"Gwaseo is not in violation of the principle of clarity"
The Constitutional Court has made its first ruling that the provision in the Income Tax Act allowing capital gains tax to be imposed on overseas derivatives trading does not violate the Constitution.
According to the legal community on the 22nd, the Constitutional Court unanimously upheld the constitutionality in a constitutional complaint case filed by individual investors against Article 118-2, Paragraph 4 of the former Income Tax Act and Article 5, Paragraph 2, Item 2 of the Act on Capital Markets and Financial Investment Business.
The petitioners traded KOSPI 200 options on the Korea Exchange (KRX) derivatives market during the day, and KOSPI 200 options futures linked to the European Derivatives Exchange (Eurex) after the regular market closed at night. They incurred losses in the domestic derivatives market but made profits in the Eurex-linked futures trading.
Since this was before December 19, 2017, when the Income Tax Act was amended to allow the aggregation of capital gains from domestic and overseas derivatives, taxation on overseas derivatives profits was conducted separately. They claimed a refund for the capital gains tax for the 2016 tax year paid on Eurex-linked futures trading, arguing that “if profits and losses were combined, there would be no tax payable,” but the competent tax office rejected their claim.
The petitioners filed a lawsuit seeking to cancel the rejection of their refund claim, and after their request for a constitutional review during the lawsuit was dismissed, they filed a constitutional complaint. Article 118-2, Paragraph 4 of the former Income Tax Act defines the scope of capital gains on foreign assets as “income arising from transactions or acts involving derivatives, etc., as prescribed by Presidential Decree.” Article 5, Paragraph 2, Item 2 of the Capital Markets Act defines overseas derivatives markets as “markets located overseas that are similar to derivatives markets.”
The Constitutional Court first ruled that the provision on capital gains from foreign assets “does not violate the principle of prohibition of excessive delegation.” The Court stated, “Derivatives can exist in various forms depending on the type of underlying asset, the form of contract, and the rights acquired through the contract, and new products are continuously developed in response to new economic phenomena.”
Furthermore, the Court held, “To respond flexibly and effectively to the emergence of new derivatives, the need for regulation, and rapid changes in the financial environment, it is necessary to delegate the scope of taxable derivatives to subordinate legislation.” Regarding the overseas derivatives provision, the Court concluded, “The Capital Markets Act contains detailed regulations on derivatives, exchange-traded derivatives, and derivatives markets,” and therefore “does not violate the principle of clarity in taxation requirements.”
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