CFM63040 - Foreign exchange: matching: anti-avoidance: 바카라 사이트˜one-way bet바카라 사이트™ schemes: options

Regulation 5 ceases to have effect from 22 April 2009

Regulation 5: option schemes

Regulation 5 counters a disclosed 바카라 사이트˜one-way forex bet바카라 사이트™ scheme that relies on a disparity of tax treatment between currency options and options over foreign currency denominated treasury bills.

In the scheme, a company (바카라 사이트˜Company A바카라 사이트™), which accounts in sterling and wishes to hedge its forex exposure in respect of an investment in a subsidiary:

  • Grants a call option to another group member (바카라 사이트˜Company B바카라 사이트™) over US dollar treasury bills - so that if the dollar strengthens, the price of US dollar denominated bills will rise, and Company B will exercise the option (so that Company A makes a loss, effectively overpaying for the bills).
  • Acquires a put option over US dollars - so if the dollar weakens below the strike price of the option, Company A will exercise its option (and so make an economic profit selling the dollars for more than their market value).

Thus Company A makes a commercial profit if the dollar weakens, and a loss if it strengthens. Company A can use the combination of instruments to hedge shares in a company with a US dollar functional currency. This means that, under SSAP 20, gains or losses on the options are taken to reserves.

For tax purposes, however, only the gain on the put option - if the dollar weakens - falls within FA02/SCH26/PARA16(3)(a), and is disregarded. If the dollar strengthens, and Company A has a loss because the call option is exercised against it, the loss is claimed as allowable because it does not arise on an option 바카라 사이트™whose underlying subject matter consists wholly or currency바카라 사이트™ - it is therefore outside of Para 16(3)(a).

Regulation 5 will apply where an arrangement satisfies four statutory conditions.

  • A company must be party to two or more derivative contracts under an arrangement to hedge a currency risk.
  • The contracts, when taken together, must be intended to act as a hedge of that currency risk.
  • The arrangements must be such that, if a profit arises on at least one of the derivative contracts, the profit would fall within FA02/SCH26/PARA16(3); but if a loss arose on at least one of the contracts, it would not fall within that sub-paragraph.

The loss mentioned in the bullet point above must arise on a derivative contract that is an option.

Where all these conditions are satisfied, any loss on the option is disregarded in determining the company바카라 사이트™s taxable profit or loss.