Exchange gains or losses arising from derivative contracts hedging shares etc.U.K.

4.—(1) For the purposes of [F1section 606(4) and 598(1)(a) of CTA 2009] there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part of any shares, ships or aircraft.

[F2(1A) But where the matched shares, ships or aircraft are matched after the company became party to the derivative contract, paragraph (1) only applies to a just and reasonable proportion of any exchange gain or loss having regard to—

(a)the fraction of the accounting period for which the shares, ships or aircraft are matched with the derivative contract,

(b)the fraction of the accounting period for which the company was party to the derivative contract, and

(c)fluctuations in exchange rates during the period.]

(2) This regulation does not apply if movements in the fair value [F3, or profits or losses arising on the disposal,] of any shares, ships or aircraft which are an asset falling within regulation 4(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) [F4Shares, ships or aircraft are matched to the greatest possible extent with—]

(a)

the derivative contract designated as a hedge if condition 1 is satisfied;

(b)

subject to paragraph (a), the derivative contract referred to in condition 2 if that condition is satisfied.

F5...

Condition [F61]

The condition is that F7... the shares, ships or aircraft are a hedged item under a designated hedge of exchange rate risk in which the derivative contract is the hedging instrument.

Condition [F82]

The condition is that the underlying subject matter of the derivative contract is such that the company [F9intends], by entering into [F10[F11or] continuing to be party to] that contract, F12... 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 [F13condition 2] applies, a derivative contract is matched with an asset only to the extent that the [F14value of the obligation under] the derivative contract F15... does not exceed the unmatched carrying value of the asset at [F16the relevant time].

[F17(4A) For the purposes of [F18section 606(4) of CTA 2009] there is prescribed an exchange gain or loss arising to a company in an accounting period in relation to a derivative contract of the company which is matched with the whole or part [F19of—

(a)any share capital of the company,

(b)in relation to a building society, any deferred shares issued by the building society to the extent that they are accounted for as equity instruments in accordance with generally accepted accounting practice, or

(c)[F20a hybrid capital instrument] issued by the company to the extent that it is accounted for as an equity instrument in accordance with generally accepted accounting practice.]

(4B) A derivative contract is matched with share capital in particular where for the accounting period of the company immediately preceding the first accounting period beginning on or after 1st January 2005—

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

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

[F21(4C) This regulation does not apply to amounts in relation to a derivative contract which are excluded amounts under regulation 5ZA.]

(5) In this regulation—

F22...

“unmatched carrying value” means, in relation to an asset, an amount equal to the [F23relevant value] to the extent that that amount has not previously been matched in accordance with this regulation or regulation 3.

[F24“the value of the obligation under the derivative contract” means the value of the obligation of the company to pay in exchange for one currency an amount of a second currency and includes any notional obligation to pay an amount of currency in respect of a contract for differences.]

Textual Amendments

F7Words in reg. 4(3) omitted (6.12.2011 at 11.45 a.m. with effect in accordance with reg. 1(2) of the amending S.I.) by virtue of The Loan Relationships and Derivative Contracts (Disregard and Bringing into Account of Profits and Losses) (Amendment No. 2) Regulations 2011 (S.I. 2011/2912), regs. 1(1), 5(2)

F20Words in reg. 4(4A)(c) substituted (with effect in accordance with Sch. 20 para. 10(b) of the amending Act) by Finance Act 2019 (c. 1), Sch. 20 para. 9(4)

Commencement Information

I1Reg. 4 in force at 1.1.2005, see reg. 1(1)