Early High Court Decision 2007Du4504 ( December 28, 2007)

Classification of income from gains from transfer accrued from forward exchange transactions of swap deposits;

Transfer margin accruing from forward exchange transactions of swap deposits shall not be included in interest income under the Income Tax Act.

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

1. The Defendant’s imposition of global income tax on the remaining tax amount column in attached Form 1, which the Defendant provided to the Plaintiffs, is all imposed.

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2. The costs of the lawsuit are assessed against the defendant.

Attached Form 1 is as shown in the attached Table 1.

1. Details of the disposition;

A. During the period from 2003 to the beginning of 2006, banks primarily purchased high-amount deposits, foreign currency deposits customers, etc. by purchasing them at the UN rate of exchange (hereinafter referred to as the “HHE”) by again returning a certain principal and profit to the won currency transaction (hereinafter referred to as the “value exchange transaction”) in the form of a law, i.e., returning a certain amount of principal and profit in the currency (hereinafter referred to as the “value exchange transaction”) under the Income Tax Act, on the ground that the securities exchange profit (hereinafter referred to as the “value exchange transaction”) under the Income Tax Act can be subject to the comprehensive taxation of financial income. Therefore, it is possible to avoid the comprehensive taxation of financial income by taking account of the fact that the interest rate for three-month term deposits can be secured at the rate of 4.31% per annum (hereinafter referred to as the “value exchange transaction”).

B. The director of the Seoul Regional Tax Office conducted a consolidated investigation of legal advice and suggestions against the new bank, the Korea AAA Bank, the Korea Exchange Bank, and the Corporate Bank, etc., and confirmed that the above banks conducted the swap deposit transactions with the plaintiffs from 2003 to 2005, and that the above banks did not withhold the tax on the interest income accrued from the swap deposit transactions, but did not withhold the gift exchange profits accrued from the forward exchange transactions.

C. Meanwhile, around August 2006, the director of the Seoul Regional Tax Office believed only a bank's explanation that customers are not able to understand the structure of the swap deposit and the actual condition of the forward exchange transaction, and that there was no risk burden from the employees of the bank. If there was a risk burden, the bank did not enter into the currency swap deposit transaction, and simply subscribed to the currency swap deposit in the form of a bank's direct answer to the effect that more than 90% customers are aware of the fixed interest rate at the time of opening the currency swap deposit and are able to receive financial income tax as income tax, etc.

D. Based on the notice of data from the director of the Seoul Regional Tax Office, the Defendant: (a) based on the notice of data from the director of the Seoul Regional Tax Office, operated the swap deposit transaction as a single integrated transaction between a fixed deposit transaction and a forward exchange transaction; (b) deemed that the total gains from the transfer of the deposit interest and a forward exchange exchange fall under interest income under Article 16(1)13 of the Income Tax Act; and (c) included the gains from the transfer of gift exchange not collected by financial institutions in the total income amount of the Plaintiffs; and (d) made a correction and notification of the comprehensive income tax to the Plaintiffs as stated in the initial

E. The plaintiffs filed a request for a trial with the National Tax Tribunal. On December 2, 2007, the National Tax Tribunal rendered a decision to correct the tax amount by revoking the portion of additional tax in the previous disposition against the plaintiffs, on the ground that the imposition of additional tax and additional tax for arrears is improper, since it is difficult to expect the plaintiffs to make a final return and payment of global income tax on the transfer margin from forward exchange because the nature of the transfer marginal profit from forward exchange falls under interest income, but the plaintiffs trusted that the transfer marginal profit from forward exchange is exempt from this non-taxable income, and they do not instruct financial institutions to withhold tax.

"The defendant, according to the above decision on January 2008, reduced the amount of additional tax from the amount stated in the original tax column in attached Form 1 (hereinafter referred to as "the disposition on imposition of the amount stated in the above paragraph (d) in the case of plaintiffs branchB, RedCC, DoD and Maximum E, and the disposition on imposition of the amount stated in the remaining tax column in attached Form 1 after the reduction in the case of the remaining plaintiffs, and the disposition on imposition of the amount listed in the remaining tax column in attached Table 1 in the case of the plaintiffs."

[Reasons for Recognition] In the absence of dispute, Gap evidence Nos. 1, Eul evidence No. 1 to 3 (including each natural disaster No. 1) and the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiffs' assertion

① The United Nations currency swap deposit consists of separate transactions between the United Nations regular deposit transactions and the forward exchange transactions. Since gains on the transfer of gift from forward exchange transactions are not included in interest income under the Income Tax Act, the instant disposition based on the premise that gains on the transfer of gift exchange are interest income is unlawful.

② In light of the fact that a commercial bank has consistently handled the United Nations swap deposit from around 2002 to deal with non-taxable business, the tax authority did not take the instant disposition as a taxable object 1 even once, in view of the fact that the instant disposition is contrary to the principle of protecting trust.

B. Relevant statutes

Attached Form 2 shall be as listed in attached Table 2.

C. Determination

1) The key issue of this case is whether gift exchange gains can be taxed pursuant to Article 16(1)13 of the Income Tax Act on the gains from transfer of gift by deeming the UN regular deposit transactions and forward exchange transactions as a single combined transaction, not a separate transaction. In addition, the Income Tax Act provides not only the interest and discount amount (Article 16(1)3) of deposits (including installment savings, installments, deposits, and postal transfers) received in the Republic of Korea, but also the income similar to this income that has the nature of a consideration for the use of money (Article 16(1)3 of the Income Tax Act) as interest income. However, in foreign exchange transactions, foreign currency trading gains arising from exchange rate differences are not provided as interest income subject to taxation.

2) ① The customers who have subscribed to the swap deposit can be separated from the United Nations regular deposit transaction, or the income tax-free fixed deposit transaction can be recognized as a single fixed interest rate contract product that can avoid comprehensive taxation on financial income as a non-taxable product without accurately recognizing the actual status of the forward exchange transaction and the concept of the forward exchange marginal profit. ② The customer appears to have entered into the United Nations currency deposit contract with the financial institution through the currency swap deposit transaction. ② The customer is entitled to receive the profits in the U.S. currency amount already determined at the time of the final maturity of the forward exchange deposit transaction with the principal at the time of the maturity, which is similar to the currency deposit transaction. In the event of the early termination of the UN regular currency deposit transaction, the gift exchange transaction is also agreed to be terminated simultaneously; ③ the financial institution directly delivers the real currency to the customer through the forward exchange transaction or directly transfers the currency exchange transaction to the customer through the forward exchange transaction, and there is room for doubt as to whether the gift exchange transaction and the currency exchange transaction were realized.

3) On the other hand, it is reasonable to view that there was an agreement between banks and the plaintiffs on the gains from exchange in the form of a juristic act such as exchange in kind, currency transactions, currency exchange transactions, and currency exchange transactions. However, if the banks intend to gain gains from exchange without subject matters of interest income tax under the Income Tax Act through the legal form of forward exchange transactions, they may choose one of the legal relationships that are different from those of forward exchange transactions in terms of efficiency in accomplishing its objectives and degree of burden of tax, etc. In order to achieve the same economic purpose, the tax authorities shall respect the legal relations chosen by the parties concerned in terms of their own interest income generated from forward exchange transactions, and thus, the difference between the above legal relationship between the financial institutions in terms of currency exchange transactions and the total amount of income from exchange transactions in the form of a listed exchange agreement and the total amount of income from exchange transactions in accordance with the legal relationship between the financial institutions in question and the total amount of income from exchange transactions in exchange transactions in accordance with the form of securities exchange transactions.

Therefore, the disposition of this case on the premise that the defendant's transfer margin from the exchange of gift is a taxable income under the Income Tax Act is illegal, and the plaintiffs' assertion 1 which points this out is justified (Therefore, the plaintiffs' assertion 2 is not judged).

3. Conclusion

Therefore, the plaintiffs' claim of this case is reasonable, and it is so decided as per Disposition by admitting it.