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The sluggish nature of the economy in recent years has meant that an even greater number of Irish companies have had to look to overseas markets in the UK, US and farther afield to grow their businesses. These companies now find themselves transacting in currencies other than the Euro. The trend toward corporate inversions has seen a large number of Irish companies being acquired by foreign parents.
These companies are often required to operate in the functional currency of the parent, which is typically a currency other than the Euro. Such activities frequently result in gains and losses arising from exchange-rate movements, with resulting accounting implications. Increased volatility in currency markets in recent months, due to the debt crisis in Greece and the weakening of the Euro, has also contributed to significant foreign-currency movements for companies.
This article examines some of the common tax issues that arise for Irish companies undertaking transactions in non-Euro currencies and those with a non-Euro functional currency in both a trading and a non-trading context. However, deferred-tax considerations are outside the scope of this article.
Many companies will not encounter any differences, but when they do, these may be significant, and the tax consequences will need to be considered.
There is still a requirement for the company to measure its performance and its assets and liabilities etc.
Foreign exchange gains and losses arising from the conversion from the functional currency to presentation currency can be ignored for tax purposes. Functional currency is the currency of the primary economic environment in which the company operates and must be determined on an entity-by-entity basis.
The primary economic environment in which a company operates is usually the economic environment in which it primarily generates and expends cash. In determining the functional currency, consideration is given to primary and secondary indicators. Primary indicators are closely linked to the environment in which the company operates and are therefore given more weight, with secondary indicators providing supporting evidence.
The relative importance of the various indicators will vary from company to company. Furthermore, when determining the functional currency of a foreign operation such as a subsidiary, branch, associate or joint venture , management will need to examine additional indicators such as:. Broadly, when companies undertake transactions in currencies other than their functional currency, they are required to translate those transactions into their functional currency at the spot rate applying on the date on which the transaction occurred.
However, monetary assets and liabilities are required to be retranslated at the rate applying at the balance sheet date, with any resultant gains or losses being taken to the profit and loss account. Such exchange gains and losses typically arise when the company undertakes trading transactions in currencies other than its functional currency for accounting purposes.
The provisions apply both to Irish-resident trading companies and to non-Irish-resident companies trading in Ireland through a branch or agency. Broadly, this includes foreign-currency-denominated trade-related payables e. This includes currency swaps and forward rate agreements. Symmetry is therefore achieved on the tax treatment of relevant monetary items and their related hedges. Following the accounting treatment in the manner set out in s79 overrides any distinction that would otherwise be drawn between long-term and short-term payables and between realised and unrealised exchange gains and losses.
Thus, exchange gains and losses whether realised or unrealised arising on long-term trade-loan payables or on borrowings drawn down to fund the acquisition of fixed assets for use in the trade are taxable or deductible for corporation tax purposes as they arise in the profit and loss account. Exchange-rate movements occurring between the date of acquisition and the date of disposal of the asset are prima facie incorporated in the CGT computation in accordance with s 1A TCA Section 79 3 TCA clarifies that any portion of the chargeable gain or loss that is attributed to an exchange-rate movement, and hence incorporated in the Case I trading computation, is excluded from the CGT computation.
In preparing the corporation tax calculations of a trading company, care must be taken to distinguish money held or payable for trading purposes from money held or payable for non-trading purposes. Companies with a non-Euro functional currency and a Euro corporation tax liability may wish to hedge against risk arising from exchange-rate movements between that functional currency and Euro in the time period before the corporation tax liability falls due to be paid.
However, the amount of the gain or loss that is excluded is capped. A gain is excluded only to the extent that it does not exceed the exchange loss that would, absent the hedge, have arisen on the corporation tax liability, and vice versa. A mismatch could arise where, for example, the final corporation tax liability is lower than the amount hedged. Care is therefore required in entering into such hedges, and the position should be carefully monitored.
Monetary assets and liabilities are translated at the rate applying at the balance sheet date, and non-monetary assets and liabilities are translated at historical rates. Broadly, the provisions allow companies to calculate capital allowances and trading loss relief in the functional currency, thereby preserving their value in functional-currency terms.
The provisions also cover the restatement of these items where there is a change in the functional currency of the company. Where an asset qualifying for capital allowances is acquired in a currency other than the functional currency of the company for example, a company with either a Euro or a Sterling functional currency buys an asset in US Dollars , s provides that the cost of the asset should be translated to the functional currency at the rate of exchange applying at the date on which the expenditure is incurred, which is defined as the date on which it becomes payable.
Where it is to be offset against profits earned in an earlier or subsequent period, it is then translated to Euro at the same rate of exchange used to translate the trading income of the period in which the loss is to be set off. This is typically the average exchange rate for the period in question. Underpayment of preliminary corporation tax Revenue issued eBrief No. If the company meets the conditions set out in the eBrief, it may make a written application to the Collector-General for a waiver of interest.
Each non-trading transaction must be considered on an individual basis to determine whether there has been a disposal of a chargeable asset for CGT purposes. Of course, CGT will not apply to the disposal of a liability in a non-trading context.
It is noteworthy that realised and unrealised exchange gains and losses arising on liabilities within s79 e. Each time that a disposal occurs of a non-Euro currency that is not held for trading purposes, a company is required to prepare a CGT computation. Following the principles of Bentley v Pike  STC , taxpayers are required to compute the capital gain or loss arising on the disposal of foreign currency by reference to the. Euro equivalent spot rates prevailing at the date of acquisition and the date of disposal of the currency.
This can present a significant administrative burden for companies. The impact of this was addressed by Revenue in s79C TCA in the context of non-Euro currency held in a bank deposit account of qualifying companies. This is subject to some exceptions, which are discussed below. Although it may typically be expected that no gain or loss would arise on, say, the repayment of a loan at face value, a chargeable gain or loss may arise for CGT purposes when the computation is prepared under s 1A TCA owing to foreign-exchange movements occurring between the dates on which the debt is drawn down and is repaid.
Section 1 a TCA provides that the disposal of a debt by the original creditor does not give rise to a chargeable gain or a loss by virtue of s 3 , meaning that any foreign-exchange movements will be irrelevant for CGT purposes.
These are discussed further below. Care should be taken in situations where a debt is assigned. Any gain or loss arising on the disposal of the debt would therefore be subject to CGT.
Where the debt is novated rather than assigned, the original loan agreement is extinguished and it is replaced by a new loan agreement between the borrower and the person who is replacing the original lender. A subsequent disposal of the debt by the new lender should qualify for relief under s 1 as the new lender should be considered the original creditor in respect of this debt.
The key characteristic of a debt of security, as determined by the Irish High Court case of J. McCracken J in his judgment also noted that the debt in question should not constitute a debt on a security on the basis that the loan was non-transferable i. The case was appealed to the Supreme Court, which upheld the original judgment. However, Murphy J held that:. In group situations there may be a requirement for companies to advance intra-group loans denominated in a foreign currency.
Care needs to be taken in determining whether any such loans bear the features of a debt on a security in the hands of the lender. The repayment of this loan should not, therefore, give rise to any chargeable gain or loss. Section 6 TCA provides that s 1 does not apply to a debt owed by a bank that is denominated in a non-Euro currency e. In computing the CGT, deposits are treated as acquisitions, and withdrawals are treated as disposals. Where multiple bank accounts exist or frequent transactions occur, the CGT calculations can become quite cumbersome.
Where the necessary conditions are met, s79C provides that the non-Euro bank account is not an asset for CGT purposes, thus removing the requirement for companies to prepare CGT calculations for each individual movement in the non-Euro bank account i.
To remove any benefit that may be obtained by virtue of this tax-rate differential, the chargeable amount is subject to an adjustment to make the tax payable equate to the amount that would have been payable if CGT applied instead of Case IV.
This requirement makes the scope of the new provision quite narrow, as it excludes any companies that are not direct holding companies. Thus, even holding companies which have a significant number of trading subsidiaries but that are not directly wholly owned by the holding company concerned are unable to meet the conditions of s79C.
A further point should be borne in mind in relation to withdrawals of non-Euro currency from a bank account in light of the fact that the currency itself is an asset under s TCA For example, where a company withdraws funds and holds them for a period of time before using them, say, to acquire an asset , there may be a tax exposure in relation to exchange movements arising during that holding period. Applying the funds on the day of withdrawal should prevent an exposure arising.
There are many reasons for this, including: Although the functional currency of most companies e. This is especially true for intermediate parent companies and group treasury companies. Transactions in a foreign currency can no longer be measured at the forward contract rate. Such transactions are required to be translated at the transaction-date rate, with the forward foreign-currency contract being separately recognised and measured at fair value.
Under SSAP an equity investment denominated in a foreign currency and hedged by a loan could be treated as if it were a monetary item. Exchange differences on the shares and the related loan were then taken to reserves. Any excess on the loan that could not be offset was taken to profit and loss account.
The primary indicators are the currency that mainly influences: Furthermore, when determining the functional currency of a foreign operation such as a subsidiary, branch, associate or joint venture , management will need to examine additional indicators such as: On disposal of the cash balances, any realised gains or losses arising by virtue of exchange-rate movements would therefore be included in the CGT calculation subject to s79C, discussed below.
Were borrowings drawn down to fund the acquisition of shares in a subsidiary? As the borrowings are a liability of the company, any realised gains or losses should not be liable to CGT.
Relevant tax contracts Companies with a non-Euro functional currency and a Euro corporation tax liability may wish to hedge against risk arising from exchange-rate movements between that functional currency and Euro in the time period before the corporation tax liability falls due to be paid. Capital allowances Where an asset qualifying for capital allowances is acquired in a currency other than the functional currency of the company for example, a company with either a Euro or a Sterling functional currency buys an asset in US Dollars , s provides that the cost of the asset should be translated to the functional currency at the rate of exchange applying at the date on which the expenditure is incurred, which is defined as the date on which it becomes payable.
Foreign currency Each time that a disposal occurs of a non-Euro currency that is not held for trading purposes, a company is required to prepare a CGT computation. Following the principles of Bentley v Pike  STC , taxpayers are required to compute the capital gain or loss arising on the disposal of foreign currency by reference to the Euro equivalent spot rates prevailing at the date of acquisition and the date of disposal of the currency.
This is considered further below. However, Murphy J held that: Generally, where a loan: Foreign-currency bank accounts Section 6 TCA provides that s 1 does not apply to a debt owed by a bank that is denominated in a non-Euro currency e. Asset and wealth management Aviation finance Banking and capital markets Charities and not-for-profit Energy and renewables Engineering and construction Food and agri-business Healthcare Insurance. Local government Manufacturing Pharmaceutical and life sciences Public sector Real estate Retail and consumer Services for legal firms Technology, media and telecommunications.
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