The tax treatment of foreign exchange gains or losses in determining capital gains on foreign securities

The Conseil d’État recently ruled on the determination of capital gains from the sale of foreign securities in a judgment dated September 13, 2021 (No. 443914).

Reminder Regarding Capital Gains on the Sale of Securities

The procedures for determining taxable capital gains are set out in Article 150-0 D of the General Tax Code:

“The net gains mentioned in I of Article 150-0 A consist of the difference between the actual sale price of the securities or rights, net of fees and taxes paid by the seller, and their actual acquisition price (…).”

The text does not specify how to determine taxable capital gains when the sale and acquisition prices are denominated in foreign currencies. Two options are available:

• Either the exchange rate applicable on the date of the sale is used to determine the acquisition and sale prices. In this case, gains or losses on exchange rates are not taken into account.
• Or, the exchange rate applicable on the date of acquisition and the one applicable on the date of sale are respectively used to determine the capital gains. In this case, gains or losses on exchange rates will be considered in determining taxable capital gains.

It is this question that the Conseil d’État addressed in its judgment of September 13, 2021.

The Position of the Conseil d’État

Recall of the Facts

M.B and Mrs. E sold shares of a U.S. company in 2015. To determine the acquisition and sale prices, they used the dollar exchange rate on the date of the sale. Therefore, the exchange rate gain was not taken into account. The tax authorities challenged this calculation, arguing that the exchange rate on the day of acquisition should be used to determine the purchase price and the one on the day of sale to determine the selling price.

The Administrative Court of Appeal of Paris, in a decision dated July 31, 2020 (No. 19PA02095), sided with the tax authorities, stating that exchange rate gains and losses should be taken into account in determining taxable capital gains. This decision was in contrast to the one adopted by the Court of Appeal of Nancy in a judgment dated May 16, 2007 (No. 05NC01153).

The Decision

In its decision of September 13, 2021, the Conseil d’État considers that:

“It is necessary to determine the actual acquisition and sale prices mentioned in this article in euros, if necessary by converting into euros, based on the exchange rates applicable respectively on the date of acquisition or sale, the prices that were paid at the time of these transactions in foreign currencies. As a result, exchange rate gains or losses that may be recorded during the sale of securities, social rights, and similar securities thus defined constitute a component of net gains or losses realized and are taken into account in determining the amounts taxable under Article 150-0 A of the General Tax Code.

The Conseil d’État thus validates the position of the Administrative Court of Appeal of Paris.

It is worth noting that this solution is identical to that adopted for capital gains on real estate located abroad by the Administrative Court of Appeal of Marseille in its decision of February 4, 2020 (No. 18MA0433), for which an appeal has been allowed. We will keep you informed of the Conseil d’État’s position.

Finally, regarding professional capital gains on assets acquired and sold in foreign currencies, the Conseil d’État, in a judgment dated March 12, 2014 (No. 352212), considered that exchange rate gains or losses should be taken into account in determining the realized gain or loss, similar to the judgment under review.