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HMRC internal manual

International Manual

Intra-group funding: legislation and case law

Treatment of exchange differences on non-arm’s length trading

For accounting periods beginning after 30 September 2002

Where transfer-pricing rules operate to impute interest (or a higher rate of interest)on the whole of an outward loan, all the exchange gains and losses continue to berecognised in full. However, because of FA96/SCH9/PARA11A, exchange gains or losses oncreditor loan relationships are to be disregarded only where, and to the extent that, theloan fulfils an equity function.

For further information see CFM9820.

For accounting periods beginning on or before 30 September 2002

FA93/S136 to FA93/S138 provide for the ring fencing of exchange losses on a loan orforward currency contract which is entered into otherwise than on arm’s length terms.Such losses are available for relief only against future exchange gains arising on thesame loan or contract.

For outward loans where SCH28AA applies to impute interest or a higher rate of interestany exchange losses will be allowed in full.