What exchange rate should be used for exchange rate differences when payments pass through a foreign currency account and no actual currency exchange takes place? We successfully defended a simple and lawful solution on behalf of our client – contrary to the ‘hypothetical’ exchange rate imposed by the authority.
Client's situation
Our client settled its liabilities and received payments denominated in EUR directly from a bank account held in that currency. As there was no actual exchange of EUR for PLN, the company was unable to determine the exchange rate actually applied by the bank.
To value these transactions and determine exchange rate differences, the company used the average exchange rate published by the National Bank of Poland (NBP) on the last working day preceding the date of payment of the liability and, respectively, the date of receipt of the receivable. The tax authorities have questioned this practice.
The issue
DMS TAX’s task was to assess the correctness of the exchange rate applied by the company – taking into account the case law of the administrative courts and the practice of the tax authorities – and to safeguard the client in the event of a dispute.
Our approach
In view of the unfavourable – and, in our view, legally unfounded – practice of the authorities, we applied for an individual ruling. We argued that, since it is impossible to determine the exchange rate actually applied, the appropriate rate is the average exchange rate published by the National Bank of Poland (NBP) on the last working day preceding the date of the transaction.
The Minister of Finance ruled that the ‘exchange rate actually applied’, as announced by the applicant’s bank at the same time, should be used. In view of this unfavourable decision, we called on the authority to remedy the breach of the law and subsequently appealed against the interpretation to the Provincial Administrative Court in Kraków.
A simple and legally compliant method of settlement has been maintained
The Provincial Administrative Court in Kraków overturned the interpretation, upholding the position set out in the complaint. The court held that, since the bank does not carry out currency conversion and no actual currency exchange takes place, the authority’s approach is unfounded, and the exchange rate determined in this way would merely be a ‘hypothetical’ rate, rather than one actually applied.
For the client, this meant retaining a simple, predictable and lawful method of settling exchange rate differences – without the need to resort to an artificially constructed exchange rate and without the risk of the settlements being challenged.
What this means
This case provides practical guidance for companies that keep their accounts in foreign currencies: in the absence of an actual currency exchange, it is reasonable to use the National Bank of Poland’s average exchange rate. The case was handled by managing partner Jacek Dobrucki.