early 2012Gu3235 ( October 29, 2012)

Where a person does not acquire exchange marginal profits from the repayment of borrowed money at the time of the transfer of assets overseas acquired with borrowed money, he/she shall exclude exchange marginal profits from gains on transfer.

It is illegal to calculate capital gains including transfer marginal profits from the exchange of the borrowed amount in the absence of the transferor's actual acquisition of exchange marginal profits from the borrowed amount in the event of the transfer of assets acquired through the principle of exchange of treasury funds and the local financing base.

2013Guhap170 Revocation of Disposition of Imposing capital gains tax

Jeon AAA

Head of Dong Daegu Tax Office

April 10, 2013

May 31, 2013

1. On May 13, 2011, the Defendant’s imposition of capital gains tax of KRW 000 (including additional tax) for the year 2010 against the Plaintiff shall be revoked that exceeds the amount of KRW 000 (including additional tax).

2. The plaintiff's remaining claims are dismissed.

3. 1/10 of the costs of lawsuit shall be borne by the plaintiff, and the remainder by the defendant.

The Defendant’s imposition of capital gains tax of KRW 000 (including additional tax) for the year 2010, which was made by the Plaintiff on January 4, 2012, shall be revoked.

1. Details of the disposition;

A. On August 23, 2007, the Plaintiff acquired the instant house located in CanadaOOOOO (hereinafter referred to as “the instant house”) from USD 000 (including USD 000) (hereinafter referred to as “CAD,”) and later paid USD 000 per month to the instant bank upon repayment of the principal and interest of the instant bank. (BB bank (hereinafter referred to as “the instant bank”). (b) on June 15, 2010, the Plaintiff transferred the instant house to USD 00, while part of the transfer price was paid directly to the instant bank in order to repay the payment of USD 00 (hereinafter referred to as “the instant loan”). Meanwhile, the Plaintiff did not report and pay the transfer income tax in relation to the transfer of the instant house.

C. On January 4, 2012, the Defendant applied the fiscal exchange rate under the Foreign Exchange Transactions Act at the time of the acquisition and transfer of the said house to the Plaintiff pursuant to Article 178-5(1) of the Enforcement Decree of the Income Tax Act (hereinafter “Enforcement Decree of the instant case”) with respect to the transfer of the instant house (i.e., USD 000 x USD 000 x fiscal exchange rate at the time of acquisition x USD 000 x fiscal exchange rate at the time of acquisition x USD 000 x fiscal exchange rate at the time of transfer x USD 000) and 000 won for transfer expenses such as attorney’s expenses, and then determined and notified the Plaintiff of the instant disposition (hereinafter “instant disposition”).

D. On April 2, 2012, the Plaintiff filed an objection against the instant disposition with the Defendant, but the Defendant dismissed the objection on the ground that “The exchange loss incurred in the repayment of local loans at the time of the transfer of the instant house does not constitute necessary expenses.”

E. Accordingly, the Plaintiff requested the Tax Tribunal on July 11, 2012, but the Tax Tribunal decided to dismiss the request on October 29, 2012.

[Ground of Recognition] The facts without dispute, the entries in Gap evidence 1 to 4 (including each number), and the whole purport of the pleading

2. Whether the instant disposition is lawful

A. The parties' assertion

1) The plaintiff's assertion

Since the loan of this case is a local source loan theory for the acquisition and transfer at the same time as the acquisition of the house, regardless of the fluctuation of exchange rate, and the conversion of the gains from transfer under Article 118-4 (2) of the Income Tax Act into foreign currency is not a factor in which the gains from transfer cannot be generated, and even under the provisions of the Enforcement Decree of this case, the transfer or acquisition is not a factor in which the gains from transfer cannot be generated, and the exchange rate gains of the loan of this case which is not received or disbursed as the gains from transfer should not be recognized as the gains from transfer. Therefore, among the mother theory used to acquire the house of this case, the loan of this case which is succeeded to the buyer by the time of transfer should be excluded from the calculation of the gains from transfer of the house of this case, but the disposition of this case which is not deducted is unlawful.

2) The defendant's assertion

Article 97 (1) of the Income Tax Act provides that, in calculating the gains on transfer of a resident, necessary expenses deductible from the transfer value are limited to the acquisition value, capital expenses, and transfer expenses. The exchange rate loss of the loan in this case does not fall under any item of the necessary expenses, and thus, it cannot be deducted from the gains on transfer. In Seoul High Court Decision 2006Nu19282, the Seoul High Court held that it is legitimate that the interest cost of the loan that is not the necessary expenses deductible from the transfer value is not deducted from the transfer value as necessary expenses and not deducted from the transfer value as necessary expenses. If the exchange rate loss of the parent-base theory is allowed from the transfer value of real estate, even if the exchange rate loss is allowed from the transfer value of real estate, it cannot be caused by the improper balance between the person who uses the funds and the person who uses other funds,

The phrase “the date of receipt or disbursement” stipulated in the enforcement decree of this case is merely for determining the basic or arbitrated exchange rate under the Foreign Exchange Control Act, and cannot be interpreted to mean that only the money actually received by the seller or the purchaser or the money actually paid by the seller or the purchaser or the money actually paid is regarded as the elements of capital gains. Therefore, the disposition of this case is lawful.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

1) Articles 118-2 subparag. 1, 118-3(1), and 118-4(1) of the Income Tax Act provide that income generated from the transfer of assets abroad (land or buildings) shall be the actual transaction value as at the time of transfer, and the assets shall be the quantity calculated, and the necessary expenses deducted from the transfer value in the calculation of transfer margin shall be limited to the acquisition value, the capital expenses, and the transfer expenses. Article 118-4(2) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17456 of Dec. 31, 201) provides that necessary expenses such as conversion of transfer margin into foreign currency, and the calculation of the market price shall be prescribed by Presidential Decree. In addition, Article 178-5 of the former Enforcement Decree of the Income Tax Act (hereinafter referred to as the "former Enforcement Decree of the Income Tax Act") provides that the transfer rate shall be calculated based on the basic exchange rate or arbitrated exchange rate under the Foreign Exchange Transactions Act, and the transfer value shall be calculated under the amended Enforcement Decree No.18(2).

2) In light of the following circumstances known in accordance with the facts and facts of recognition, and the relevant laws and regulations, in calculating gains from the transfer of overseas assets pursuant to the provisions of the Enforcement Decree of this case, exchange gains (the same as exchange losses due to the repayment of the loan of this case) without any actual acquisition by both parties shall be interpreted as excluded from gains from gains from transfer, and if not, it is reasonable to view that the provisions of the Enforcement Decree of this case deviates from the delegation scope of the mother law that requires taxation on the "gains from the transfer of overseas assets" or goes against the substance over form principle and go against the essence of income tax. Therefore, the disposition of this case, which calculated gains from the transfer of the loan of this case, including gains from the transfer of the loan of this case (00 won), in which the plaintiff paid the transfer proceeds directly from the acquisition of the house of this case, and the plaintiff did not actually acquire the exchange gains from the transfer, is unlawful.

A) Under the Income Tax Act, the transfer value of assets abroad is the actual transaction value at the time of transfer, and only the principle that the acquisition value, etc. shall be deducted at the time of calculation of transfer margin, and all of them are delegated to the Enforcement Decree without any provision concerning foreign currency conversion of transfer margin.

B) The former Enforcement Decree of the Income Tax Act provides that the transfer date shall be calculated at the base exchange rate (financial exchange rate) as of the transfer date, and this is ultimately subject to the transfer income tax only when the transfer margin accrues by calculating the transfer margin by applying the basic exchange rate in foreign currency at the time of transfer.

C) However, the provisions of the Enforcement Decree of the instant case provide that the transfer value and necessary expenses shall be calculated based on the basic exchange rate as of the date of receipt or payment of the transfer value and necessary expenses, so that the exchange marginal profits arising from the exchange rate difference not only from transfer gains but also from transfer and acquisition can be evaluated as transfer marginal

D) In the instant case where the Plaintiff acquired USD 000 for the instant housing, and transferred to USD 000, under the provisions of the former Enforcement Decree of the Income Tax Act, there is no transfer margin, and there is no room for the same problem as this case. However, according to the provisions of the Enforcement Decree of the instant case, exchange marginal profit can be generated, and exchange marginal profit or loan repayment that has not been realized by succession to the loan, there is a problem as to whether to recognize the exchange marginal profit

E) In other words, the Plaintiff acquired the instant house by combining its own funds and USD 861,250 in the local procurement base loan, and thereafter, paid the instant loan (the balance of the parent-base loan) in full as sales price, and the Plaintiff did not have acquired any exchange marginal profit on the instant loan amount, and this part is not the benefit to be realized in the future.

F) Nevertheless, the Defendant imposed capital gains tax on the exchange marginal profits on the instant loan that the Plaintiff did not have acquired at all on the sole ground that there was no provision on the items of necessary expenses deduction.

G) However, with respect to the inclusion of exchange marginal profits in the calculation of gains from transfer abroad, it is possible to include the provisions on the Enforcement Decree without any provision in Article 118-4(1) and (2) of the Income Tax Act, which are the mother law, to evaluate exchange marginal profits as gains from transfer under the Enforcement Decree. However, if the transfer income tax is imposed by recognizing exchange marginal profits which have not been acquired by the transferor as gains from transfer, it is against the purport of the provisions of the mother law, and it goes beyond the scope of delegation. In addition, imposing tax by deeming exchange marginal profits which have not been acquired by the transferor and are unlikely to be realized in the future is contrary to the substance over form and the nature of income tax.

H) Unlike the provisions of the former Enforcement Decree of the Income Tax Act, in cases where it was intended to include exchange marginal profits in the provisions of the Enforcement Decree of the instant Income Tax, the provisions on the part where exchange marginal losses occurred inevitably, such as the repayment of loans in Korean currency, should have been stipulated in the provisions on the conversion of transfer marginal profits. In other words, in cases where it was intended to evaluate exchange marginal profits acquired by a resident due to exchange rate fluctuations as gains from transfer in view of realizing realizing the exchange marginal profits in a foreign country, the provisions on conversion of transfer marginal profits in Korean currency should have been stipulated to be deducted from transfer marginal profits as a matter of course.

I) The Seoul High Court case No. 2006Nu19282 is a case where the necessary expense deduction of the interest paid on the loan was involved in calculating the transfer income of domestic assets, and this case is about the transfer of overseas assets, and it does not recognize the necessary expense deduction of USD 5,288.83 paid each month by the plaintiff as the principal and interest payment payment, but is about the exchange loss of the loan of this case, and the two cases are entirely different.

(j) In calculating gains on transfer of domestic assets or overseas assets pursuant to the former Enforcement Decree of the Income Tax Act, there is no difference between the acquisition with one’s own funds or the calculation of gains on transfer, and where exchange gains are included in the calculation of gains on transfer in accordance with the provisions of the Enforcement Decree of the instant Income Tax

(k) However, the Defendant’s assertion that the purchase of assets abroad with one’s own money and the actual gain from exchange, and that the purchase of assets abroad with loans and the actual gain from exchange through the repayment of loans must be imposed equally is erroneous in light of the nature of income tax.

(l) Although the Defendant asserts that there have been side effects of acquiring assets abroad with loans in order to avoid tax, it cannot be said that the acquisition of assets abroad with loans, and, however, in fact, in order to avoid tax, the actual acquisition of assets from its own funds and reporting of capital gains tax by keeping false loan forms may occur. However, this is not a problem to be resolved by imposing the same taxation as the case where the tax authority actually acquired funds from another by strictly examining whether it is actually acquired funds from another, and where it fails to obtain actual exchange gains by purchasing funds with loans, it is not a problem to solve this problem.

(m) If the provision of the Enforcement Decree of the instant case interprets that the transfer amount and the acquisition amount actually received or disbursed by the date of receipt or payment of the transfer value and necessary expenses are converted into the basic exchange rate on the corresponding day, it would be possible to supplement the deficiencies of the provision of the Enforcement Decree of the instant case, and to interpret harmonious interpretation without focusing on the scope of delegation by the mother

3) In accordance with the above determination, the exchange marginal profits on the instant borrowings are excluded from the transfer marginal profits, and the total amount of the transfer income tax to be paid by the Plaintiff is 000 won (including additional tax 000 won) such as the “justifiable tax amount” column in the attached tax calculation table. Therefore, the portion exceeding the above KRW 000 (including additional tax 000) in the instant disposition should be revoked illegally.

3. Conclusion

Therefore, the plaintiff's claim of this case is justified within the above scope of recognition, and the other claim is dismissed as it is without merit. It is so decided as per Disposition.