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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching: anti-avoidance: ‘one-way bet’ schemes: dual currency loans

Regulation 4 ceases to have effect from 22 April 2009

Regulation 4: dual currency loan

In broad terms, the effect of Regulation 4 of SI 2006/843 is to disregard the loss claimed by the company that would otherwise benefit from the arrangements. It is intended to catch a wider range of schemes than merely the arrangement described at CFM63020, and therefore applies to exchange losses on derivative contracts as well as to those on loan relationships.

The provision applies to accounting periods ending on or after 22 March 2006, but not to arrangements where the company ceased to be party to the loss-generating loan or derivative before that date.

Regulation 4 views the arrangements from the perspective of the company claiming a foreign exchange loss on a loan relationship or derivative contract. Four conditions must be satisfied.

  • The company must be party to one or more loan relationships or derivative contracts of the company, referred to as the ‘specified instruments’. These are the loss-generating instruments - in the CFM63020 example, the external borrowing is the ‘specified instrument’.
  • Another company in the same group (referred to as ‘company Y’) has a net investment in a foreign operation. For this purpose, two companies are in the same group if they are connected companies within the CTA09/S466 meaning. In example at CFM63020 Holdco would be ‘company Y’.
  • The third condition asks you to hypothesise that the assets representing the net investment are held directly by the taxpayer company. Thus, in the example, it is necessary to imagine that the shares in the US subsidiary are held directly by Plc. The condition is met if, on this assumption, there would be a hedging relationship between the specified instrument or instruments, and the net investment. This condition would be satisfied in the example, since Plc’s dollar borrowing hedges the shares in the US subsidiary. ‘Hedging relationship’ is defined as in the main Disregard Regulations, see CFM57050.
  • Finally, there must be arrangements in place that allow a choice of currencies.

The arrangements referred to in the last bullet point can involve any combination of loan relationships and derivative contracts, referred to as ‘the arrangement instruments’. But company Y must be a party to at least one of the arrangement instruments. And - crucially - there must be an option included in the terms of any of the arrangement instruments, exercisable by company Y or any other company that is party to the arrangements, which by its exercise can prevent a particular exchange gain or loss from arising.

In the example at CFM63020, the ‘arrangement instrument’ is the loan from Plc to HoldCo. This contains an option enabling the loan to repaid in sterling. If this is exercised, in the event of the dollar strengthening, it would stop the exchange gain in Plc and the exchange loss in HoldCo - which would otherwise be the consequence of the currency movement - from arising. So, in the example, the fourth condition would be fulfilled.

Where all four conditions are satisfied, any exchange loss on the any loan relationship or derivative contract that is among the ‘specified instruments’ is disregarded.

It is likely that the ’unallowable purposes’ provisions at CTA09/S441 or CTA09/S690 will in any event apply to many or most ‘dual currency loan’ schemes. Regulation 4(8) therefore gives explicit priority to ‘unallowable purposes’.