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Write-ups in the case of foreign currency liabilities

Generally, foreign currency liabilities have to be measured at their value at the time when they were created (acquisition rate). Recently, the Federal Fiscal Court (Bundesfinanzhof, BFH) had to decide in two cases on the conditions under which a write-up would be permissible.

Foreign currency-related cases

(1) In its ruling of 10.2.2021 (case reference: IV R 18/18), the BFH had to make a decision on a foreign currency loan that a GmbH & Co. KG [German limited partnership with a limited liability company as a general partner] had taken out in Swiss francs, in 1999. By the balance sheet date (31.12.2010) the exchange rate of the Swiss franc to the Euro had gone up considerably. This had correspondingly led to an increase in the amount repayable in Euros. The company was of the opinion that the increase in the exchange rate could be presumed to be a permanent increase in value and wrote up the value of the liability to the current value.

(2) In a second case, of 12.11.2020 (case: XI R 29/18), the BFH had to rule on a similar situation where, in 2008, a GmbH [a German limited liability company] had recorded a foreign currency loan in Swiss francs at an exchange rate of CHF 1.555 per €. During the subsequent period, the exchange rate of the Swiss franc to the Euro rose sharply. Furthermore, the Swiss National Bank (SNB) announced that it would no longer tolerate a rate of below CHF 1.20 per €. Consequently, the GmbH increased the value of the foreign currency liability in its 2011 balance sheet to the value that was current at that time.

Not a permanent increase in value in the view of the fiscal administration

According to settled case-law, foreign currency liabilities may only be reported in the tax accounts at a value that is higher than the one based on the acquisition rate if the changes to the exchange rate that have occurred by the respective balance sheet date are presumed to be permanent. In both the cases described above, the competent local tax offices took the view that the value increases could not be presumed to be permanent; that is why the write-ups of the foreign currency liabilities were not accepted.

A permanent increase according the BFH decision

The BFH came to a different conclusion. In the case of long-term foreign currency liabilities, normally, variations in the exchange rate are not presumed to be permanent because, up to the date of the loan repayment, the changes in the value can generally balance each other out. According to the view of the BMF, an increase in the value of a foreign currency liability would however be presumed to be permanent, in particular, if the economic and monetary policy data had undergone a fundamental change. Such a change may be assumed if, from the balance sheet date perspective, the relations between the currency areas have changed so greatly and lastingly that it cannot be anticipated that there will easily be a return to the exchange rate recorded on the date when the liability was entered into.

In the case that involved the GmbH & Co. KG, the BFH accepted that such a fundamental change had occurred on account of the extraordinary measures taken by the Euro states to contain the European sovereign debt crisis, in 2010. It had no longer been possible to assume that, within the term of the liability, the currency fluctuations would have balanced each other out.

In the second case, the BFH likewise identified more reasons that justified a permanent value increase than indicated otherwise. As the SNB had deliberately intervened in the exchange rate development the result was a sustained change in the exchange rate and this had justified the write-up to the current value.

Please note: On the basis of this BFH ruling, taxpayers will now be able to make write-ups that reduce their tax charges irrespective of the residual time to maturity if due to a fundamental change it becomes apparent that there will be no return to the original exchange rate. Although, the taxpayer will have to bear the evidential burden for the existence of such a fundamental event.

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