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3 Int'l Tax Rev. 5 (1991-1992)
French Fiscal Constraints Demand Unequal Forex Tax

handle is hein.journals/intaxr3 and id is 63 raw text is: French fiscal constraints demand unequal forex tax Foreign exchange gains or losses realised by a French corporation form part of its taxable income, and are treated as ordinary profits or losses unless they are included in a long-term capital gain taxable at a reduced rate. In application of article 38-4 of the French Tax Code, the same tax treatment normally applies to unrealised exchange gains and losses at the end of a fiscal year. This tax rule therefore differs from account- ing principles, under which unrealised ex- change gains must not be recorded, while a reserve must be booked for potential exchange losses. However, the basic principle is subject to certain exceptions, which relate either to the nature of the assets denominated in foreign currencies, or to the category of the taxpayer. In addition, specific rules apply to forward instruments and to matching transactions. EXCEPTIONS LINKED TO NATURE OF ASSETS Article 38-4 provides that foreign curren- cies and debts and receivables denominated in foreign currencies must be converted into French francs at the exchange rate of the last day of the fiscal year. The foreign exchange differences must be recognised as ordinary income or expenses. Because this rule does not cover assets other than currencies or receivables, foreign ex- change differences on fixed assets, inventories and securities need not be recognised. How- ever, in the application of general tax rules, a deductible reserve may be booked when the estimated value of such an asset, expressed in French francs, is lower than its acquisition cost. INTERNATIONAL TAX REVIEW • DEC 1991/JAN 1992 This reserve is considered either as an ordinary loss or as a capital loss, depending on the nature of the asset. Some specific problems may arise in the case of debt instruments, which can be regarded either as debt or as assets not subject to article 38-4. As far as bonds are concerned, their classifi- cation as securities prevails over their classi- fication as debt instruments. In other words, subject to the exception mentioned below, any unrealised foreign exchange gain is not taxable, whereas it is possible to book a deductible reserve when the estimated value at year-end is lower than the acquisition cost. Exchange differences on other debt instru- ments, such as Treasury bills or certificates of deposit, which are not considered as securities, are subject to article 38-4 and thus included in the taxable results. TAXPAYER EXCEPTIONS Article 38-4 provides for specific rules appli- cable to banks and other credit establishments. Under these rules, the acquisition cost of securities denominated in foreign currencies must be converted into French francs at the end of the fiscal year. Exchange differences resulting from this valuation must be recog- nised as ordinary profits or losses. Foreign exchange differences on other kinds of assets are subject to the standard principles. These rules apply to exchange differences

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