법무법인(유한) 율촌 | Yulchon LLC

The Supreme Court of Korea ruled on April 28, 2011 that gains from Yen Swap Deposits cannot be recharacterized as interest income, thus allowing gains from these products to remain tax free. Yulchon represented the victorious plaintiff in this case.
 

Yen Swap Deposits, a type of derivative, is a combination of Yen time deposits and KRW-JPY forward exchange transactions and gained popularity due to the tax exemption on profits generated from KRW-JPY forward exchange transaction. Korea has never imposed tax on any capital gains from foreign exchange transactions and derivatives trading, but the tax authorities suddenly changed their position with respect to the taxability of Yen Swap Deposits, asserting that the foreign exchange gain ("FX gain") from the KRW-JPY forward exchange should be treated as interest income for tax purposes. Yulchon, representing the purchasers of the Yen Swap Deposits and the banks that sold such products, filed an appeal disputing the tax assessments at issue.
 

After a series of decisions issued against plaintiffs represented by other law firms, it seemed almost certain that all plaintiffs would ultimately lose. Yulchon, however, obtained a decision in favor of the plaintiff from the Seoul Administrative Court for the first time. Yulchon made informative and persuasive presentations to the judges, many of whom were unfamiliar with terms and concepts such as the FX dealing system, forward transactions, swap transactions, and the inevitable existence of arbitrage via market participation because the swap point between KRW and JPY had remained positive for several years. Yulchon persuaded the Seoul Administrative Court that the capital gain at issue could not be recharacterized as interest income solely because the swap and deposit were executed simultaneously, if the forward rate in the FX market had been applicable to the banks and customers without any manipulation. The Seoul High Court affirmed this ruling in January 2010.
 

Following this Supreme Court's decision, it is expected that about 80 cases dealing with the same issue and currently pending before courts across the country, will be settled.