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Supreme Court Decision 2013Du6107 Decided December 10, 2015【Revocation of Partial Rejection of a Petition for Correction of Global Income Tax】* First draft
Having purchased the security certificates of the investment trust (hereinafter the “Investment Trust”) at a sum of 230 million Won through Korea Investment & Securities Co., Ltd. (hereinafter “Korea Investment Securities”), the Plaintiff claimed for redemption. With an over 70 percent of its investment in stocks issued and traded in Japan (hereinafter the “Stock”), the Investment Trust is structured in such a way that its profits and losses vary depending on the Yen-Won exchange rate fluctuations, as well as the Stock price fluctuations (i.e., the so-called “non-hedge fund,” namely, an investment fund in which the profits and losses from the exchange rate fluctuations are fully reflected in the investment profits and losses). Over the Plaintiff’s investment period, the Stock price dropped by over 56 percent, resulting in a profit from exchange rate fluctuation. Of the above redemption price, Korea Investment Securities separately computed profits from exchange rate fluctuations (i.e., currency gains), which it included in the dividend income amount, and withheld income tax; the Plaintiff, for his part, also initially paid his global income tax, by including the currency gains in his dividend income amount. Subsequently, however, the Plaintiff filed a petition for correction with the Defendant (i.e., Samsung District Tax Office Chief) seeking the return of his global income tax on the ground that “the currency gains should not have been included in the dividend income amount.” However, deeming that “the currency gains are included in the dividend income amount, as they do not constitute the profits and losses from the trade or valuation of the stocks under Article 91-2(2) of the former Restriction of Special Taxation Act (amended by Act No. 9272 of Dec. 26, 2008),” Samsung District Tax Office Chief only re-computed the dividend income amount by reducing the above currency gains, thereby returning only a part of the tax payment, while refusing to return the remainder.
【Main Issues and Holdings】
Method of computing the profits and losses from trade or valuation of foreign-listed stocks excluded from the dividend income amount under Article 91-2(2) of the former Restriction of Special Taxation Act and Article 92-2(3) of the former Enforcement Decree of the Restriction of Special Taxation Act (i.e., aggregate of the profits and losses from stock price fluctuations and those from exchange rate fluctuations); and where the foreign-listed stocks’ foreign currency-denominated price declined and the Korean Won-denominated exchange rate against foreign currency rose, whether only the profits from exchange rate fluctuations may be included in dividend income (negative)
【Summary of Decision】
As a matter of principle, income amount shall be computed in the currency of the country with taxation authority. As such, when a resident’s income from the price fluctuations of foreign assets is taxable, the income amount necessarily has to be computed by incorporating the profits and losses from exchange rate fluctuations. For this reason, Article 118-4(2) of the former Income Tax Act (amended by Act No. 9270 of Dec. 26, 2008) and Article 178-5(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301 of Feb. 4, 2009) provide that, when calculating capital gains from the transfer of foreign assets, the transfer price and necessary expenses shall be calculated pursuant to the basic or arbitrated exchange rate as of the date of receipt and the date of expenditure, thereby prescribing that the capital gains amount shall be computed by incorporating the profits and losses from exchange rate fluctuations.
With a view to promoting overseas investment by residents, Article 91-2(2) of the former Restriction of Special Taxation Act (amended by Act No. 9272 of Dec. 26, 2008; hereinafter the same) provides that the profits and losses from trade or valuation of foreign-listed stocks shall be excluded from the dividend income amount for a limited period until December 31, 2009. The process of converting the profits and losses from trade or valuation of foreign-listed stocks into Korean Won necessarily involves an aggregation of the profits and losses from stock price fluctuations and those from exchange rate fluctuations. As such, the profits and losses from trade or valuation of foreign-listed stocks excluded from the dividend income amount under Article 91-2(2) of the former Restriction of Special Taxation Act and Article 92-2(3) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21307 of Feb. 4, 2009) mean the aggregate of the profits and losses from stock price fluctuations and those from exchange rate fluctuations. Therefore, even where the foreign-listed stocks’ foreign currency-denominated price declined and the Korean Won-denominated exchange rate against foreign currency rose, one may not include only the profits from exchange rate fluctuations in the dividend income amount by compartmentalizing the aggregate amount into losses from stock price fluctuations and profits from exchange rate fluctuations.
【Reference Provisions】
Articles 17(1)5 and 118-4(2) of the former Income Tax Act (Amended by Act No. 9270 of Dec. 26, 2008), Article 23(1) of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 21301 of Feb. 4, 2009; see current Article 26-2), Article 178-5(1) of the former Enforcement Decree of the Income Tax Act, Article 91-2(2) of the former Restriction of Special Taxation Act (Amended by Act No. 9272 of Dec. 26, 2008; see current Article 87-6), Article 92-2(3) of the former Enforcement Decree of the Restriction of Special Taxation Act (Amended by Presidential Decree No. 21307 of Feb. 4, 2009; currently deleted)
Articles 17 of the former Income Tax Act (Dividend Income)
(1) Dividend income shall consist of the following income under each subparagraph below as earned in the given year.
5. Profit from investment trusts as provided by the Presidential Decree, earned domestically and/or overseas[.]
Article 118-4 of the former Income Tax Act (Calculation of the Required Expenses of Transfer Income)
(2) Matters necessary to calculate the required expenses under the provisions of the first Paragraph, such as foreign currency conversion of transfer capital gains, the actual transaction value spent for acquisition, and the computation of market price, shall be provided by the Presidential Decree. [Inserted Dec. 28, 1998]
Article 26-2 of the Enforcement Decree of the Restriction of Special Taxation Act (Scope, etc. of Collective Investment Schemes)
(1) "Collective investment schemes prescribed by Presidential Decree" in Article 17(1)5 of the Act means a collective investment scheme meeting all the following requirements:
1. It shall be a collective investment scheme under the Financial Investment Services and Capital Markets Act (excluding special accounts of an insurance company pursuant to Article 251 of the same Act but including a trust which preserves the principal, as a money trust; hereinafter referred to as "collective investment scheme");
2. It shall settle accounts and distribute dividend once or more each year from the date of establishment of the relevant collective investment scheme: Provided, That the distribution of a profit falling under any of the following items may be reserved, and where a profit pursuant to Article 242 of the Financial Investment Services and Capital Markets Act is less than zero, the distribution may also be reserved (limited to cases prescribed by collective investment rules pursuant to Article 9(22) of the same Act):
(a) A profit calculated by changing a list of index or investing in derivatives by an exchange traded collective investment scheme pursuant to Article 234 of the Financial Investment Services and Capital Markets Act;
(b) A profit on valuation of a collective investment scheme valuated pursuant to Article 238 of the Financial Investment Services and Capital Markets Act;
3. It shall be entrusted with money and refunded with money (including a trust, the trust value and the refund value of which are all denominated in money, as cases where it is entrusted with assets other than money and refunds).
(2) When paragraph (1) applies, a trust set up abroad shall be deemed a collective investment scheme even if it fails to meet the requirements referred to in the subparagraphs of paragraph (1).
(3) Where a collective investment scheme fails to meet the requirements referred to in the subparagraphs of paragraph (1), it shall be taxed according to the following classification:
1. A profit from an investment trust, investment association or undisclosed investment pursuant to Article 9(18) of the Financial Investment Services and Capital Markets Act shall be taxed, considering it a profit from trust, other than a collective investment scheme pursuant to Article 4(2) of the Act;
2. A profit from an investment company, limited liability investment company, limited investment partnership, private equity fund (limited to cases where it is not governed by special taxation on a company in the same trade pursuant to Article 100-15 of the Restriction of Special Taxation Act) pursuant to Article 9(18) of the Financial Investment Services and Capital Markets Act shall be taxed, considering it a dividend and distributed money referred to in Article 17(1)1 of the Act.
(4) Profits and losses from trade or valuation of securities falling under any of the following subparagraphs, which are securities directly acquired by a collective investment scheme or by investing in collective investment scheme under Article 9(21) of the Financial Investment Services and Capital Markets Act, or derivatives on exchange under the Financial Investment Services and Capital Markets Act (hereinafter referred to as "derivatives on exchange") shall not be included in profits from collective investment schemes pursuant to paragraph (1) (hereinafter referred to as "profits from collective investment schemes"): Provided, That this shall not apply to profits and losses from trade of stocks or investment certificates [limited to cases where he/she or it owns not less than 25/100 of the total number of stocks issued or the total amount of investment of a corporation which has issued stocks or investment certificates in the year in which the date of transfer arrives and during the five year period immediately preceding the year of the transfer, which are stocks listed on a stock market pursuant to Article 9(13) of the Financial Investment Services and Capital Markets Act (hereinafter referred to as "stock market") or investment certificates] which a nonresident or a foreign corporation has acquired through a private offering collective investment scheme pursuant to Article 249 of the Financial Investment Services and Capital Markets Act or a private offering specialized investment company which is not governed by special taxation on a company in the same trade pursuant to Article 100-15 of the Restriction of Special Taxation Act:
1. Securities listed on the stock market (excluding securities referred to in the following items; hereafter the same shall apply in this paragraph):
(a) Bonds, etc. under Article 46(1) of the Act;
(b) Stocks or beneficiary certificates of a foreign collective investment scheme established under foreign Acts and subordinate statutes;
2. Stocks or investment shares of a venture business under the Act on Special Measures for the Promotion of Venture Businesses;
3. Derivatives on exchange intended for securities referred to in subparagraph 1.
(5) Profits from trading collective investment securities under Article 9(21) of the Financial Investment Services and Capital Markets Act and foreign collective investment securities under Article 279(1) of the same Act (excluding those falling under any of the following subparagraphs) by means of money transfer between accounts, change of the name of account's holder, and actual transfer of collective investment schemes, shall be profits from a collective investment scheme:
1. Stocks or investment shares under Article 94(1)3 of the Act;
2. Stocks, etc. under Article 178-2(2);
3. Collective investment securities of the collective investment scheme, designed to trace the changes in index based only on prices of exchange traded stocks under Article 234 of the Financial Investment Services and Capital Markets Act;
4. Collective investment securities of collective investment scheme listed on a stock market under Article 9(18)2 of the Financial Investment Services and Capital Markets Act (excluding a scheme which does not distribute all the profits available for dividend under Article 51-2(1) of the Corporate Tax Act on one or more occasions in the previous business year).
(6) A profit from a collective investment scheme shall be the amount after deduction of various remuneration, fees, etc. under the Financial Investment Services and Capital Markets Act.
(7) A profit from a collective investment scheme shall not include a profit from a lump sum retirement allowance trust or a dividend pursuant to Article 2(1) of the Addenda of the Guarantee of Workers' Retirement Benefits Act (Act No. 7379).
(8) Article 4(2) of the Act shall apply to a collective investment scheme which meets all the requirements referred to in the following subparagraphs, as a private offering collective investment scheme pursuant to Article 9(19) of the Financial Investment Services and Capital Markets Act, which is not considered as a collective investment scheme pursuant to paragraph (1) even in cases where it meets all the requirements referred to in paragraph (1):
1. Where an investor is a resident (including a nonresident and a foreign corporation who has no place of business in the Republic of Korea; hereafter the same shall apply in this Article) or is comprised of a resident and his/her relative pursuant to Article 20 of the Enforcement Decree of the Framework Act on National Taxes or a related person (where an investor is a nonresident or a foreign corporation who has no place of business in the Republic of Korea, referring to a person in relationship falling under any of the following items):
(a) A nonresident, his/her spouse, lineal relation, brother and sister;
(b) Relationship in which one party owns directly or indirectly not less than 50/100 of stocks with voting right of the other party;
(c) Where a third party owns directly or indirectly not less than 50/100 of stocks with voting right of one party or the other party respectively, relationship between such one party and the other party;
2. Where an investor makes a decision on management of assets substantially.
(9) Article 2(2) of the Enforcement Decree of the Adjustment of International Taxes Act shall apply mutatis mutandis to the calculation of the indirect ownership ratio of stocks pursuant to paragraph (8)1(b) and (c).
(10) The method of calculation of the tax base on a profit from a collective investment scheme shall be prescribed by Ordinance of the Ministry of Strategy and Finance.
Article 178-5 of the former Income Tax Act (Foreign Currency Conversion of Transfer Capital Gains)
(1) The calculation of the transfer capital gains under the provisions of Article 118-4(2) of the Act shall be based on the basic exchange rate or arbitrated exchange rate under the Foreign Exchange Transaction Act as of the date of reception of transfer value or spending of required expenses.
Article 87-6 of the Restriction of Special Taxation Act (Special Taxation for Dividend Income from Collective Investment Securities Such as Collective Real Estate Fund, etc.)
(1) Notwithstanding Article 129 of the Income Tax Act, the tax rate of 5/100 shall be applied to dividend income paid to a resident by any real estate fund under the Financial Investment Services and Capital Markets Act or real estate investment company under the Real Estate Investment Company Act (hereafter referred to as "real estate fund, etc." in this Article) that invests its assets not less than the rate prescribed by Presidential Decree of its total assets in a rental house prescribed by Presidential Decree on or before December 31, 2014 with respect to the stocks or beneficiary certificates (hereafter referred to as "collective investment securities" in this Article) in his/her possession with the total par value of each real estate fund, etc. not exceeding 300 million won. In such cases, dividend income from the collective investment securities (where the total par value exceeds 300 million won, such exceeding collective investment securities shall be included) shall not be included in global income in calculating global income tax base under Article 14(2) of the Income Tax Act.
(2) Where the collective investment securities of a real estate fund, etc. are deposited with an investment trader or investment broker, the real estate fund, etc. shall notify an investment trader or investment broker to whom a holder of collective investment securities entrusts the purchase and sale of a detailed statement of income subject to separate taxation under paragraph (1) classified by holder of collective investment securities, investment trader or investment broker, directly or through the Korea Securities Depository, immediately after deciding to pay the dividend income, and the investment trader or investment broker in receipt of notification shall withhold the tax as notified.
(3) If the collective investment securities of a real estate fund, etc. are not deposited with an investment trader or investment broker, the real estate fund, etc. shall withhold the tax after classifying the income subject to separate taxation by holder of collective investment securities, directly or through its transfer agency.
(4) Where a withholding agent under paragraphs (2) and (3) pays the dividend income from the real estate fund, etc. directly, he/she shall submit a detailed statement of the separate taxation of the real estate fund, etc. that is prescribed by Ordinance of the Ministry of Strategy and Finance to the head of the tax office having jurisdiction over the withholding tax by the end of the month immediately following the end of the quarter in which the payment date of the dividend income arrives.
Article 92-2 of the former Enforcement Decree of the Restriction of Special Taxation Act (Special Provision on Investment Company’s Dividends, etc.)
(3) The profits and losses from trade or valuation of securities under Article 91-2(2) of the Act shall only include the profits and losses from stock price fluctuations: Provided, That in case the profits and losses from stock price fluctuations and those from exchange rate fluctuations arose simultaneously, the profits and losses from exchange rate fluctuations shall be deemed those from stock price fluctuations, for purposes of calculation.
【Plaintiff-Appellant】 Plaintiff (Law Firm Yangjae et al., Counsel for plaintiff-appellant)
【Defendant-Appellee】 National Tax Service Samsung District Tax Office Chief (Lee & Ko, Attorneys Ryoo Sung-hyun et al., Counsel for defendant-appellee)
【Judgment of the court below】 Seoul High Court Decision 2012Nu4571 decided January 18, 2013
【Disposition】 The judgment below is reversed, and the case is remanded to Seoul High Court.
【Reasoning】
The grounds of appeal are examined.
1. Article 17(1) of the former Income Tax Act (amended by Act No. 9270 of Dec. 26, 2008; hereinafter the same) provides, “Dividend income shall consist of the following income under each subparagraph below as earned in the given year.” Subparag. 5 of the same Article provides, “Profit from investment trusts as provided by the Presidential Decree, earned domestically and/or overseas.” Article 23(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301 of Feb. 4, 2009; hereinafter the same), which is delegated from the statute, provides that an investment trust shall be: “an investment trust pursuant to the Indirect Investment Asset Operation Business Act” (subparag. 1); “settled at least once every year from the date the given investment trust is established” (subparag. 3); and “commissioned in money and redeemed in money” (subparag. 4).
Meanwhile, Article 91-2(2) of the former Restriction on Special Taxation Act (amended by Act No. 9272 of Dec. 26, 2008; hereinafter the “Statutory Provision”) provides, “Notwithstanding Article 17(1) of the former Income Tax Act, dividend income that a resident receives from investment trust qualifying under Article 17(1)5 of the former Income Tax Act (hereinafter the ‘investment trust’) shall not include the profits and losses incurred up to December 31, 2009, from trade or valuation of those locally issued, foreign-traded stocks directly acquired by the investment trust (limited to those listed in foreign markets similar to security markets under the Securities and Exchanges Act or KOSDAQ market; hereinafter the ‘foreign-listed stocks’).” Article 92-2(3) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21307 of Feb. 4, 2009; hereinafter the “Enforcement Decree Provision”) provides, “The profits and losses from trade or valuation of securities under Article 91-2(2) of the Act (i.e., the Statutory Provision) shall only include the profits and losses from stock price fluctuations: Provided, That in case the profits and losses from stock price fluctuations and those from exchange rate fluctuations arose simultaneously, the profits and losses from exchange rate fluctuations shall be deemed those from stock price fluctuations, for purposes of calculation.”
As a matter of principle, income amount shall be computed in the currency of the country with taxation authority. As such, when a resident’s income from the price fluctuations of foreign assets is taxable, the income amount necessarily has to be computed by incorporating the profits and losses from exchange rate fluctuations. For this reason, Article 118-4(2) of the former Income Tax Act (amended by Act No. 9270 of Dec. 26, 2008) and Article 178-5(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301 of Feb. 4, 2009) provide that, when calculating capital gains from the transfer of foreign assets, the transfer price and necessary expenses shall be calculated pursuant to the basic or arbitrated exchange rate as of the date of receipt and the date of expenditure, thereby prescribing that the capital gains amount shall be computed by incorporating the profits and losses from exchange rate fluctuations.
With a view to promoting overseas investment by residents, the Statutory Provision provides that the profits and losses from trade or valuation of foreign-listed stocks shall be excluded from the dividend income amount for a limited period until December 31, 2009. The process of converting the profits and losses from trade or valuation of foreign-listed stocks into Korean Won necessarily involves an aggregation of the profits and losses from stock price fluctuations and those from exchange rate fluctuations. As such, the profits and losses from trade or valuation of foreign-listed stocks excluded from the dividend income amount under the Statutory Provision and the Enforcement Decree Provision mean the aggregate of the profits and losses from stock price fluctuations and those from exchange rate fluctuations. Therefore, even where the foreign-listed stocks’ foreign currency-denominated price declined and the Korean Won-denominated exchange rate against foreign currency rose, one may not include only the profits from exchange rate fluctuations in the dividend income amount by compartmentalizing the aggregate amount into losses from stock price fluctuations and profits from exchange rate fluctuations.
2. Reviewing the reasoning of the judgment below and the body of evidence duly admitted by the court below reveals the following: (a) having purchased the security certificates of the Investment Trust at a sum of 230 million Won through Korea Investment & Securities Co., Ltd. (hereinafter “Korea Investment Securities”), the Plaintiff claimed for redemption on December 2, 2008; (b) with an over 70 percent of its investment in stocks issued and traded in Japan (hereinafter the “Stock”), the Investment Trust is structured in such a way that its profits and losses vary depending on the Yen-Won exchange rate fluctuations, as well as the Stock price fluctuations; during the Plaintiff’s investment period the Stock price dropped by over 56 percent, the losses from which was partially offset by the profits from exchange rate appreciation, resulting in a redemption price of 185,518,844 Won; (c) of the above redemption price, Korea Investment Securities separately computed 157,846,781 Won as profits from exchange rate fluctuations (hereinafter the “currency gains”), which it included in the dividend income amount, and withheld income tax; the Plaintiff, for his part, also initially paid his global income tax, as he reported the final tax rate for his global income tax for fiscal year 2008 on June 1, 2009 by including the above currency gains in his dividend income amount; but (d) subsequently on December 21, 2009, the Plaintiff filed a petition for correction with the Defendant seeking a return of his global income tax on the ground that “the currency gains should not have been included in the dividend income amount”; however, on July 23, 2010, the Defendant deemed that “the currency gains are included in the dividend income amount, as they do not constitute the profits and losses from the trade or valuation of the stocks under the Statutory Provision,” while re-computing the dividend income amount by reducing the above currency gains (hereinafter the reduced amount of currency gains is referred to as the “present currency gains”), thereby returning only a part of the tax payment and refusing to return the remainder (the Appealed Disposition).
Examining these facts in view of the statutory provisions and legal doctrines as seen earlier, the sum of the losses from the present stock price fluctuations and the present currency gains constitutes trade and valuation profits and losses from foreign-listed stocks, which are excluded from the dividend income amount under the Statutory Provisions and the Enforcement Decree Provisions. As such, the present currency gains cannot be separated out to be included in the dividend income amount.
Nevertheless, the court below determined otherwise, by judging as lawful the Appealed Disposition, in refusal of the Plaintiff’s petition for correction, on the grounds that the present currency gains is included in the dividend income amount as an investment trust profit, on the erroneous premise that the present currency gains may be included in the dividend income amount by separating them out from the losses from the Stock price fluctuations.
Therefore, in so determining, the court below erred by misapprehending the legal principles on the means of computing the trade and valuation profits and losses on foreign-listed stocks under the Statutory Provisions and the Enforcement Decree Provisions, thereby affecting the conclusion of the judgment. The ground of appeal assigning this error is with merit.
3. Therefore, without proceeding further to decide on the remainder of the grounds of appeal, we reverse the judgment of the court below, and remand the case to the court below for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices.
Justices Kwon Soon-il (Presiding Justice)
Kim Yong-deok
Park Poe-young (Justice in charge)
Kim Shin
* This translation is provisional and subject to revision. |
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