Recent developments in the taxation of loan relationships – foreign exchange

Recent developments in taxation of loan relationships

Finance Bill 2016 includes amendments to the non-arm’s length rules for foreign exchange differences arising from loan relationships.

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The intention is to prevent a mismatch in the taxation of exchange differences from borrowing and on lending where the amount of one but not the other exceeds arm’s length.  This can be seen as part of a continuing trend of improvements to the legislation which make it easier to manage the exposure to taxable exchange differences.  This is particularly relevant at the moment with greater volatility in exchange rates as a result of a possible Brexit and uncertainty in the world economy.  The Finance Bill changes apply from 1 April 2016 whatever a company’s year-end.  


Funding for acquisitions or the refinancing of existing borrowings may be undertaken in several currencies reflecting the choice of lenders rather than the objectives of the borrower.  This can result in exchange differences for accounting and tax purposes when measured against the functional currency of the borrower.For private equity backed groups, the accounting implications of exchange differences may not be a particularly significant matter.  Of greater concern, however, is the volatility in cash tax payments which can result from unhedged borrowings.  

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Naz Klendjian


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