Financial Secretary to the Treasury Stephen Timms has announced that the UK government intends to introduce a change to the tax rules on foreign exchange hedging.
The change in question is being made to enable companies wishing to hedge anticipated share issue proceeds in respect of a rights issue of shares denominated in a different currency from their functional currency to do so in a tax neutral manner.
The proposal was announced by Timms in a written ministerial statement to the House of Commons on March 10, 2009.
The current Loan Relationships and Derivative Contracts Regulations already seek to ensure that hedging arrangements are carried out in a tax neutral manner. However, the rules do not apply where a company hedges the exchange rate risk from the anticipated proceeds of a rights issue of shares. The new proposal seeks to extend these regulations to cover such hedging contracts.
Under the amendments, where a company enters into a derivative contract for the purpose of hedging the exchange rate risk from anticipated proceeds of a rights issue of shares, any exchange gain or loss on the derivative contract arising between the date of announcement of the rights issue and receipt of the share proceeds will be disregarded to the extent that the derivative is hedging the proceeds.
However, if there is an exchange gain on the hedging derivative and that gain is subsequently distributed to shareholders, the exchange gain will be brought back into account as a derivative contract profit for the accounting period in which the distribution is made.
This change is intended to apply to hedging transactions entered into on or after January 1, 2009 and still current on March 10, 2009. With respect to any transaction within the ambit of this change entered into before March 10, 2009 the rules will ensure that the company in question is not disadvantaged by this change regarding any exchange movement on the derivative before March 10, 2009.
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