Corporation Tax Act 2009 section 694

Exchange gains and losses

Section 694 deals with how exchange gains and losses arising from derivative contracts are treated for corporation tax purposes when transfer pricing rules apply, and how matching relationships affect that treatment.

• Where transfer pricing rules treat a company as not being a party to a derivative contract, exchange gains and losses on that contract are left out of account for tax purposes — but only to the extent the contract is unmatched
• Where transfer pricing rules substitute arm's length terms for a derivative contract, exchange gains and losses are recalculated using those arm's length terms — again, only to the extent the contract is unmatched
• A derivative contract is "matched" if it is in a matching relationship with another derivative contract or loan relationship intended to eliminate or substantially reduce the risk from exchange rate fluctuations, or if exchange gains or losses are excluded by regulations
• The general transfer pricing rules do not otherwise require exchange gains and losses on derivative contracts to be recalculated on an arm's length basis, except through the specific mechanisms in this section