[1] In order to deny the validity of a taxpayer’s transaction as an act of tax avoidance despite the form of such transaction, whether there must be individual and specific rules of denial (affirmative)

[2] The case affirming the judgment below holding that where Gap bank and its customers entered into the "NE Exchange Deposit Agreement" with the condition that they enter into the United Nations regular deposit and forward exchange transaction, gains from the above forward exchange transaction are difficult to be deemed as interest on deposits or similar, and it cannot be deemed as profit margin or similar profit margin from repurchase of bonds or securities, and thus, it does not constitute a subject of taxation of interest income tax under Article 16 (1) 3 of the former Income Tax Act

[1] When a taxpayer engages in economic activities, one of the several legal relations can be selected to achieve the same economic purpose. Thus, even if it is an act to avoid the heavy burden of tax, it shall be deemed valid unless there are special circumstances to deem the act to constitute a disguised act. In order to deny the validity of a taxpayer’s transaction based on the substance over form principle as an act of tax avoidance notwithstanding its form, individual and specific denial provisions should be provided under the principle of no taxation without law.

[2] In a case where Gap bank and its customers entered into the "NE Exchange Deposit Contract" which entered into a currency regular deposit and forward exchange transaction together, the case affirming the judgment below that the above forward exchange contract does not constitute an object of interest income under Article 16 (1) 3, 9 and 13 of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006) since it is difficult to deem that the above forward forward exchange transaction constitutes a fictitious act separate from the UN regular deposit contract, it constitutes an act without the validity of a juristic act, or it is incorporated into the UN regular deposit contract, and it is difficult to deem that the above forward forward exchange profit from the forward forward exchange transaction is difficult to be deemed as interest on a deposit or any similar act, and it is difficult to regard as profit margin from repurchase of bonds or securities as a profit margin or any similar act.

[1] Article 16 (1) of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006); Article 24 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705 of Feb. 19, 2005) / [2] Article 16 (1) 3 and 9 (see current Article 16 (1) 8) of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006) (see current Article 16 (1) 12 of the current Act), Article 24 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705 of Feb. 19, 2005)

[1] Supreme Court Decision 90Nu3027 decided May 14, 1991 (Gong1991, 1666), Supreme Court Decision 98Du14082 decided Nov. 9, 199 (Gong1999Ha, 2531), Supreme Court Decision 2007Du26629 decided Apr. 9, 2009 (Gong2009Sang, 672)

Plaintiff 1 and 47 others (Law Firm Rate, Attorneys Shin Sung-ki et al., Counsel for the plaintiff-appellant)

Head of Yongsan Tax Office (Government Law Firm Corporation, Attorneys Gu Chungcheongnam-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2009Nu6836 decided January 26, 2010

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

The grounds of appeal are examined.

Article 16 (1) of the former Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006; hereinafter the same) provides that "interest income shall be the income falling under any of the following subparagraphs arising during the pertinent year." subparagraph 3 provides that "interest and discount amount of a deposit received in Korea", "profit margin on repurchase of bonds or securities as prescribed by the Presidential Decree" in subparagraph 9, and "income margin on repurchase of bonds or securities as prescribed by the Presidential Decree" in subparagraph 13, and "income similar to income under subparagraphs 1 through 12, which has the nature of consideration for the use of money."

In addition, Article 24 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 18705, Feb. 19, 2005; hereinafter the same) provides that "the profit margins on repurchase of bonds or securities as prescribed by Presidential Decree" under Article 16 (1) 9 of the Act means the profit margins on bonds or securities traded by financial institutions on condition of repurchase or repurchase by applying the pre-determined interest rate according to the repurchase period."

Inasmuch as taxpayers may choose one of the several legal relations to achieve the same economic purpose while engaging in economic activities, it shall be deemed valid unless there are special circumstances to deem the transactional act to be an act to circumvent the excessive burden of tax, barring any special circumstance. In order to deny the validity of the transactional act of taxpayers as an act of tax evasion according to the principle of substantial taxation notwithstanding its form, individual and specific denial provisions are required under the principle of no taxation without law (see, e.g., Supreme Court Decisions 90Nu3027, May 14, 1991; 2007Du2629, Apr. 9, 2009).

Comprehensively taking account of the evidence of its employment, the Plaintiffs entered into a contract with the new currency exchange rate of 200 to be paid in Korean currency at the same rate of exchange rate of 00 (hereinafter referred to as “the instant currency exchange rate of 2002”) (hereinafter referred to as “the instant currency exchange rate of 200”). Since the Plaintiffs purchased the currency at the rate of 0.25% before and after their deposits, and at the same time subscribed to the UN currency deposit at the maturity of 0.25% (hereinafter referred to as “the UN currency deposit”) at the same rate of exchange as that of the gift exchange rate of 200 to be paid in Korean currency at the maturity or termination of the said deposit (hereinafter referred to as “the instant currency exchange rate of this case”). The new currency exchange rate of 202 to be paid in Korean currency at the same rate of exchange rate of exchange from 00 to 202 to 30.0% to 200 new currency exchange rate of exchange traded securities exchange rate of the instant securities exchange rate of Korea.

The court below determined based on the above factual basis that even if the transaction form taken by the parties is an act to avoid the burden of tax, it shall be deemed effective unless there are special circumstances, such as the act constitutes a disguised act, it is difficult to view that the gift exchange contract of this case constitutes a separate contract separate from the UN regular deposit contract, it constitutes a disguised act without the validity of a juristic act, or it is incorporated into the UN regular deposit contract, and it is difficult to view the gains from the gift exchange transaction of this case as an object of taxation of interest income tax under Article 16 (1) 3 of the former Income Tax Act, because they are interest on deposits or similar thereto under Article 16 (1) 9 of the former Income Tax Act, and Article 16 (1) 9 of the former Income Tax Act provides an opportunity to use money from the time of repurchase to the time of fulfillment of redemption condition from the time of repurchase agreement, and it is difficult to view that the foreign securities exchange profits of this case or securities repurchase profits of this case as interest income under Article 16 (1) 3 of the former Income Tax Act or securities repurchase profits under Article 16 (1) of the former Enforcement Decree.

In light of the above legal principles, relevant regulations and records, the above judgment of the court below is just and acceptable, and there is no error in the misapprehension of legal principles as to the scope of application under Article 16 (1) 13 of the former Income Tax Act, as otherwise alleged in the ground of appeal.

Therefore, each 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 Shin Young-chul (Presiding Justice)