Luxembourg taxation unrealised forex
Inventory of foreign currency receivables and payables in the absence of foreign exchange hedging instruments The Luxembourg Accounting Act does not directly address the issue of the valuation of foreign currency receivables and payables at the time of the inventory. This question must therefore be considered in the light of the main accounting principles, and in particular: The principle of prudence, according to which only profits realised on the closing date may be entered Article Luxembourg practitioners have developed several treatments based on these main principles.
Approach suggested by the prudence principle At the time the accounts are closed, receivables are valued at the lower of the historical rate or the exchange rate prevailing at the date upon which the accounts are closed. Symmetrically, debts are valued at the higher of the historical exchange rate or the exchange rate prevailing on the date upon which the accounts are closed.
In this way, only unrealised foreign exchange losses will have an impact on the profit for the financial year. Approach suggested by the true and fair view principle This approach suggests that receivables and payables should be shown in the balance sheet at an amount based on the exchange rate on the date of the inventory i. The General Financial Directorate has not found any reason to deviate from the established practice and therefore the tax administrators' application procedures regarding the taxation of foreign exchange differences will remain the same.
Nevertheless, the court's holding in this case is final and binding. To register for Law-Now, please go to www. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
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Unrealised gains and losses are included in the other comprehensive income by the larger corporations. Accounting treatment At the end of each reporting period Foreign currency monetary items shall be translated using the closing rate. Non-monetary items which are measured at historical cost in a foreign currency shall be translated using the exchange rate at the date of transaction.
Subsequently, no recalculation is needed. Non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was measured. Reporting foreign currency transactions A foreign currency transaction is a transaction that is denominated in or requires settlement in a foreign currency, including transactions arising when an entity: buys or sells goods or services whose price is denominated in a foreign currency; borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.
Recognition of foreign exchange gains or losses When the entity translates the balances in the foreign currency of monetary items into the presentation currency at the reporting date; or When the entity makes settlement of monetary items in a foreign currency, and there is a change in the exchange rates on the transaction date and on the date of settlement.
Gains or losses arising on translating monetary items or on the settlement of monetary items shall be recognised in profit or loss in the period in which they arise. Realised and Unrealised gains or losses Realised gains or losses are the gains or losses on foreign exchange transactions that have been completed as at the reporting date. In clearer terms, this means that the payment has been made or received prior to the close of the accounting period.
Unrealised gains or losses are the gains or losses on transactions that have not been completed as at the reporting date. This would mean that the payment has not been made or received prior to the close of the accounting period. Tax treatment Taxability and deductibility of foreign exchange gains and losses Foreign exchange gains and losses are taxable and deductible respectively if the gains and losses are: arising from revenue transactions; realised; arising from a trade.
Revenue transactions Revenue transactions are transactions relating to the normal operating cycle of an entity such as sales, purchases, trading, etc. The court looked to the definition of the term "taxable income" in the Income Tax Act, which states that income gains from all activities and handling of all property is the subject of taxation. Where there is only a change of the exchange rate which is not dependent on the underlying flow of money, any such gain arising out of exchange rate differences does not qualify within that definition.
Unrealised foreign exchange gains are therefore not taxable income regardless of whether they are included in profit or loss statements for accounting purposes. The court's decision, however, may impact not only the taxation of foreign exchange gains, but also losses and any other unrealised gains or losses arising on asset revaluation for example. As a response to the decision, the General Financial Directorate issued a statement to the Chamber of Tax Advisors, in which it tries to reassure possibly concerned taxpayers that the grounds the Supreme Administrative Court ruled on in this particular case are very specific and cannot therefore be considered settled judicature of the Supreme Administrative Court due to the uniqueness of the case.
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