The Tax Treatment of Foreign Exchange Results and Hedge Instruments in Relation to Non-Deductible Interest Costs

This article analyses the tax impact of the connection between interest, inflation, foreign exchange rates and the expected changes in foreign exchange rates. A distinction is made between “real” foreign exchange results and “unreal” foreign exchange results and exposures. Furthermore, some strategies for hedging a foreign exchange exposure on debt are discussed. On the basis hereof, the basic conditions of a balanced tax system regarding the treatment of non-deductible interest, foreign exchange results on the debt on which the interest is not deductible and results on instruments used to hedge the foreign exchange exposure on the debt, are discussed. The analysis considers the Dutch situation as an example.