Example: A German GmbH acquired a stake in a US-based company on the basis of an agreement dated January 2020. Since various bodies still had to give their approval, the performance of the contract (payment of purchase price and transfer of ownership) was expected in June 2020. The purchase price in dollars was determined in January. Immediately upon signing the agreement the buyer entered into a currency forward contract with a bank to hedge the currency risk.
The Federal Fiscal Court (Bundesfinanzhof, BFH) had to make a decision on just such a case in its ruling from 10.4.2019 (case reference: I R 20/16). In the underlying case, the German company subsequently sold the previously acquired stake and closed out the currency future contract. In doing so it generated an additional currency profit in the process that, in the view of the BFH, was likewise subject to the tax exemption for the sale of shares. The Federal Ministry of Finance (Bundesministerium der Finanzen, BMF), in its circular from 5.10.2020 (reference: IV C – S 2750-a/19/10005 :002) expressed its opinion on when currency transactions are subject to tax exemptions.
This should only be the case if there is an instigating relationship between the acquisition of the shareholding and the currency hedging transaction. In the BMF circular such an instigating relationship would be assumed if, when entering into the respective hedging agreement, the taxpayer wanted solely to hedge the subsequent specifically expected proceeds from the sale of shareholdings within the meaning of Section 8b(2) of the German Corporation Tax Act against currency fluctuations.
Please note: Conversely, losses from currency hedging transactions (just like losses from the sale of shareholdings themselves) are not deductible if there is such an instigating relationship.