Hedging rights proceeds - Mazars - United Kingdom
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Hedging rights proceeds
On 10 March 2009 the Government announced that a further circumstance will be added to the list of exceptions to the normal rule requiring gains and losses on foreign exchange transactions to be taxed in line with recognition in the financial statements.
This change is unlikely to have a wide application. It is only of relevance to a company that receives proceeds of a rights issue in a currency other than its functional currency and enters into a currency contract that hedges the proceeds into its functional currency.
The proposed change is that gains or losses on a derivative used to fix the proceeds a share issue into the functional currency of the issuing company will not be taxed unless a gain is distributed to the shareholders. The change in law will be effected by an amendment to a statutory instrument – the Loan Relationship and derivative Contracts (Disregard and Bringing into Account) Regulations 2004 (SI 2004/3256). The change will apply where the derivative is entered into after 31 December 2008. For derivatives taken out before 10 March 2009 to hedge rights issue proceeds this new disregard applies to those still current at that date.
The disregard is mandatory. The forex gain or loss on a derivative meeting the conditions will not be taxed or tax relieved respectively.
Note that if a company does not hedge their currency exposure on the proceeds of a rights issue any forex gain or loss on the proceeds is not brought into tax as the gain or loss does not arise on a financial instrument or loan relationship.
This change has been prompted by the current flurry of rights issues. This addition to the disregard rules only applies to a company issuing shares denominated in a currency other than its functional currency
The tax disregard will not apply to the extent there is a forex gain, and the gain is ultimately distributed has been included to cover structures that result in a part of the proceeds of a share issue being credited to distributable reserves, not the issuing company’s share premium account. It would appear that there is no symmetry in this restriction of the tax disregard: it will not be possible to obtain tax relief for a forex loss.
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