INTM551040 - Hybrids: financial instruments (Chapter 3): overview: quasi-payments - foreign exchange losses of non-UK company

Debt instruments - exchange loss arising to a non-UK company

The UK tax regime for debt respects the functional currency of the company, but this is not necessarily the case in other jurisdictions. Another jurisdiction might require exchange differences to be measured by reference to that jurisdiction’s legal currency, irrespective of the functional currency of the company.

If this were the case, the assumptions in s259BB(4) that the payee is a company both resident and carrying on business in the same jurisdiction of the company that has an exchange loss on a debt, may lead to the conclusion that an exchange gain taxable as ordinary income is expected to arise to the payee. In those circumstances the exchange loss would satisfy the definition of a quasi-payment.

In these circumstances it is necessary to consider whether Part 6A could apply. For example, the hybrids rules may apply where

• the UK company payee does not have an exchange gain nor loss (because the loan is denominated in sterling), and
• the non-UK payer suffers a tax-deductible exchange loss in a jurisdiction that requires exchange differences to be computed by reference to the official currency, irrespective of functional currency

See the example at INTM551340 (in which, based on the particular facts in that example, no counteraction would arise under s259CE).