In recent weeks, there have been two major developments relative to the deduction of foreign currency exchange [better known as “FOREX”] losses in cross-border situations and this through [a] a judgement delivered by The Hague Court of Appeal (“the Court”) on 13 January 2015 (Ref: BK-14-00254/00255) and [b] the Opinion by AG Kokott of 22 January 2015 [Ref: Case C-686/13] respectively.
[a] Decision by The Hague Court
Case BK-14-00254/00255 concerns a Dutch taxpayer who had entered into a series of transactions with third party undertakings which led to currency losses, and who have claimed such currency losses in its corporate income tax return. The Dutch tax authorities have considered currency losses were exempt under the Dutch participation exemption and therefore, not deemed deductible for Dutch corporate income tax purposes. The Dutch taxpayer invoked the Deutsche Shell case (C-263/08), in which the CJEU had ruled that prohibiting the deduction of final currency losses that arose with the alienation of foreign PE assets constituted a breach of EU law. The Hague Court ruled that the Deutsche Shell doctrine should also be applicable to currency results on participation in subsidiary companies.
The Court did not agree with the Dutch tax authorities that the currency losses could not be considered final as the currency losses were a result of intra-group restructuring and the shareholding in the subsidiaries continue to exist within the group. The Court considered that the currency loss should be permanent from the view of the taxpayer, implying that it can neither be taken into account at the level of the Dutch fiscal unity nor in a foreign Member State.
Furthermore, the Court decided that the fact the activities of the Dutch taxpayer were not liquidated, did not prevent the deductibility of the currency loss.
[b] Option by AG Kokott
In Case C-686/13, which is still pending judgment, a Swedish taxpayer who held a UK shareholding the capital of which was issued in $ US, planned the cessation of the activities of its UK shareholding, which was regarded as an alienation under Swedish law. As a result, the Swedish taxpayer would incur a FOREX loss (SEK vs $ US).
Advocate General Kokott concluded that EU law does not preclude the Member State of residence of the parent company to disallow a FOREX loss deduction included in a capital loss derived from shares in a subsidiary resident in another Member State, where the Member State of residence of the parent company applies a system (that is the Swedish participation exemption) which does not take capital gains and capital losses from such shares into account for the calculation of the tax base.
Source: EU Direct Tax Group