Transitional rules for converting currencies to the Euro.

• Author: Yu, Angela
• Position: IRS regulations

On Jan. 1, 1999, 11 European Union (EU) countries converted their currencies (legacy currencies) to the euro. Companies conducting business in the legacy currencies generally will have three years to make the conversion to the euro; by July 1, 2002, the legacy currencies will be replaced entirely by the euro. The IRS has issued temporary regulations that provide transitional rules for existing businesses using legacy functional currencies that must convert to the euro (Temp. Regs. Sec. 1.985-8T(a)(1)). The primary purpose of the regulations is to provide transitional rules for the conversion, and thus should have no effect beyond the transition period. In addition, the regulations do not create new substantive tax rules. This may give taxpayers a significant amount of flexibility in applying the transition rules.

EU Members Converting to the Euro after Jan. 1, 1999

Four EU member countries (Denmark, Greece, Sweden and the U.K.) are not participating in the initial round of conversion to the euro. The U.K. tentatively has stated that it will adopt the euro as its national currency in 2005. The question arises as to whether the temporary regulations will apply to post-Jan. 1, 1999 conversions. The regulations were promulgated to address issues relating to the initial euro conversion and, thus, may not apply when companies resident in other EU-member countries adopt the euro as their currency in later years. The regulations, however, do not provide a specific date by which conversion must be completed, and thus may be broad enough to apply to later conversions. If the regulations do not apply to these later conversions, such conversions may be viewed as realization events.

Parallel Books and Records

Many European qualified business units (QBUs) may be unable to completely convert their accounting systems to accept the euro before 2002 and, thus, may be required to keep two sets of books during the transition period. The euro books may be a secondary set of accounts that is less complete than the legacy currency books (e.g., to comply with certain tax or regulatory reporting requirements before 2002). A QBU will not be treated as having adopted the euro as its functional currency unless it maintains all its books and records in the euro (Temp. Regs. Sec. 1.985-8T(b)(2)(B) and Regs. Sec. 1.989(a)-1(d)). Thus, depending on a client's circumstances, maintaining a temporary euro set of books for a QBU may or may not mean that it has adopted the...