The case holding that the disposition imposing interest income tax on the profit accrued from the forward exchange transaction of the so-called swap deposit transaction, which is conducted together with the currency regular deposit transaction and the forward exchange transaction, is unlawful.

The case holding that the disposition imposing interest income tax on the securities exchange transaction is unlawful on the grounds that the profits from the securities exchange transaction of the so-called United Nations swap deposit transaction and the currency exchange transaction are not taxable income under the Income Tax Act, but with the nature of the price due to the use of money under Article 16 (1) 3 or 13 of the Income Tax Act, since the profits from the foreign exchange transaction and the exchange transaction are not taxable income under the Income Tax Act.

Article 16 (1) 3 and 13 of the Income Tax Act

C&C Co., Ltd. (Attorney Jeong Byung-chul et al., Counsel for the defendant-appellant)

The director of the Nammun District Office (Attorney Process-at-Law)

December 2, 2008

1. The Defendant’s imposition of withholding tax of KRW 183,91,350 for the Plaintiff on November 8, 2006, KRW 2,152,821,130 for the year 2004, KRW 532,285,380 for the year 2005, and KRW 221,110 for the year 206 shall be revoked.

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

The same shall apply to the order.

1. Basic facts and circumstances of the disposition of imposition;

A. The Plaintiff was established on September 19, 1981, and thereafter, around March 5, 1983, changed the trade name with the name as of November 1, 2004 as Korea-U.S. Bank, and currently engaged in banking business at 39, Jung-gu, Seoul (hereinafter “Plaintiff”).

B. The Plaintiff: (a) mainly between 2003 and 2006, on the ground that interest on fixed deposit transactions with high-amount customers, foreign currency deposit customers, etc. is included in taxable objects; (b) however, (c) is exempt from global income tax due to gift exchange profits (over to 3.6% per annum) under the Income Tax Act; and (d) is 4.31% per annum of interest rate for three-month fixed deposit; (b) is entitled to secure interest rate for 4.31% per annum (over to 3-month fixed deposit (over to 4.6% per annum); (c) is subscribed to the deposit after receiving Korean currency from customers as specified below (hereinafter referred to as “spot deposit transactions”); (d) purchases them by applying a certain gift exchange rate on the date consistent with maturity on the date of deposit transactions (hereinafter referred to as “value exchange transactions”); and (e) purchases them in the form of a juristic act to return profits in Korean currency again, and (e) exchange transactions and foreign currency (over to 2) exchange swap transactions.

(1) On October 28, 2003, the customer exchangeds KRW 660,00,000 to 60,376,530, applying the spot exchange rate of 10.9314 won/1N on the same day, and entered into an international currency deposit transaction contract with the Plaintiff on January 29, 2004, setting the interest rate of 0.0545% between the Plaintiff and the due date, and deposit the said amount to the Plaintiff.

(2) On January 29, 2004, the customer entered into a gift exchange contract with the Plaintiff on January 29, 2004, with a view to securing the sale of 60,376,530N, which was exchanged in the spot exchange transaction as seen above, by applying the gift exchange rate of 11.0306 won/1N on the day of the said transaction. To ensure this, the customer entered into a gift exchange contract with the Plaintiff on January 29, 2004.

(3) On January 29, 2004, upon maturity between the Plaintiff and the Plaintiff, the customer received 60,376,530 UN (= principal 60,376,530 UN x interest rate 0.05% x 93 days (from October 28, 2003 to January 29, 2004) during the deposit period x 360) and then received 1,401N (T/Tbuying rate) at 10.9509 won/7,740 won in Korean won in Korean currency, and received 60,376,5450 won in foreign currency, and 360 won in foreign currency, 60536,5396,500 won in foreign currency, and 60,5396,5396,63965,639,6396,505,6396,506,6396,51,696, etc.

C. During the period from January 18, 2006 to April 26, 2006, the director of the Seoul Regional Tax Office conducted a corporate tax integration investigation with respect to the Plaintiff. The opportunity to use money was provided to the Plaintiff according to the swap deposit transaction, and the customer is considered to have paid the price therefrom. Thus, even if the entire amount including not only the interest arising from the currency regular deposit transaction but also the interest accrued from the currency exchange transaction falls under interest income under Article 16 (1) 13 of the Income Tax Act (amended by Act No. 8144 of Dec. 30, 2006; hereinafter the same), the Plaintiff confirmed that the Plaintiff did not withhold the tax, and notified the Defendant of the details of the rectification of the corporate tax and the interest income source tax against the Plaintiff.

D. Meanwhile, the director of the Seoul Regional Tax Office, around August 2006, knew the concept of the structure of the goods of the swap deposit and the concept of the gift exchange marginal profit for the customers who subscribed to the swap deposit throughout the country, there is a motive to subscribe to the swap deposit, and whether the customer recognized it as the fixed interest rate at the time of subscription to the swap deposit and made transactions. As a result, he believed only the explanation of banks such as the Plaintiff, etc. that approximately 90% customers would not understand the structure of the swap deposit and the actual condition of the gift exchange transaction and pay a fixed interest rate. If there was a risk burden, he did not hear the statement that there was a risk burden from the employees of the bank such as the Plaintiff, etc., and simply recommended to subscribe to the swap deposit by the employees of the banks such as the Plaintiff, etc., it is more detailed that they would be able to subscribe to the currency deposit through the income tax-free gift tax.

E. After being notified by the director of the Seoul Regional Tax Office of the results of the corporate tax integration, on November 8, 2006, the Defendant determined and notified each of the Plaintiff of KRW 183,91,350 for interest income tax for the year 2003, KRW 2,152,821,130 for the year 204, KRW 532,285,380 for the year 2005, and KRW 221,110 for the year 206 (hereinafter “instant disposition”).

F. On February 6, 2007, the Plaintiff, who was dissatisfied with the instant disposition, filed an appeal with the National Tax Tribunal on February 6, 2007, but was dismissed on December 24, 2007.

[Ground of recognition] Unsatisfy, Gap evidence 1-1 to 4, Gap evidence 2, Gap evidence 3 and 4-1 to 3, Gap 5, 6, Eul evidence 1-2, Eul evidence 2-1 to 4, Eul evidence 3 through 5, Eul evidence 6-1, Eul evidence 6-2, Eul evidence 6-1, Eul evidence 6-2, testimony of a witness interested in completion, the purport of the whole pleadings

2. Whether the disposition of imposition is lawful.

A. The plaintiff's assertion

The plaintiff asserts that the disposition of this case by the defendant is unlawful for the following reasons.

(1) The gains from forward exchange transactions, which are one of derivative financial products, are not listed as taxable income under the Income Tax Act, and thus do not constitute “the use of money” under Article 16(1)13 of the Income Tax Act, and thus, the United Nations regular deposit transactions and forward exchange transactions through swap deposit transactions cannot be deemed as a subordinate contract to the United Nations regular deposit transactions, even if they are based not only on the legal form but also on economic substance. The forward exchange transactions do not differ from the typical forward exchange transactions. However, even though the forward exchange transactions are not typical foreign exchange forward transactions, they cannot be imposed on the interest income, not subject to taxation, solely on the ground that the large amount of assets were not exposed to the loss risk resulting from exchange rate fluctuations.

(2) The purport of Article 14 of the Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007) is to preferentially determine legal substance rather than economic substance. The Supreme Court precedents also held that even the act of taking the form of transaction with no economic rationality, such as bypassing or multi-stageing, it is possible to impose tax only by individual and specific denial regulations that can deny the validity of such act. This is a genuine transaction in accordance with the principle of private autonomy and freedom of contract in that customers and the plaintiff agreed to obtain profits from exchange transactions, which is not subject to object of taxation, through exchange transactions, not gift swap transactions. The plaintiff received advice from many experts such as law firms on the exchange margin of gift swap transactions, which is not a taxation transaction. The plaintiff recommended the swap and reported taxation to customers, and the Supreme Court also held that the taxation authority can not impose taxes on the derivatives transaction in the future by clearly denying the legal form of individual financial derivatives transactions, such as the United Nations deposit transactions, and thus, it cannot be said that there is no possibility that the tax authority can impose taxes on the future.

(3) Even if the Plaintiff was provided with an opportunity for a customer to use money through the swap deposit transaction, the Plaintiff’s funds raised and used by the customer are not “nuclearization” due to the swap deposit transaction, but merely borrowed funds to other customers and received approximately KRW 2% interest per annum. However, the Defendant’s disposition of this case, which reported that the Plaintiff paid to the customer the amount exceeding twice the interest rate per annum due to the swap deposit transaction, does not comply with the substance of the transaction (Therefore, it is deemed that the portion of approximately 3.95% per annum except interest per annum 0.05% per annum from the total amount paid to the customer through the swap deposit transaction is in accord with the substance of the transaction).

B. Relevant statutes

It is as shown in the attached Form.

(c) Markets:

(1) The purport of the relevant statute

Article 16 (1) 3 of the Income Tax Act lists interest and discount amount of deposits (including installment savings, installment savings, deposits, and postal transfers) received in Korea as one of interest income. Article 16 (1) 13 of the Income Tax Act provides that income similar to income such as subparagraph 3 of the same Article, which has a nature of consideration following the use of money, is also an interest income, and it is evaluated as being introduced and implemented in the form of comprehensiveism by type.

On the other hand, foreign exchange transaction profits arising from exchange rate differences in foreign exchange transactions are not taxable income under the Income Tax Act because they are listed in the income tax law, which is known in the form of income in the form of income subject to taxation.

(2) Whether the gains from forward exchange transactions in the swap swap deposit can be deemed as interest income

(A) Unless there exist special circumstances, such as that a certain transaction constitutes an act to avoid tax burden, it shall be deemed as valid. Thus, to deny this, a legal basis is required in light of the demand for legal stability or predictability of the principle of no taxation without law to protect a taxpayer from the person with the power (see Supreme Court Decision 90Nu3027, May 14, 1991). In order to deny a party’s transaction according to the method of economic observation or the principle of substantial taxation, notwithstanding its legal form, in order to deny the validity of calculation of tax evasion, individual and specific rules of denial must be provided under the principle of no taxation without law (see Supreme Court Decision 91Nu13571, Sept. 22, 1992).

(B) In light of the above facts, the customers who subscribed to the swap deposit can be divided into the UN prescribed deposit and forward exchange transactions, or the actual condition of forward exchange transactions and the concept of forward exchange marginal profit are not accurately known, and it seems that they are aware that they are non-taxable goods and have entered into the UN prescribed interest rate deposit transactions with the recognition of a single fixed interest rate contract that can be subject to comprehensive taxation on financial income as income tax. ② The customer is ultimately entitled to receive profits in Korean won at the time of the signing date of the UN currency swap transactions with the principal in Korean won at the time of the maturity of the UN currency deposit transactions. The same applies to the customers who subscribed to the UN currency swap deposit transactions at the same time. ③ The fact that there is no room for the customers to receive foreign currency exchange transactions at the same time, and whether the Plaintiff actually received foreign currency exchange transactions at the same time through the UN currency exchange swap transactions at the time of the signing date of the UN currency swap deposit transactions at the time of the maturity deposit transactions at the time of the maturity.

(C) However, on the other hand, the issue of whether to enter into a certain form of financial instruments transaction by the Plaintiff is one of its own choice in consideration of the following: (i) the exchange transaction in kind in the form of a juristic act; (ii) the sale in kind; (iii) the sale in kind; and (iv) the sale in kind; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in Korea; and (v) the sale in exchange; and (v) the sale in exchange; and (v) the sale in exchange in Korea, the sale in Korea should be determined individually in accordance with the relevant legal relationship; and (v) the same should not be determined in the form and scope of the sale in question.

(D) From this point of view, it should not be deemed that the swap deposit transaction constitutes a tax avoidance act, or that the substance of the swap deposit is not different from the fixed profit on the basis of the substance over form principle, and taxation should not be conducted by deeming it as the fixed profit on the basis of the substance over form principle. Accordingly, the profits the customer receives from the Plaintiff through the swap deposit transaction shall be deemed as the interest income under Article 16 (1) 3 of the Income Tax Act, depending on each legal relationship that forms the constituent part, the interest accrued from the swap deposit transaction shall be deemed as the interest income under Article 16 (1) 3 of the Income Tax Act. However, the profits accruing from the forward exchange transaction shall not be deemed as the interest income, not the taxable income under the Income Tax Act, which is the foreign exchange trading profit, which is the interest income in the nature of the consideration for the use

(3) Sub-decisions

Therefore, the defendant's disposition of this case on different premise is illegal, and the plaintiff's assertion is justified.

3. Conclusion

Therefore, the plaintiff's claim is justified and it is so decided as per Disposition with the assent of all participating Justices.

Justices Kim Jong-young (Presiding Justice)

1) The rate of return of a State bond with three-year maturity notified on the date of withdrawal means the excess rate where the repayment period notified on the date of redemption exceeds the rate of return of a State bond adjacent to the said remaining period or in the family.

Note 2) The Plaintiff’s use of the term “NS swap deposit transaction” as the concept of “NSS swap transaction” with the said transaction along with the said transaction in kind, is argued to the effect that it is inappropriate for the Defendant to intentionally attract “SS swap transaction” irrelevant to the nature of the said transaction. However, the Plaintiff himself/herself has already used the term “original/NSS swap transaction” and “original/NSS prescribed deposit transaction” in the certificate No. 3 in that he/she has already already used the term “HES transaction” and “H/NS prescribed deposit transaction” in the certificate No. 3, so it refers to the said transaction, which is conducted together with the said transaction in kind, as the said transaction in which the said term is called “NS swap deposit transaction” for convenience.

3) Notwithstanding the legal form of the gift exchange transaction among the swap deposit transactions, it is controversial that the substance of the swap deposit can be imposed by giving priority to the economic substance by deeming it as a fixed deposit in Korean currency. However, in light of Article 14(3) of the Addenda of the Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007) (amended by Act No. 8830 of Dec. 31, 2007), if this provision is imposed on a taxable year unit, it is applied from the taxable year of Jan. 1, 2008, if it is imposed on a taxable year unit, from the taxable year of Jan. 1, 2008, if it is imposed on an individual transaction unit, it appears that the provision is applicable to the transaction after the enforcement date, or whether it is applicable to the previous case, or whether it is applicable to the case before the enforcement date. Thus, Article 14(3) of the Framework Act on National Taxes can not be directly grounds for the imposition of the previous case.