When is income on currency options recognised?

In the case of “virtual” currency forward contracts income is deemed to arise upon receipt of payment.

A recent case (judgment of the Province Administrative Court in Warsaw dated 24 May 2010, Case No. III SA/Wa 1838/09) involved a limited-liability company that intended to conduct business involving restructuring of enterprises and providing comprehensive debt-collection services, and in particular the company planned to acquire derivative instruments for its own account. The company planned to buy derivatives from other market participants before their due dates, particularly currency forward contracts. As a result of a forward transaction, there is a sale of foreign currency at a specified time and price. The contract could be “real” when there was an actual delivery of currency, or “virtual” when the payment constitutes the difference between the forward rate and the current rate.

The company was unsure when to recognise income with respect to “virtual” derivatives in the form of currency forward contracts and currency options without an actual delivery of currency, and sought a ruling from the Ministry of Finance. The company took the position that the income for purposes of corporate income tax would be realised upon receipt of payment. The ministry disagreed. Citing Corporate Income Tax Act Art. 12(3a), the ministry took the view that income from such transactions arises when the claim arises for payment of the difference between the forward rate and the current rate.

The case finally reached the province administrative court, which upheld the taxpayer’s position. In the court’s view, in such case CIT Act Art. 12(3e) will apply respectively. The court stated in its justification that as a result of the transactions in question, no goods are delivered, no property rights are sold, and no services are performed, as the Ministry of Finance argued. The transactions are also not settled over periods agreed between the parties. The decisive factor in transactions of this type will be the date of receipt of payment. This is an interesting ruling for many investors who plan to carry out transactions of this type.