early 2007west3096 ( December 28, 2007)

Profit from the forward exchange transaction of the swap deposit shall not be deemed as interest income.

Income from the forward exchange transaction of the swap deposit is similar to the interest of the deposit, and cannot be deemed as interest income in the nature of the consideration due to the use of the money.

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

1. The Defendant’s disposition of imposition of KRW 1,286,839 of global income tax for the year 2004 on March 2, 2007 against Plaintiff GangwonB and the disposition of refusal to rectify the global income tax for the year 2003 on June 7, 2007 is revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. In around 2003, the Plaintiff Han-CC entered into a gift exchange contract (hereinafter referred to as “the gift exchange contract in this case”) with each of the Co., Ltd. (hereinafter referred to as “AAB”) around 2004, (1) after the Plaintiffs paid won currency to the AAB, (2) after the Plaintiffs deposited the UN currency exchange from the said won currency, and (3) upon the maturity of the said UN regular deposit contract (hereinafter referred to as “the deposit contract in this case” and “the deposit transaction in this case”) whereby the principal and interest are returned at maturity after receiving a fixed interest rate of 0.25% prior to and after the maturity, and (3) upon the maturity of the said UN regular deposit contract, the gift exchange contract (hereinafter referred to as “the gift exchange contract in this case,” and “the gift exchange transaction in this case”).

B. The AA Bank: (a) deemed the interest income under the former Income Tax Act (amended by Act No. 8144, Dec. 30, 2006; hereinafter “Income Tax Act”); (b) however, the portion arising from the instant currency exchange transaction was not withheld on the premise that the interest income is not an interest income; and (c) on the ground that the profits arising from the instant currency exchange transaction constituted interest income, the Defendant issued a correction and notice to the Plaintiff KangB on March 2, 2007 (including additional taxes) of the global income tax of KRW 1,975,534 (including additional taxes) for the sake that the profits arising from the instant currency exchange transaction constituted interest income (hereinafter “the initial imposition disposition”).

D. On December 28, 2007, the National Tax Tribunal rendered a decision to rectify the tax amount of the instant disposition by excluding the portion of the return and erroneous payment on the ground that there is justifiable reason for failure to return and pay the comprehensive income tax on the interest arising from the gift exchange transaction in this case with AB. Accordingly, the Defendant reduced the return and erroneous payment on the original tax amount to KRW 1,286,839 (hereinafter “instant disposition”), thereby reducing the return and erroneous payment on the part of the tax amount to KRW 1,286,839 (hereinafter “instant disposition”).

E. Meanwhile, on May 31, 2005, the Plaintiff HanCC filed a request for correction to refund the tax amount of KRW 2,890,218 (including additional tax) related to the portion of the global income tax already paid, alleging that the portion arising from the gift exchange transaction in this case was not interest income. Accordingly, on June 7, 2007, the Defendant rejected correction on the ground that the profits arising from the gift exchange transaction in this case constituted income subject to taxation pursuant to Article 16 (1) 13 of the Income Tax Act, but subsequently reduced the additional tax of KRW 603,859, and thereafter, the remainder of the tax amount related to the instant transaction in this case was 2,286,359 (hereinafter collectively referred to as “the Plaintiff’s refusal of the disposition in this case”).

[Reasons for Recognition: Facts without dispute, Gap evidence 1-2, Eul evidence 1-2, Eul 1, 6, 7-1, 2-2, and the purport of the whole of the legal arguments]

2. Whether the disposition is lawful;

A. The plaintiffs' assertion

(1) The instant transaction consists of two separate trades, namely, the instant forward exchange transaction, which is capital transaction, and the instant deposited transaction. The interest accrued from the instant deposited transaction constitutes interest income as stipulated in Article 16(1)3 of the Income Tax Act. However, the interest accrued from the instant forward exchange transaction does not constitute a consideration for monetary use as a profit from foreign exchange transaction. Thus, in light of the principle of no taxation without law and the principle of substantial taxation, the income similar to the income as stipulated in Article 16(1)3 of the Income Tax Act does not constitute “income as stipulated in Article 16(1)13 of the Income Tax Act.”

(2) Profits arising from the instant futures exchange transaction are only foreign exchange trading profits, and there is no nature of financing. Moreover, in the instant futures exchange transaction, unlike bonds or securities with repurchase agreement, the repurchase right between us is not reserved. Thus, the principle of no taxation without law and the principle of substantial taxation do not constitute income similar to income under Article 16(1)9 of the Income Tax Act under Article 16(1)13 of the Income Tax Act.

(3) Even if the profits from the forward exchange transaction of this case fall under the income stipulated in Article 16 (1) 13 of the Income Tax Act, in light of the fact that most commercial banks including AAA bank handled the currency exchange deposit from around 2002 to disposed of as non-taxation on the profits from the forward exchange transaction, the defendant did not be subject to taxation until the time of each disposition of this case, and that the National Tax Counseling Center responded to the purport that the profits from the forward exchange transaction of this case from September 2003 are not subject to taxation on the question as to whether the profits from the forward exchange transaction of this case are subject to taxation, each disposition of this case violates the principle of trust protection.

(b) Related statutes;

It is as shown in the attached Table related statutes.

(c) Fact of recognition;

(1) From around 2002, AA Bank developed financial instruments that carry out the UN-regular deposit transactions and forward exchange transactions to customers with the name of "the swap deposit", and made public relations and sale as more favorable than ordinary regular deposit at the early effective return rate compared to ordinary deposit. The customer, who made the instant transaction, made payment in Korean currency to AA Bank, made an application for foreign currency deposit transactions with the Bank, and entered into a "UNFCCC-regular deposit contract" with the Bank. At the same time, the customer, who made the instant transaction, entered into a contract with the Bank at the same time as the maturity of the UN-Initial rate of exchange (the rate of exchange calculated as follows), set at the maturity rate at the maturity of the contract at the rate of exchange at the maturity of the gift exchange (the rate of exchange calculated as follows) and entered into a gift exchange contract with the intent to sell the United Nations at the fixed rate of exchange (the futures exchange rate).

(2) According to the instant transaction, customers changed their own won into the United Nations and deposited AA into the Republic of Korea. At maturity, there is almost no interest on the deposit, but at the time of the conclusion of the contract, they obtain gift redemption profits (in Korean won and foreign currency, the rate of 3% per annum at the time of the contract) based on the futures exchange rate already agreed at the time of the contract. Accordingly, they are similar to the fixed interest rate, and gift redemption profits under the Income Tax Act are also tax-exempt, so they could secure high profits in comparison with the fixed amount of won currency deposits.

(3) Since the UN/original exchange rate market did not exist in the Republic of Korea until May 29, 2006, AAA Bank has been provided with USD 133 (2) at the time of the instant transaction from Thompson Korea Co., Ltd. (hereinafter referred to as the "Stex Points" means the transaction price which regulates actual profits and losses between the parties by revising the interest rate difference in two currencies exchanged in the exchange swap in order to determine the futures exchange rate, and US/N swap points are provided with the same US/N swap points as the gift exchange rate calculated by aggregating US/N exchange rate with the gift exchange rate calculated by adding US/N swap points and US/N exchange rate in the gift exchange rate calculated by the totaling US/N currency exchange rate with the gift exchange rate in the gift exchange rate calculated by the gift exchange rate in US/N. However, as the rate of exchange rate in the gift exchange agreement between Thom Korea and the rate of exchange at the rate of exchange at the same time, it shall be provided with the rate of exchange at the rate of exchange rate per hour.

(4) AA bank operated the instant transaction, provided that, if there is no separate declaration of intention from the customer on the re-agreement before maturity, it would automatically terminate the UN Contract for Regular Deposit and Exchange Contracts and deposit into the customer account designated in advance, and that, if the UN Contract for Regular Deposit is terminated, the gift exchange contract shall also be terminated.

[Ground for Recognition: Facts without dispute, Gap 2 through 5, Gap 7-1, 2, Gap 8-1 through 3, Gap 10, 14, Eul 9-1, and the purport of the whole pleadings]

D. Determination

(1) Provisions of the Income Tax Act

The Income Tax Act lists interest and discount amounts of deposits (including installment savings, installment savings, deposits, and postal transfers) received in Korea under Article 16(1)3 and 9 as interest income, and repurchase agreement marginal profits on bonds or securities prescribed by the Presidential Decree as one of the interest income, by newly creating subparagraph 13 on December 31, 201, which is similar to those under subparagraphs 1 through 12 on December 31, 2001, provides that the income having the nature of the consideration for the use of money is also included in interest income, thereby taking a tangible comprehensive principle in determining interest income subject to taxation. On the other hand, the Income Tax Act only imposes income tax only on the income prescribed by the Act, and does not impose tax on income not listed as taxable objects such as foreign exchange transaction profit arising from exchange rate difference in foreign exchange transactions.

(2) Whether the interest income from the gift exchange transaction of this case constitutes interest income in the nature of payment due to the use of money as income similar to the interest of deposit interest

(A) Although the transaction form, which the parties take place, is an act to avoid the burden of tax, it shall be deemed valid unless there are special circumstances, such as that the above act constitutes the disguised act. Thus, to deny this, a legal basis is required in light of the request for legal stability or predictability to protect taxpayers from the person with the power (see Supreme Court Decision 90Nu3027, May 14, 1991).

In full view of the following circumstances revealed from the aforementioned facts and the purport of the entire pleadings, it is difficult to view that the instant futures exchange transaction is merely a fictitious act, or that the instant transaction is merely a single won deposit transaction taking the form of foreign currency regular deposits and futures exchange transactions. Rather, it is reasonable to deem that the instant securities exchange transaction, the instant deposit transaction, and the instant futures exchange transaction were effective as a separate juristic act, respectively.

① Although the Plaintiffs did not specifically recognize the structure of the instant transaction or the actual condition of the forward exchange transaction at the time of entering into the instant transaction contract with AA bank, they were engaged in the instant transaction with the awareness that financial income is exempt from taxation, and thus, it would have been able to obtain tax revenues higher than general deposits through forward exchange transaction. Therefore, it cannot be deemed that there was an explicit or implied agreement between the Plaintiffs and AA bank that a forward exchange contract was concluded only formally, and that the fact that a forward exchange contract was null and void.

② At the time of the instant transaction with AA bank, the Plaintiffs separately entered into a contract for foreign currency deposit and a forward exchange contract of this case with the respective separate document. The agreed exchange rate applicable to the instant forward exchange transaction is not determined voluntarily by AA bank, but determined by reflecting the actual forward exchange rate in each foreign exchange market at the time of the instant transaction.

③ In the event that there is no separate declaration of intent from the customer on the re-agreement before maturity while selling the swap deposit, AAA Bank shall automatically terminate the NA regular deposit contract and a forward exchange contract and deposit into the customer account designated in advance. In the event of termination of the NA regular deposit contract, the gift exchange contract may also be terminated at the same time, but it seems that the instant forward exchange contract is closely combined with the instant contract for the purpose of achieving the purpose of the UNFCCC swap deposit transaction.

④ The final and conclusive determination of profits and losses to be gained by the parties to a transaction according to the futures exchange rate and the spot exchange rate at the time of the conclusion of the contract is reasonable in light of the general futures exchange transaction’s nature. In particular, as at the time of the conclusion of the contract of this case, where the futures exchange rate at the time of the conclusion of the contract of this case is higher than the spot exchange rate, i.e., the UN/C. swap point at the time of the conclusion of the contract of this case ＋, it is determined definitely to gain profits during the due date. Thus, it is difficult to view that the Plaintiffs’ profits earned from the instant transaction depends on the nature of the instant transaction. Furthermore, the meaning that the profits earned by the Plaintiffs are conclusive by the instant forward exchange transaction is more than the spot exchange rate at the time of the conclusion of the contract, and it is difficult to view that there is no risk of exchange at all, since the gift exchange rate at the time of the execution of the contract of this case is less than the currency exchange rate at the time of the conclusion of the contract.

⑤ In the instant case, there is insufficient evidence to prove that AA bank engaged in tacking transactions in order to avoid exchange risk caused by the instant transaction. However, whether to engage in tacking transactions to avoid risk, and whether to avoid exchange risk without conducting tacking transactions is a matter of choice by the financial institution itself depending on the situation and prospects of the foreign exchange market. Thus, even if there was no tacking transaction related to the instant transaction, it does not constitute circumstances that may affect the nature of the instant transaction.

6. Generally, interest refers to the amount of money received or its substitute in proportion to the original amount and the lending period. The Plaintiffs’ profit derived from the instant futures exchange transaction is not proportional to the trading period, and even if the transaction amount and the period are identical, it differs depending on the agreed futures exchange rate at the time of such transaction.

7) As a result, the AA bank paid won currency at the maturity of most customers at the time of the instant transaction. However, according to the each entry in the evidence No. 13-1 through No. 5, the AA bank entered the instant deposit contract into and entered the amount of deposit into the UNFCCC account and the amount of deposit into the UNFCCC account in various books including financial statements. Accordingly, it is recognized that the NA bank’s foreign currency balance sheet from around 2003, which was at the time of the instant transaction, to around 2004, stated that the amount of deposit would have increased more than 2002, and thus, it is difficult to readily conclude that the AA bank used the Korean won currency fund, different from the entry in the general corporate accounting principles and the guidelines for the management of deposits, deeming the amount of deposit received from customers to have been raised as the Korean won fund in violation of the general accounting principles and the guidelines for the management of deposits.

(B) When a taxpayer engages in economic activities, he/she may choose any of the various legal relations in order to achieve the same economic purpose by taking into account the efficiency of the objectives and the degree of the burden of relevant expenses, such as taxes, among the various legal relations, and the tax authority shall respect the legal relations chosen by the parties, except in extenuating circumstances (see Supreme Court Decision 2000Du963, Aug. 21, 2001).

As seen earlier, insofar as all transactions constituting the instant transaction are valid as separate legal acts, it is reasonable to view that the content and scope of taxation are determined individually in accordance with the legal relationship. Although the instant futures exchange contract was closely combined with the instant deposit contract, the Plaintiffs were less burden of income tax than when they entered into a general deposit contract and receive interest by taking such a form of transaction, such circumstance alone does not require the same treatment under the tax law regardless of the difference in the legal form (the same shall apply in cases of this case where the legality of taxation disposition on the income before the establishment of Paragraph (3) by the amendment of Article 14 of the Framework Act on National Taxes on December 31, 2007 is at issue). In view of the nature of the benefits derived from the instant futures exchange transaction, the benefits arising from the instant futures exchange transaction are merely a kind of foreign exchange profit, which is a capital interest, and it is reasonable to deem that the said transaction is not a consideration for the use of money as income similar to the interest on deposits.

(3) Whether profits from trading with repurchase agreement of this case are income similar to trading with repurchase agreement of bonds or securities, which is in the nature of consideration due to the use of money, or income from trading with repurchase agreement of this case, is subject to the premise that trading with repurchase agreement of this case, which is defined as a kind of interest income under Article 16 (1) 9 of the Income Tax Act and Article 24 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010) is profit margin from trading with repurchase agreement of this case. However, in the case of trading with repurchase agreement of this case under Article 16 (1) 9 of the Income Tax Act, profits from trading with repurchase agreement of this case, the nature of consideration following the use of money is weak compared to other interest income listed in each subparagraph of Article 16 (1) 9 of the Income Tax Act, and Article 24 of the Enforcement Decree of the Income Tax Act limits its scope as interest income, it is reasonable to consider that Article 16 (1) 13) of the principle of no taxation without law.

(4) Sub-determination

Therefore, each of the dispositions of this case based on the premise that the profit accrued from the gift exchange transaction of this case constitutes interest income as stipulated in Article 16 (1) 13 of the Income Tax Act is unlawful without considering the remaining arguments of the plaintiffs.

3. Conclusion

The plaintiffs' claims are justified, and all of them are accepted.