The Supreme Administrative Court ruled recently in a case
brought before it by a tax payer regarding the taxation of
unrealised foreign exchange gains. 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. 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.
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