In a case where Party A, a resident of Canada, acquired a house in Canada as Canada and used it as acquisition fund by obtaining a loan from the parent-base loan, transferred a house, repaid the parent-base loan balance as part of the transfer price, and the tax authority imposed a capital gains tax disposition, the case holding that the exchange marginal profit corresponding to the balance of the parent-base loan should be excluded from gains on transfer from the transfer of a house.

Articles 118-2, 118-3, 118-4, and 118-8 of the former Income Tax Act (Amended by Act No. 10408, Dec. 27, 2010); Article 178-5(1) of the Enforcement Decree of the Income Tax Act

Plaintiff (Attorney Jeon Soo-soo, Counsel for the plaintiff-appellant)

The Head of Dong-gu Tax Office (Law Firm, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

Daegu High Court Decision 2013Nu1004 decided September 27, 2013

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. Article 118-2 of the former Income Tax Act (amended by Act No. 10408, Dec. 27, 2010; hereinafter “Income Tax Act”) provides that capital gains from the transfer of assets located abroad of a certain resident (hereinafter “overseas assets”) shall be subject to taxation of capital gains tax. Articles 118-3, 118-4, and 118-8 provide that capital gains from the transfer of overseas assets shall, in principle, be calculated by deducting necessary expenses such as acquisition value, capital expenses, and transfer expenses from the actual transaction value at the time of transfer of the assets. Meanwhile, Article 178-5 (1) of the Enforcement Decree of the Income Tax Act (amended by Act No. 10408, Dec. 27, 2010) provides that “in the calculation of gains from transfer under Article 118-4 (2) of the Act, the transfer value and necessary expenses shall be calculated based on the basic exchange rate or arbitrated exchange rate as of the date of receipt or payment of the necessary expenses.”

2. A. citing the reasoning of the judgment of the court of first instance, the lower court: ① acquired the instant house located in Canada on August 23, 2007 in USD 1,325,00 (hereinafter “$”) and used it for its acquisition fund after obtaining a loan of USD 861,250 from the Donian bank at debate to USD 861,250; ② on June 15, 2010, the Plaintiff transferred the instant house to USD 1,320,790,78 (hereinafter “the instant loan”); ③ did not report or pay the transfer income tax on the transfer of the instant house; ③ The Defendant recognized the transfer income tax of USD 1,320,790 ($ 756,790,790; USD 206,305,1365,205,1305,205,136,205,205,205,275,2714,205,25,275,27

Furthermore, the lower court determined that the part of the disposition of this case, which exceeds the legitimate tax amount calculated by excluding exchange marginal profits equivalent to the loan of this case from transfer marginal profits, was unlawful, on the grounds that the Plaintiff did not actually acquire such marginal profits (the same amount as exchange marginal profits from the repayment of the loan of this case) and should be excluded from transfer marginal profits, and the transfer income tax is deemed to be included in exchange marginal profits which the transferor did not actually acquire, and thus the imposition of transfer income tax is contrary to the essence of income tax.

B. In the event a resident acquires a house overseas by obtaining a housing mortgage loan in foreign currency, the judgment of the court below which held that the exchange margin corresponding to the loan of this case should be excluded from the transfer margin due to the transfer of the house of this case, is justifiable, and there is no error in the misapprehension of legal principles as to the calculation of the transfer margin of assets overseas, as otherwise alleged in the grounds of appeal, by misapprehending the legal principles as to the calculation of the transfer margin of assets overseas, although the transfer margin is included in the transfer margin by adding up the profits and losses arising from the exchange rate fluctuations to the transfer margin as to the transfer income from the transfer of assets overseas.

3. Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee In-bok (Presiding Justice)