Commencement Information

I1 Reg. 3 in force at 1.1.2005, see reg. 1(1)