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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Deemed loan relationships: disguised interest: exchange gains and losses

Exchange gains and losses

Arrangements that produce returns economically equivalent to interest will not always be made in the functional or accounting currency of the company receiving the return.

Many returns from such arrangements will be in the form of an increase in the carrying value of the investment providing the return. Where that is the case, it will be necessary for the carrying value of the investment to be translated into the functional or accounting currency of the company. Consequently, the return from the investment will be subject to exchange gains and losses.

CTA09/S486B(8) makes it clear that those exchange gains and losses will be included within the debits and credits brought into account under the disguised interest rules.

Example

Company A has a functional currency of £sterling and has invested in shares in Company B in $US. The shares in Company B will produce a return to Company A that falls within the disguised interest rules.

The shares in Company B have the following fair values:

1 January 2010 $100m
   
31 December 2010 $105m
31 December 2011 $110m

The £/$ spot rates of exchange on the appropriate days are:

1 January 2010 1:1.5
   
31 December 2010 1:1.75
31 December 2011 1:1.6

The fair value of the Company B shares for the purposes of the Company A accounts are, therefore, as follows:

1 January 2010 £66.67m
   
31 December 2010 £60m
31 December 2011 £68.75m

Consequently, S486B(8) makes it clear that the amounts to be brought into account under the disguised interest rules would be as follows:

Year ended 31 December 2010 £6.67m (debit)
   
Year ended 31 December 2011 £8.75m (credit)