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.