CFM62910 – Corporate Finance Manual – HMRC Internal Manual


REGULATION 5ZA(2) SI 2004/3256

As explained in CFM62905, REG 5ZA has the effect of removing the inadequacy of tax treatment when companies use a derivative contract to hedge economic risk on:

  • the acquisition cost of the shares, as well as incidental acquisition costs (see CFM62920)
  • subscribing for shares or establishing a creditor loan relationship with another company for the purpose of directly or indirectly financing a share acquisition (see also CFM62920)
  • the proceeds from the disposal of the shares, or any relevant dividend paid in connection with the disposal (see CFM62930)

Economic risk

The economic risk that is intended to be covered must be that attributable to fluctuations in exchange rates between the currency of the future acquisition price, of the sale proceeds, of the dividend concerned, of the subscription for shares or of the advance in within the framework of the creditor loan relationship and either:

  • the company’s relevant currency (its functional currency or a chosen designated currency); or
  • the currency in which the company is raising debt or equity financing for a planned stock acquisition


ABC Ltd has entered into a memorandum of understanding to acquire the entire capital of XYZ SA, a company based in France, for 500 million euros. ABC Ltd has a GBP functional currency and has raised US$600 million in debt financing to fund the acquisition. ABC Ltd enters into a derivative contract to hedge the economic risk between the acquisition cost of the shares of €500 million and the expected debt cash of $600 million. There would be a relevant hedging relationship between the derivative contract and the economic currency risk between the purchase price of the euro stock and the cash to be raised through the dollar debt financing, such that the profits or losses arising from the derivative contract could be ignored.

Additional tips

Choice of designated currency – see CFM64500.


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