Legislation, Hedge Fund and Taxations

Realize that the legislation sought, in the first place, to comprehensively conceptualize the hedge operation, a concept that must be observed in full when analyzing the deductibility of losses.

Note that it is clear that the hedge transaction must:

  • Mandatorily be intended to protect against risks inherent to price or rate fluctuations and even if this protection
  • Is related to the operational activities of the legal entity and
  • Intended to protect the rights and obligations of the legal entity (e.g. protection of loans in dollars, amounts receivable from exports, amounts payable from imports, etc.).

Thinking from the logical point of view of the standard, what is sought here is not to allow the deductibility of losses arising from speculative operations in the financial market, but only those operations contracted with the objective of protecting the rights and obligations arising from the company’s operational activities.

Then, in view of the fact that such conditions are extremely subjective, the regulation sought to establish some criteria to guide the fulfillment of the conditions. You can make use of the there.

The need for hedge through controls that show the values ​​of risk exposure related to the assets, rights, obligations and other hedged items, highlighting the risk management process and the methodology used to calculate these values and the adequacy of the hedge by means of controls that prove the existence of a correlation, on the date of contracting the operation, between the price variations of the hedge instrument and the expected returns for the assets, rights, obligations and other items subject to hedge.

See that the legislation determines several requirements and controls that aim to demonstrate the known effectiveness of the hedge, considering that this is a condition for the deductibility of eventual losses.

The Last Options

To this end, IN determines the need for cumulative proof of (i) the need for hedging, as long as there are rights and obligations arising from the company’s operational activity that are subject to financial risks arising from price or rate variations, ( ii) proof of the company’s policy used in risk management, objectively demonstrating the methodology used, (iii) demonstration of the temporal correlation between the results obtained in the hedge operation (gain or loss) and the variations in the value of the assets, rights and obligations – hedged objects – these must be balanced.

Having overcome the question of the conditions to be observed in relation to the hedge evidence, we will finally discuss the deductibility of any losses with hedge.

At this point, we have to, if the company meets these conditions, there will be no impediment as to the deductibility of loss arising from these operations, just by respecting the temporal criterion, which, as already mentioned, should only occur when the contract is settled.

On the other hand, if the company is unable to prove these conditions, the deductibility of losses on the hedge (speculative) will be limited to gains earned in the same period with variable income, including swap. In other words, if the company has investments in other operations with variable income, including other hedges or swaps, the loss resulting from the deductible (speculative) hedge in the Real Profit will be limited to the gains earned in these other operations and the surplus cannot be used as expense, and should therefore be added to the calculation of taxable income.

Hedge taxation by PIS

In relation to PIS, the logic is the same, both in relation to the temporal criterion and the differentiation between the effective hedge treatment and the speculative hedge, concepts already explored above.

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