1. Case summary

(a) A project to newly build and sell a main complex building by the plaintiffs;

(1) On December 24, 2014, Plaintiff 1 and Plaintiff 2 registered a housing construction and sales business, etc. with the trade name “(trade name omitted).” After obtaining a construction permit from the competent authority, constructed a “multi-household 40 households and an officetel 8 households,” a main complex building of which is a multi-household 40 households and an officetel 734.5 square meters on the land of Seo-gu, Busan, Seo-gu, Busan, with the permission of the competent authority, and sold it from 2016. From among them, the sale by two households of officetels registered as business facilities on the building ledger was conducted in the first and second taxable periods of value-added tax in 2017.

(2) Plaintiff 3 newly constructed “(name 2 omitted)-based multi-household buildings (name 2 omitted)-based multi-household buildings consisting of 16 households and 7 households on the land of 165.3 square meters in Busan-gu, Busan-gu, Busan-do, and 165.3 square meters. From among them, the sale of 7 households of officetels, which are business facilities in the public book, was carried out in the second taxable period of value-added tax in 2013. ② “(name 3 omitted)-based multi-household buildings (name 3 omitted)-based multi-household buildings consisting of 16 households and 4 households on the ground of 528 square meters in Busan-gu, Busan-gu, Busan-do, (name 3 omitted)-based multi-household buildings (name 16 households on the land of 16 households and 20 households on the land of 16 households on the 20-year multi-household buildings (name 4,2015.

(3) With the trade name of “(trade name 5 omitted)”, Plaintiff 4 newly constructed “(building name 5 omitted) multi-households consisting of 8 households and 2 households of officetels on the land of 181.4m2 in Busan Dong-gu, Busan ( Address 5 omitted) and sold them in lots. Of them, two households of officetels, which are business facilities registered, were sold in the first taxable period of value-added tax in 2014.

B. Details of the disposition imposing the value-added tax in this case

(1) With respect to the supply of two officetelss of “(the name of the building omitted)”, Plaintiff 3 did not report value-added tax or declared tax exemption for the supply of “(the name of the building omitted) 7 households of “(the name of the building omitted)”, “(the name of the building omitted 3 omitted) 4 households of “(the name of the building omitted 4 omitted)” and “(the name of the building omitted 4 omitted) 10 households of “(the name of the building omitted 5 omitted)” respectively.

(2) However, upon notification of the Commissioner of Busan Regional Tax Office’s taxation data that the instant officetel supply is not subject to value-added tax exemption under the instant tax exemption provision, the instant disposition of imposition of value-added tax (hereinafter collectively referred to as “disposition of imposition of value-added tax”) was taken against Plaintiffs 1, 3, and 4 as follows.

(A) On September 3, 2018, the head of Seosan District Tax Office imposed and notified each of the first and second returns (including additional taxes) on Plaintiff 1 on September 2017, 2018, and subsequently corrected the amount of the final tax by reducing or correcting the amount of additional taxes other than the additional taxes paid as a result of the determination by the Tax Tribunal to cancel the remaining additional taxes, thereby determining the amount of the final tax to be KRW 12,984,247, and value-added tax of KRW 2,272,538, respectively for the year 2017.

(B) On December 3, 2018, Plaintiff 3, the director of the Busan District Tax Office, and the director of the competent tax office of Busan District Tax imposed and notified each value-added tax (including the additional tax) for the second period of 2013 and the first period of 2016. The director of the competent tax office imposed and notified the second period of 2014 value-added tax (including the additional tax). The Defendants subsequently corrected the amount of the final tax to cancel the remainder of the additional tax other than the additional tax due upon the decision of the Tax Tribunal. Accordingly, the Defendants determined the amount of the final tax to be KRW 4,967,620 for the second period of value-added tax, KRW 58,69,465 for the second period of 2013, KRW 47,321,388 for the first period of value-added tax for the first year of 2016.

(C) On July 5, 2018, the head of the Korea Tax Office imposed and notified Plaintiff 4 of the first-year value-added tax (including the additional tax) on July 5, 2014, but subsequently corrected the amount of the final tax by reducing the amount of the additional tax, other than the additional tax for unfaithful payment, according to the decision of the Tax Tribunal, to cancel the additional tax.

C. Circumstances of the instant global income tax disposition

(1) Plaintiff 1, Plaintiff 2, and Plaintiff 3 filed an application for special tax reduction or exemption (hereinafter “special tax reduction or exemption”) for a small or medium enterprise under Article 7 of the former Restriction of Special Taxation Act (amended by Presidential Decree No. 14390, Dec. 20, 2016; hereinafter the same) on the grounds that the amount of income in 2015, which is the immediately preceding taxable period, falls short of KRW 36 million, which is the standard amount prescribed in Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 28637, Feb. 13, 2018; hereinafter the same).

(2) After conducting an individual consolidated investigation against Plaintiffs 1, 2, and 3, the director of the Busan Regional Tax Office, the director of the Busan Regional Tax Office, the director of the Busan Regional Tax Office, and the director of the competent regional tax office, the director of the competent regional tax office, the director of the competent regional tax office, the director of the competent regional tax office, the director of the competent regional tax office, the director of the competent regional tax office, the director of the competent regional tax office, and the director of the competent regional tax office, the sales revenue of the Plaintiff 1, and the plaintiff 3, who newly started a business in 2016 in which the sales revenue of the “(the name of the building omitted 3 omitted)” occurred, notified the tax data that the amount of revenue in the pertinent taxable period exceeds KRW 150 million,00,000,000 which is the standard amount stipulated in Articles 1

(3) Accordingly, each of the dispositions imposing global income tax (hereinafter collectively referred to as “instant disposition imposing global income tax”) against Plaintiffs 1, 2, and 3 was taken as follows.

(A) On September 3, 2018, the director of the tax office North Busan District Tax Office imposed and notified Plaintiff 1, and the director of the tax office having jurisdiction over Defendant Busan District Tax Office imposed and notified Plaintiff 2 of global income tax (including additional tax) for each 2016 year. After that, the amount of final tax to be corrected by reduction in accordance with the decision of the Tax Tribunal (in particular, both Plaintiff 1 and Plaintiff 2 imposed an additional tax for illegal underreporting, but both Plaintiff 1 and Plaintiff 2 were corrected as an additional tax for general underreporting with respect to Plaintiff 2) was determined as KRW 418,539,02 for Plaintiff 1 and KRW 154,543,98 for Plaintiff 2.

(B) On December 3, 2018, the head of the competent tax office, on December 3, 2018, imposed and notified Plaintiff 3 of global income tax (including additional tax) for the year 2016, and determined the final tax amount as KRW 183,697,734 by partly correcting the said tax reduction.

(C) Meanwhile, with respect to Plaintiffs 1 and 3, the special tax reduction or exemption was not applied, and with respect to Plaintiffs 2, the special tax reduction or exemption was applied.

2. As to ground of appeal No. 1 by Plaintiffs 1, 3, and 4

A. According to the instant tax-free provision, value-added tax shall be exempted on the supply of national housing prescribed by Presidential Decree. Article 106(4)1 of the Enforcement Decree of the Restriction of Special Taxation, upon delegation, provides that “national housing prescribed by Presidential Decree” as “housing below the size prescribed in Article 51-2(3).” Article 51-2(3) of the Enforcement Decree of the same Act provides that the said size shall be “national housing scale under the Housing Act.” Furthermore, Article 2 subparag. 3 of the former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016; hereinafter the same shall apply) provides that “national housing size” shall not exceed “the area used exclusively for residential purposes (hereinafter referred to as “exclusive residential area”) with the exclusive residential area of 1 house or 85 square meters per household (excluding the Seoul Metropolitan area under Article 2 subparag. 1 of the Seoul Metropolitan Area Readjustment Planning Act.”

In addition, Article 2 subparag. 1 of the former Housing Act defines “house” as “all or part of a building with a structure wherein members of a household can live an independent residential life for a long time,” and defines “quasi-housing” as “a building other than a house and facilities available as a residential facility, etc.” under Article 1-2 of the Enforcement Decree of the Housing Act, and the scope and type of “quasi-housing” are delegated to the Presidential Decree. Article 2-2 subparag. 4 of the former Enforcement Decree of the Housing Act (wholly amended by Presidential Decree No. 27444, Aug. 11, 2016; hereinafter the same) as one of the “quasi-housing” under Article 2-2 subparag. 14(b) of the former Enforcement Decree of the Housing Act provides that “offices pursuant to [Attachment Table 1] subparag. 14(b) of the Enforcement Decree of the Housing Act shall be separated from “house or multi-family housing” and “multi-family housing” under Article 1-2 subparag. 14(b) of the former Enforcement Decree of the Housing Act.

① Meanwhile, Article 95(2) and (2) of the Enforcement Decree of the Restriction of Special Taxation Act prescribing the scope of monthly tax deduction from global income tax amount of workers upon delegation of Article 95-2(1) of the same Act, which sets forth the scope of rental housing subject to tax reduction or exemption for small housing rental business operators under delegation of Article 96(1) of the same Act, which sets forth the scope of “the portion used for rental housing” subject to the special taxation for investors in kind by a rental housing real estate investment company under delegation of Article 97-6(1) of the same Act, which sets forth the scope of “the portion used for rental housing” subject to the special taxation for investors in kind pursuant to delegation of Article 97-6(2)1 and (4)9 of the Enforcement Decree of the same Act, which sets forth the scope of “house” subject to the special taxation for capital gains tax for the acquisitor pursuant to delegation of Article 99-2(1) of the same Act, and explicitly provides for “officetel” or “house” under the Housing Act.

B. In full view of the language and structure of the above provisions, the purport of the instant tax-free provision to exempt value-added tax on the supply of housing below national housing scale, differences in various legal regulations on the “house” and “officetel,” in particular, unlike the instant tax-free provision, and balance with the fact that the “office” or “officetel used for residence” is included in the “house,” barring special circumstances, it cannot be deemed as the “national housing” under the instant tax-free provision regardless of whether the use in the public record at the time of supply falls under the scope of national housing under the Housing Act, regardless of whether the size of the “office” is below the national housing scale under the Housing Act. In other words, if the building supplied satisfies the requirements of the “office” under the relevant Acts and subordinate statutes and is registered as the “office” on the public record, even if that building satisfies the structure and function that can be used for residence at the time of supply, it cannot be deemed as the “office’s use” under the Building Act, and thus, it cannot be deemed as the “office’s use at the time of supply.”

C. Examining the above facts in light of the aforementioned legal principles, the instant officetel satisfies the requirements of “officetel” under the relevant statutes at the time of supply and its public register is also “business facilities” and thus, it cannot be deemed as falling under the “national housing” under the instant tax exemption provision regardless of whether its size is below the national housing scale under the Housing Act, or its structure and function is actually used for residential purposes, and whether it has been actually used for residential purposes.

D. In the same purport, the lower court determined that the instant officetel, which was permitted to construct and approved to use as “business facilities,” does not constitute “national housing” under the instant tax exemption clause, and thus, the instant disposition imposing the value-added tax on such premise was lawful. Such determination by the lower court is based on the legal doctrine as seen earlier, and it did not err by misapprehending the legal doctrine on “national housing” under the instant tax exemption clause, contrary to what is alleged in the grounds of appeal. Meanwhile, the Supreme Court precedents cited in the grounds of appeal are different from those

3. As to ground of appeal No. 2 by Plaintiffs 1, 3, and 4

The lower court determined that the Plaintiff 1, 3, and 4 cannot be deemed to have justifiable grounds for exempting from the penalty tax on the grounds that it is difficult to view that there was a variety of opinions due to tax interpretation regarding whether the supply of an officetel for residence constitutes the object of exemption from the value-added tax under Article 106(1)4 of the Restriction of Special Taxation Act.

Examining the reasoning of the lower judgment in light of the relevant legal principles and records, the lower court did not err in its judgment by misapprehending the legal doctrine on justifiable grounds for exempting penalty as alleged in the grounds of appeal.

4. As to ground of appeal No. 3 by Plaintiffs 1, 2, and 3

The lower court rejected the Plaintiffs’ assertion that the instant global income tax imposition disposition is lawful, on the premise that, with regard to the application of the simple expense rate under Article 143(4) of the former Enforcement Decree of the Income Tax Act, the starting date of the Housing Construction and Sales Business ought to be the “time of commencing the sale of housing” and that the amount of income on the sales of housing by Plaintiffs 1, 2, and 3 ought to be deemed the “time of commencing the sale of housing,” and that

Examining the reasoning of the lower judgment in light of relevant provisions and records, the lower court did not err by misapprehending the legal doctrine on the commencement date of business under the Income Tax Act, contrary to what is alleged

5. As to the ground of appeal No. 4 by Plaintiffs 1 and 3

The lower court determined that the special tax reduction or exemption pursuant to Article 7 of the former Restriction of Special Taxation Act does not apply on the ground that the housing construction and sales business operated by Plaintiff 1 and Plaintiff 3 did not constitute “construction business” under the Korea Standard Industrial Classification.

Examining the reasoning of the lower judgment in light of the relevant provisions and the record, the lower court did not err by misapprehending the legal doctrine regarding the scope of “construction business” under Article 7 of the former Restriction of Special Taxation Act, contrary to what is alleged in

6. As to Plaintiff 1’s ground of appeal No. 5

For the reasons indicated in its reasoning, the lower court determined that the portion of the tax imposed on Plaintiff 1 in the imposition of global income tax for the year 2016 was lawful.

Examining the reasoning of the lower judgment in light of the relevant legal doctrine and the record, the lower court did not err in its judgment by misapprehending the legal doctrine regarding “Fraud or other unlawful act” which is an element for imposing penalty for unlawful underreporting, contrary to what

7. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim H-soo (Presiding Justice)