Corporation Tax Act 2009 section 328E

Counterfactual currency movement assumptions: treatment of options

Section 328E explains how to apply the counterfactual currency movement test when the hedging arrangements include an option, covering both cases where the option was or was not exercised on the relevant test day.

• Where an option forms part of the hedging arrangements, special rules apply when testing what would have happened if exchange rates had moved the other way.
• If an option was exercised on the test day, the calculation should assume it was not exercised if, on the balance of probabilities, the company would have refrained from exercising it under the hypothetical opposite currency movement.
• If an option was not exercised on the test day (but was exercisable), the calculation should assume it was exercised if, on the balance of probabilities, the company would have exercised it had the exchange rate moved the other way.
• In both cases, the test is whether it is more likely than not that the company's decision on the option would have been different under the counterfactual exchange rate scenario.