Foreign currency swaps

Foreign currency swaps (외화 스왑거래) refer to the swap transactions between foreign currncies, say from Japanese Yen to Korean Won or US Dollars.

Since the early 1980s, curreny swaps have been widely used for the purpose of speculation as well as hedging. Take an example of a Korean bank which intends to take advantage of low interest rate of Japanese Yen while the needs of US Dollars are on the increase. Then the bank will go to the Japanese capital market and enter into Yen-Dollar swaps upon closing the Samurai Bond issues.

Key words
currency swap, swap interest, forward, tax

FAQs on Currency Swaps
The parties to the foreign currency swap transactions should bear in mind the following issues:
 * In general, are the swap transactions legitimate under the law?
 * Is the swap interest really the interest income?
 * Then, is the income tax levied on the swap interest?

Supreme Court Decision
In April 2011, the Supreme Court reconfirmed that swap interest is not the income on which the income tax may be levied. The court said that a tax payer may adopt one of the legal alternatives to attain the economic purpose. Even though it is taken to avoid tax burden, such transaction is deemed effective unless there are special circumstanes that it shall be a disguised transaction.

Under the principle of "substantial taxation", if a tax payer's transaction is deemed as tax evasion regardless of its title or formaliy, then its effect shall be null and void on condition that such treatment shall be provided for in the relevant tax law.

Swap interest is not the taxable income
Take an example of Yen swap deposit agreement which combines Yen denominated time deposit and forward contract. The forward contract is separated from Yen time deposit, and is not deemed as tax evasion nor one single contract combined into the Yen time deposit.

Further, forward foreign exchange arbitral profit out of the forward contract does not amount to the interest or similar one, nor the profit or similar one out of the repurchase agreement of bonds or securities. Accordingly, the income tax shall not be levied on such swap interest pursuant to Article 16(1) Subparagraphs 3, 9, and 13.