Article 25 (Non-Inclusion of Entertainment Expenses in Deductible Expenses)

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

A. From May 9, 2007 to June 11, 2007, the Seoul Regional Tax Office: (a) conducted a tax investigation for four years from 2002 to 2005 with respect to the Plaintiff; and (b) imposed the sales incentive amount of KRW 2,027,156,367 and KRW 995,321,660 (the sum of KRW 76,050,000 in the business year 2004 and KRW 919,271,660 in the business year 2005 and KRW 919,271,660 in the business year 2005; hereinafter “the advertising subsidy of this case”) as entertainment expenses and imposed the excess amount of entertainment expense in the calculation of deductible expenses as follows. < Amended by Presidential Decree No. 20317, Sep. 1, 2007; Presidential Decree No. 20064, Jul. 7, 2006>

B. The Plaintiff appealed and filed an appeal with the Tax Tribunal on November 28, 2007. On April 1, 2009, the Tax Tribunal revised the tax base and tax amount of corporate tax by adding corporate tax for the business year of 2003 to 2003 to 643,973,512 among the sales incentives as entertainment expenses in the disposition imposing corporate tax for the year of 2003 to 2005 among the above dispositions made by the Defendant on April 1, 2009, and for the second period to 2004 and the first period to 2005 to 2005 to 643,973,512 of the sales incentives as entertainment expenses.

C. The fair tax amount that the Defendant corrected in accordance with the decision of the Tax Tribunal on April 17, 2009 and the remaining tax amount, and the reasonable tax amount that the Defendant calculated in deductible expenses for each business year are as follows (hereinafter referred to as the "disposition in this case").

[Ground of recognition] Facts without dispute, Gap 8, 9 evidence, Eul 1-4 evidence (including each number), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The parties' assertion

(1) The plaintiff's assertion

The advertising expense of this case is paid for the purpose of increasing sales of the "K tower, which is a new package of containers and specifications of the plaintiff, according to the prior agreement with the AAA corporation (hereinafter "AA"). As such, the part of the disposition of this case which exceeds the legitimate tax amount among the disposition of this case imposed on the premise that it constitutes entertainment expenses excluded from deductible expenses is illegal.

(2) The defendant's assertion

The advertising expense of this case is not disbursed for the purpose of stimulating purchase intent for many unspecified persons, but is disbursed only for AAAA, which is the Plaintiff’s specific transaction business entity. Thus, it cannot be viewed as advertising expenses. Thus, the disposition of this case which excluded the advertisement expense from deductible expenses is legitimate.

(b) Related statutes;

It is as shown in the attached Form.

(c) Fact of recognition;

(1) As a limited liability company established in 191, the Plaintiff is carrying out the packing containers and containers of liquid beverages for long-term storage (referred to as "KK package", and the new products that are eligible for the payment of the advertising expense of this case shall be referred to as "KK tower"), packing machinery (using packing materials) and packing materials sales business. In light of the composition ratio of the Plaintiff's total sales in the business year from 2003 to 2005, 95% of the sales amount depends on the sales revenue of packing containers.

(2) On September 6, 1996, the Plaintiff entered into a contract with BB to bear KRW 100 million out of the advertising expenses of the above beverage products on the condition that the phrase “K package” is indicated in the advertisement, when the Plaintiff introduced the KR package machine in order to display “MM” of the new product required by BB, Inc. to display “MMM company.”

(3) In 2003, the total sales revenue of the Plaintiff decreased from 73.8 billion won (70.9 billion won for packaging containers) to 62.7 billion won (59.4 billion won for packing containers) in 2004, the Plaintiff sought the entry into the container market with a large demand for packing containers in the future. However, at the time, the Plaintiff agreed to supply the packing containers by entering into a packing agreement on June 9, 2004 between AAA and the container with a plan to produce the current 5.0 billion won, which strengthened functionality on the 'VV milk' for the preference of the market with a large amount of demand for packing containers. The main contents of the above agreement are as follows.

(4) On December 29, 2004, the Plaintiff entered into a direct advertising agency contract with TTT Venture Business Co., Ltd., which is an advertising agency, and received advertising services. The Plaintiff participated in the process of determining the advertising image and added the phrase “Vew” to the container up to the container, along with the phrase “Vew”. Meanwhile, AAA also made it available for TV advertising costs of KRW 1,01,208,515, and KRW 66,00,000, and marketing promotion expenses of KRW 140,102,281, and KRW 2,582,701, and KRW 182,70,01, and KRW 3,178,49,59,569,579,5715,571,57,57,571,57,57,57,51,57,51,57,57,51,25.

(5) At around 2005, the Plaintiff supplied the packing containers to natural and human corporations.

[Grounds for Recognition] Facts without dispute, Gap 1-7, 10, 13 evidence (including each number), the purport of the whole pleadings

D. Determination

(1) Standard for determining entertainment expenses

Article 25(5) of the Corporate Tax Act provides that entertainment expenses shall be strictly interpreted in accordance with the principle of no taxation without law in view of the fact that the purpose of restricting the inclusion of entertainment expenses in deductible expenses is to curb a company’s unsound spending, etc., and the Corporate Tax Act provides that “the entertainment expenses refer to entertainment expenses, school expenses, recompense, and other expenses of a similar nature regardless of the pretext, which are paid by the corporation in connection with its business” (Article 25(5)), and the Enforcement Decree of the Corporate Tax Act provides that “the expenses paid by the corporation to donate samples, calendars, pocketbooks, debts, cups, cups, and other similar articles to many and unspecified persons for the purpose of advertisement and publicity shall not be deemed entertainment expenses (Article 42(5)).” If a corporation’s expenses are paid for its business and the other party is a person related to its business and the purpose of placing more friendship among persons related to its business through activities such as entertainment, etc., and if the purpose of spending is to facilitate transactional relations, it should be deemed entertainment expenses, and if the other party’s desire to purchase.

(2) Whether the advertising expense of this case constitutes entertainment expenses

In full view of the above facts of recognition and the following circumstances revealed thereby, the advertising expense of this case cannot be deemed as entertainment expenses limited to the limit of the disposition of losses, and there is only room to regard it as advertising expenses.

① There was a need for the Plaintiff to spend the instant advertising expense in terms of the company’s business management conditions and marketing strategy. The Plaintiff was also in need of developing a new package market as a result of the decline in the annual sales in comparison with the previous year in 2004, and AAA also actively sought for entry into the market as a frist milk market. KR has the character of intermediate material to be used as the package of the frith product. In addition, if the frith is advertised with the frith product due to the increased sales volume of the frith product due to the increased sales volume of the frith product, it can be improved in addition to the existing frith company’s personal guidance in addition to the existing frith product’s personal guidance in order to maximize the advertising effect by directly increasing the sales volume of the frith product. The Plaintiff, rather than directly running the K frith product, may support individual marketing activities of the frith product or increase the demand for the frith product in the marketing of the product.

② The advertising expense of this case cannot be deemed to have been paid free of charge. When concluding a lease agreement with AAA to the package of KR tower, the Plaintiff agreed to ensure that the purchase price for three years after the lease should be determined in proportion to the output of AAA. In addition, the Plaintiff would be 50% of the sales and earnings of the KR tower during the relevant period of time, while the Plaintiff would directly participate in the advertisement image determination process and directly broadcast the text of the 'Ve milk' to the 'V milk' to the 'Ve milk' to the 'Ve milk' to the 'be added to the container to the KR tower. In other words, there is sufficient room to view the above advertisement as the co-advertisement of the AA’s milk products and the Plaintiff's KR tower.

③ Ultimately, the advertising expense of this case is ultimately disbursed to increase the Plaintiff’s sales. As seen earlier, the Plaintiff appears to have decided to disburse the advertising expense of this case in consideration of the necessity and preference effect of the market development through new packaging and containers, and the status in the milk market of AAA. In addition, considering that the terms and conditions of the contract entered into by AA while leasing packaging machinery in AA include the conditions of packing machine sales, the minimum quantity of the packing material of KK tower, the obligation to disburse the advertising expense of AA, etc. In addition, the advertising expense of this case is deemed to have the purpose of increasing the Plaintiff’s sales. Moreover, the disbursement circumstance, nature, and amount of the advertising expense of this case are deemed to have been normal in light of sound social norms and commercial practices, and it is difficult to view it as unnecessary or abnormal.

④ Meanwhile, even if the direct counterpart to the instant advertising support expense is a specific business entity, it is a company that mainly sells containers and containers of the Plaintiff’s intermediate nature, and since AA is a vehicle for the purpose of paying the instant advertising support expense to many and unspecified persons, the final counterpart to the instant advertising support expense may also be deemed many and unspecified persons. In other words, through the instant advertising and publicity expenses, the direct counter-party to the instant advertising support expense is using the KK tower in the V milk from the new 'AAA’s new 'V milk', and the advertisement and publicity is effective for the persons related to other food and beverage businesses to publicize that the genetic products using the KK tower were released in the premium market.

(3) Sub-decisions

Therefore, the corporate tax and value-added tax imposed in excess of the legitimate tax amount on the premise that the advertising expense of this case among the disposition of this case is restricted to the inclusion in deductible expenses is illegal.

3. Conclusion

Therefore, the plaintiff's claim of this case is reasonable, and it is decided as per Disposition by admitting it.