073. Currency Conversion Gains And Losses Of Foreign Permanent Establishments

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Under German commercial accounting law (sec. 244 HGB), the year-end balance sheet must be prepared in the German language and in German marks. Under the principle of linkage between the commercial and tax balance sheets, this provision applies for tax purposes as well. If, however, the entity preparing the balance sheet has transactions in foreign currencies, these can result in exchange gains and losses which are in principal also part of the German tax result.

Limits are, however, placed on the utilisation of foreign losses for tax purposes by sec. 2a EStG, which prevents the netting of foreign losses against other income in a variety of instances, in particular where the foreign loss is attributable to a foreign permanent establishment which does not meet certain activity requirements. A second limit results from the