Corporation Tax Act 2009 section 448

Exchange gains and losses on debtor relationships: equity notes where holder associated with issuer

Section 448 deals with the tax treatment of foreign exchange gains and losses arising on certain debt securities (known as equity notes) where the holder of the security is associated with the issuing company, and where the interest or return on the security is treated as a distribution rather than as deductible interest.

• Where a company has a debtor relationship and the interest or other return on the securities representing that relationship is wholly treated as a distribution (because the holder is associated with the issuer), any exchange gain or loss on the liability is excluded from the loan relationships tax computation.
• This exclusion reflects the fact that, since the interest is not deductible (being treated as a distribution), it would be inconsistent to allow or require the related exchange movements to affect the tax computation.
• If the debtor relationship is partly matched — for example, by an asset in the same currency — the exclusion applies only to the unmatched portion of the exchange gain or loss.
• The unmatched amount that is excluded may be nil if the debtor relationship is fully matched, meaning the full exchange gain or loss would then remain within the loan relationships computation.