What is the advantage of foreign currency

Avoid exchange rate disadvantages when making transfers or exchanges abroad

Entrepreneurs who do large-scale business abroad have two problems: 1. They trade in foreign currencies, the exchange rates of which fluctuate frequently. 2. The banks determine the rate at which they convert euro amounts into foreign currencies or vice versa. Here you can read three solutions and tax tips for the currency disadvantages when doing international business.

Problem 1: Exchange rate risks

In 2013 alone, the commercial economy purchased raw materials and semi-finished goods worth around 70 billion euros. The suppliers were usually paid in their home currencies or in dollars as the transaction currency. That means: First, euros are exchanged for example in dollars or Turkish lira and then transferred.

If German entrepreneurs sell their products or services in third countries (not EU), these are also paid for in a foreign currency. The German company then has to exchange the foreign currency received into euros.

This means that there is a high exchange rate risk for companies doing business abroad. This increases the transaction costs.

Problem 2: Bank margin worsens the exchange rate

In addition, domestic and foreign banks can pay for their "exchange" service well. They add a margin, the "spread". This spread averages 4 percent, but it can also be significantly higher. The exchange rates calculated in this way for customers in the case of foreign payments or the exchange of foreign currencies received are usually well above the interbank rates published in newspapers or by the banking association. They are determined by the credit institutions once a day for each individual currency "taking into account the rates traded in the international foreign exchange market for the respective currency on the settlement date".

Danger: These supposed "official" exchange rates are interbank rates. It is not the courses that are actually exchanged for. Interbank rates only apply to foreign exchange trading between banks. However, many banks set their settlement rates according to the reference rate of the European Central Bank (ECB).

3 solutions to trade cheaper abroad

The more extensively your company trades in foreign currencies, the more worthwhile the following solutions:

  • 1. F.Set up remd currency accounts: Foreign currency accounts can be kept in foreign currency at any bank. The advantage: You can make and credit current payments without having to convert the exchange rate. There are only account fees.
  • Investors also use foreign currency accounts for speculative purposes - in the expectation of a development in the exchange rate of the euro against the respective foreign currency.
  • 2. Banking conditions design individually: Banking terms are subject to the laws of the free market and can be freely negotiated. This is common practice in large companies, but rather unknown in medium-sized companies and especially small businesses. Tax tip: Negotiate with your bank and adjust your foreign fees to your individual needs.
  • 3. Price forecast: You can mitigate the first-mentioned problem of the exchange rate risk by informing yourself in advance about the possible development of the currency. For the most important foreign currency, the dollar, you will find the current dollar exchange rate, forecasts, diagrams and explanations here. The larger your trading volume, the more important this point is.

Tax conversion rates differ

Danger: When you declare your foreign income or expenses to the tax office, it is not the interbank rates or the actual exchange rates that are important, but official exchange rates. (The Federal Ministry of Finance issues these for every calendar month.)

Tax tip: By the way, did you know that you are entitled to a refund of the sales tax paid abroad?