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Foreign Currency Transactions (Taxation)

Volume 489: debated on Tuesday 10 March 2009

I am today announcing the Government’s intention to present to the House of Commons a change to tax rules designed to ensure that both businesses and the Exchequer are protected from the uncertainty of exchange rate movements during the period of a rights issue of shares.

This measure will ensure that where a company is making a rights issue of shares to strengthen its capital base which is denominated in a different currency from its accounting currency it can protect the capital raised from exchange rate risk in a way that is tax neutral for the company and the Exchequer.

This objective will be achieved by ensuring that any exchange gain or loss on the hedging instrument in such situations will be disregarded, consistent with the tax treatment of other types of hedging transactions. This will remove the exchange rate tax risk posed to Exchequer under the current tax treatment of companies hedging against exchange rate movements on the proceeds of a rights issue.

To ensure that the full value of the rights issue will bolster the company’s capital position, any gain arising from the hedging transaction that is subsequently distributed to shareholders will be taxed in the normal way.

This measure will be introduced by statutory instrument. It will apply to hedging transactions undertaken on or after 1 January 2009 and still current at today’s date. The change will ensure that no company is disadvantaged for tax purposes in respect of exchange movements on existing transactions before today’s date.

Draft regulations and the accompanying explanatory memorandum will be published on HM Revenue and Customs’ website as soon as possible.