MTT21280 | Calculating the effective tax rate: Adjusted profits: Currency hedging election

At the election of the group, qualifying gains or losses arising from fluctuations in exchange rates are to be excluded when determining the adjusted profits. This election allows a group to align the treatment of a net investment hedge with the equity investment it is hedging.

The election is set out in section 166 of Finance (No.2) Act 2023.

An election made under section 166 is a long term election. See MTT52200 for guidance on making elections.

Qualifying gain or loss arising from fluctuation in exchange rates

A gain or loss arising from fluctuations in exchange rates is 'qualifying' to the extent that:

• the gain or loss is attributable to an instrument intended to act as a hedge against currency risk in ownership interests held by the member, or by another member of the group, other than a disregarded ownership interest,

• the gain or loss is recognised in other comprehensive income in the consolidated financial statements of the ultimate parent,

• the instrument is considered an effective net investment hedge under the authorised accounting standard upon which those statements are prepared,

• the economic and accounting effect of the hedge has not been transferred to any other entity, where the instrument is held by the member, and

• the economic and accounting effect of the hedge has been transferred to the member, where the instrument is not held by the member.

Where all these conditions apply, the underlying profits are to be adjusted to exclude the amount.

Disregarded ownership interest

For the purpose of this election, an ownership interest in an entity held by a member of a group is disregarded if the members of that group do not, between them, have qualifying interests that entitle them to 10% or more of the entity’s profits, capital, reserves, and voting rights.