The law giving various provisions from an economical and financial standpoint (DDOEF), published in the "Journal Officiel" dated April 13, 1996, includes significant provisions relating to the tax treatment of exchange rate agreements or exchange currency agreements held by credit institutions (Swaps). On the one hand, it specifies the field of application of article 38-bis-C of the French General Tax Code, the aim of which is to adjust the tax treatment of these incomes to their accounting treatment. On the other hand, the legislator sets the rules applicable in case of change of appropriation of such agreements.

It must be reminded that article 38-bis-C of the French General Tax Code adapts the tax treatment of interests rate exchange agreements concluded by credit institutions to the accounting rules promulgated by the Committee of Bank Regulations. Therefore the "speculative" agreements (agreements in an isolated open position) and the "macro hedging" agreements (allocated to a global risk of rate) are not submitted to the rule of valuation at the market value. Nevertheless, the "micro hedging" agreements (allocated to the hedging of an identified item) and the "portfolio trading" agreements (allocated to a trading activity) are submitted to the rule of valuation at the market value.

Until the intervention of the new law, the agreements granting ceilings or interest rates floors (caps, floors, collars) were neither explicitly aimed at by article 38-bis-C of the French General Tax Code (the field of application of which was utterly limited to interest rate exchange agreements), nor by the rule 90-15 of the "CRB". The involved dealers wished that the tax authorities clarify as soon as possible this matter of field of application in a direction favourising the adjustment of the tax treatment to the practice of the "Location", i.e. registration of caps, floors and collars in a trading portfolio. The legislator admitted they were right by extending the field of application of article 38-bis-C of the French General Tax Code. The new law also defines the tax consequences resulting from portfolio transfers.

In the future, the change from an agreement valued at its market value into a category not submitted to the valuation rule will imply the immediate taxation at the common law rate of the valuation difference at the closing of the previous tax year, as the transferred agreement has to be valued at its market value at the date of the transfer. In addition, the profit or the loss resulting from this valuation will respectively be deducted or added to the taxable results according to a sharing realized in an actuarial way on the running duration remaining until the deadline of the involved agreements.

The transfer of an agreement which is not valued in a category submitted to the valuation rule, has the following consequences. Contrary to a previous regime, the valuation rule to the market value may apply to agreements allocated, after their conclusion, in a category where the valuation rule applies. In addition, the part of boots/payments not yet linked to the tax basis is comprised in the tax result during which their appropriation change occurs. This latter rule applies in the case where the part of the boot/payment not yet taxed is taken into account in the valuation of the agreement transferred, the differences of which appear in the results.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be brought about your specific circumstances.

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