Seoul Administrative Court 2008Guhap12511 ( October 20, 2009)

early 2007west0769 ( December 24, 2007)

Whether the gift exchange marginal profits from the swap deposit transactions constitute interest income.

If the United Nations Exchange and Promissory Exchange Transaction was selected as a way to create a respective legal relationship between the customer and the customer, the content and scope of taxes arising therefrom shall be determined individually in accordance with the legal relationship. Therefore, interest income arising from futures exchange transactions shall not be deemed subject to taxation.

The contents of the decision shall be the same as attached.

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

1. Purport of claim

The Defendant’s imposition of interest income tax of KRW 183,91,350 for the Plaintiff on November 8, 2006, KRW 2,152,821,130 for the year 2004, KRW 532,285,380 for the year 2005, and KRW 221,110 for the year 206 shall be revoked.

2. Purport of appeal

The judgment of the first instance shall be revoked. The plaintiff's request shall be dismissed.

1. The reasoning for the court’s explanation concerning this case is as follows: (a) Nos. 6 and 18-10-10-2 of the judgment of the court of first instance; (b) relevant laws and regulations and (c) other than changing the judgment as set forth in the following paragraph (2), and therefore, they are cited in accordance with Article 8(2) of the Administrative Litigation Act and Article 420 of the Civil Procedure Act.

2. B. Relevant statutes;

It is as shown in the attached Form.

C. Determination

(1) The Income Tax Act provisions

Article 16 (1) of the Income Tax Act lists interest and discount amounts of deposits (including installment savings, installment savings, deposits, and postal transfers) received in Korea under subparagraphs 3 and 9 as interest income, and repurchase/back agreement profits on bonds or securities as prescribed by the Presidential Decree as one of the interest income. From December 31, 2001, Article 16 (1) of the Income Tax Act newly establishes subparagraph 13, which is a type of comprehensive taxation principle, and stipulates that the income which is similar to the income under subparagraphs 1 through 12, has the nature of a consideration for the use of money, as well as the income which is similar to the income under subparagraphs 1 through 12, is also the interest income. On the other hand, the income subject to income tax is classified as income subject to taxation by identifying the income subject to taxation of income tax in the form of income, and is not imposed on income

(2) Whether the interest on a valuable deposit and similar income arising from the forward exchange transaction in the instant case fall under the interest income that has the nature of the consideration following the use of money

(A) Even if the transaction form, which the parties take place, is an act to avoid excessive tax burden, it shall be deemed valid unless there are special circumstances, such as that the above act constitutes a disguised act (see, e.g., Supreme Court Decision 90Nu3027, May 14, 1991). In full view of the evidence of the first instance court and the following circumstances acknowledged by the purport of the entire pleadings as a whole, it is difficult to view that the gift exchange transaction of this case constitutes a disguised act, or that the gift exchange transaction of this case, the deposit transaction of this case, and the gift exchange transaction of this case, respectively, was constituted as a separate juristic act. Rather, it is reasonable to view that the gift exchange transaction for the deposit transaction of this case, the deposit transaction of this case, and the gift exchange transaction of this case were effective as a separate juristic act.

① The Plaintiff prepared a written application for foreign currency deposit transaction and a gift exchange transaction agreement, which is a separate disposition document at the time of the instant transaction with the customer, and entered into a separate contract for the instant deposit and exchange contract (if the Plaintiff did not express a separate intent on the re-agreement from the customer prior to maturity while operating the instant transaction, the Plaintiff would be deposited into the customer account designated in advance by termination of the international currency regular deposit and forward exchange contract, and if the contract is terminated at the time of termination of the international currency regular deposit contract, the exchange contract is also terminated at the same time, but it seems to be closely combined with the instant contract for the purpose of the international currency swap deposit transaction, which appears to be close with the instant contract).

② Most of the customers were not specifically aware of the structure of the instant transaction or the actual condition of the instant futures exchange transaction at the time of entering into each of the above contracts. However, it seems that there was a mutual agreement with the Plaintiff on the fact that, at least, the Plaintiff and the customers were able to obtain tax revenues higher than the general deposit because they could be subject to the comprehensive taxation of financial income from the gift exchange transaction which constitutes the main contents of the instant transaction, i.e., non-income tax-free goods, and there was no explicit or implicit agreement between the Plaintiff and the customers that the gift exchange contract was concluded only formally, and that the fact that the gift exchange contract was null and void.

③ The agreed exchange rate of gift applied by the Plaintiff at the time of the instant futures exchange transaction is not arbitrarily determined, but is determined by reflecting the actual exchange rate in the foreign exchange market.

In other words, since the original/N currency exchange market did not exist until May 29, 2006, the Plaintiff concluded a gift exchange rate at the time of the instant currency exchange agreement with its customers by taking into account various circumstances, such as the exchange rate at the same time as the gift exchange rate at the time publicly announced in the foreign exchange market by Thomson Korea Co., Ltd. ("St Points" means an amount calculated by subtracting the spot exchange rate from the futures exchange rate), USD /N swap point, calculated by aggregating the above USD / source swap point and the spot currency exchange rate at US/N exchange rate at US/N exchange rate / United Nations currency exchange rate calculated by adding US/N currency exchange rate at US/N currency exchange rate to US/N currency exchange rate at the same time. However, the Plaintiff continued to enter into a gift exchange rate at the time of the instant currency exchange agreement with its customers through the uniform currency exchange rate at the rate of exchange rate at the time of the instant currency exchange rate at the rate of KRW 20/20,000.

④ In the case of a general gift exchange transaction in which the United Nations currency deposit is not attached, profits and losses that the parties to the transaction will gain during the period during which the futures exchange transaction is due according to the futures exchange rate and the spot exchange rate at the time of the conclusion of the gift exchange contract. In particular, as at the time of the conclusion of the gift exchange contract in this case, if the futures exchange rate at the time of the conclusion of the gift exchange contract is higher than the spot exchange rate, i.e., the UN/N exchange point at the time of the conclusion of the contract in this case where the situation continues to exist, it is determined definitely that profits should be earned during the due date. Therefore, it is difficult to view that whether the profits gained from the instant transaction depends on the nature of the instant transaction or not is determined. Moreover, the meaning that the forward exchange rate at the time of the conclusion of the contract in this case is lower than the spot exchange rate, and it is difficult to view that there is no risk of exchange at all as compared with the loss of the gift exchange rate due to the conclusion of the contract in this case.

⑤ In a transaction with the same structure as this case, if banks do not seek various and specific measures, such as rupture forward transactions, to avoid exposure to exchange risks under the above futures exchange transactions, they guarantee conclusive profits to customers, while banks, including the Plaintiff, including the Plaintiff, are bound to cause a corresponding definitive loss. Therefore, banks, including the Plaintiff, have prepared and implemented various and detailed measures, such as entering into a forward forward transaction contract with foreign financial institutions at the market futures exchange rate at the time in order to avoid such loss (in the case of USD / source swap, the Plaintiff seems to have terminated the risk by combining the relevant transaction or multiple transactions with foreign financial institutions).

6. Moreover, the profit gained by customers from the instant forward exchange transaction is not proportional to the transaction period, and even if the transaction size and the period are identical, the profit was changed at the time of such transaction.

7) At the time of the instant transaction, the Plaintiff actually paid won currency from most customers at the maturity, and there was almost no fact that the said payment was made in kind. However, after entering into the instant deposit contract, the Plaintiff stated that the deposit amount was appropriated in the foreign currency account and the account was entered in various books, such as financial statements. Accordingly, insofar as the said deposit amount from around 2003 to around 2004, which was the time of the instant transaction on the Plaintiff’s foreign currency balance sheet, is more increased than 2002, it is difficult to readily conclude that the Plaintiff, contrary to the general accounting principles and deposit operation guidelines, deemed that the won currency amount received from the customers was raised and used as the Korean won fund.

(8) In this case, unlike the ordinary futures exchange contract, customers who did not deposit the bonds with a bank, but in this case, they may be deemed to play the role of the deposit money with a bank.

(B) When a taxpayer engages in economic activities, he/she may choose any of the various legal relationships in order to achieve the same economic purpose, taking into account the efficiency of the purpose of the transaction and the degree of the burden of related expenses, including taxes, and the tax authority shall respect the legal relationship chosen by the parties, except in extenuating circumstances (see Supreme Court Decision 2000Du963, Aug. 21, 2001). Thus, as long as each transaction constituting the transaction of this case is effective as a separate legal act, the content and scope of tax arising therefrom are determined individually in accordance with the legal relationship. Even if the transaction of this case was concluded or carried out at the same time to avoid some burden of income tax, and the transaction of this case is terminated at the same time, it does not require the same treatment under the Tax Act notwithstanding the difference in the legal form.

Therefore, the profit from the deposit transaction of this case constitutes interest income under Article 16 (1) 3 of the Income Tax Act, but the profit from the exchange transaction of this case is merely limited to the profit from the exchange transaction of foreign exchange, which is a kind of capital profit, and thus, it does not constitute the consideration for the use of money as income similar to the interest from the deposit.

(3) Whether profits from the instant futures exchange transactions constitute interest income in the nature of the consideration for the use of money, as income similar to the trading marginal profits from bonds or securities with repurchase agreement

The taxation on marginal profits from repurchase agreements of bonds or securities is imposed by considering certain profits paid in return for repurchase by offering an opportunity to use money from the time of repurchase to the time when the conditions of repurchase are fulfilled by selling and buying "bonds or securities" as collateral for repurchase. Since the payment received by customers after giving the Plaintiff an opportunity to use them as collateral is limited to the amount equivalent to the UN interest, and the futures exchange marginal profits cannot be included in this, it is difficult to view the exchange marginal profits as bonds or securities with repurchase agreement marginal profits or similar thereto. Even if the exchange marginal profits from repurchase agreements of bonds or securities are similar to the exchange marginal profits from repurchase agreements of bonds or securities, it is difficult to regard the exchange marginal profits from repurchase agreements of securities as collateral under Article 16 (1) 9 of the Income Tax Act and Article 24 of the Enforcement Decree of the same Act are subject to the profit margin from repurchase, and it can not be allowed to interpret them as interest income in light of the principle of no taxation without law.

(4) The theory of lawsuit

Therefore, the instant disposition, based on the premise that the profit accrued from the gift exchange transaction of this case constitutes interest income under Article 16 (1) 13 of the Income Tax Act, is unlawful without further review.

3. Conclusion

Therefore, the judgment of the first instance court is legitimate, and the defendant's appeal is dismissed as it is without merit. It is so decided as per Disposition.