[1] Whether the term “office”, which is a business facility at the time of supply, constitutes “national housing” under Article 106(1)4 of the Restriction of Special Taxation Act (negative)

[2] In a case where there is a justifiable reason to believe that a taxpayer is negligent in performing his/her duty, whether a penalty tax may be imposed under the tax law (negative) and whether there is a conflict of opinion due to a doubt in the interpretation of the tax law, etc. where the taxpayer erroneously determined that a taxpayer is exempted from his/her duty of tax payment, etc. by the interpretation of his/her own name, whether it constitutes a justifiable reason that is not attributable to the breach of the duty (negative)

[1] Articles 95-2(1), 96(1), 97-6(1), 99-2(1), and 106(1)4 of the Restriction of Special Taxation Act; Articles 51-2(3), 95(2), 96(2)2, 97-6(2)1, 99-2(1)9, and 106(4)1 of the former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016); Article 2 subparag. 1 and 1-2(1), Article 3(5) of the Enforcement Decree of the Framework Act on National Taxes (see current Article 2 subparag. 4); Article 51-2(3), Article 95(2), Article 96(2)2(2)2, Article 97-6(2)1, and Article 97-4(1) of the Enforcement Decree of the former Housing Act (wholly amended by Presidential Decree No. 4274, Aug. 14, 2016)

[2] Supreme Court Decision 2011Du1776 Decided June 27, 2013

Plaintiff 1 and three others (Law Firm LLC, Attorneys Mok-ok et al., Counsel for the plaintiff-appellant)

The director of the North Incheon District Tax Office and one other (Attorney Han-soo, Counsel for the plaintiff-appellant)

Seoul High Court Decision 2018Nu78185 decided June 18, 2020

The part of the lower judgment against Defendant North Incheon District Tax Office is reversed, and that part of the case is remanded to the Seoul High Court. All of the Plaintiffs’ appeals are dismissed. The costs of appeal between Plaintiffs 1, 4, and Defendant branch tax office are assessed against the said Plaintiffs.

The grounds of appeal are examined.

1. Case summary

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

(1) On June 27, 2013, Plaintiff 1 and Plaintiff 3 registered the housing construction and sales business under the trade name of “○○○○○○○○” (business registration number 1 omitted), and subsequently constructed a new “○○○○○○○○○○○○○” (hereinafter “○○○○○○”) on the ground of an apartment house 48 households and an officetel 24 households on the land outside Bupyeong-gu, Incheon, Bupyeong-gu, Incheon, upon obtaining a construction permit from the competent authority, and sold it in 24 households registered as business facilities on the building ledger in the first taxable period of value-added tax in 2014.

(2) On March 10, 2014, Plaintiff 2 and Plaintiff 4 registered the housing construction and sales business with the trade name “○○○○○○○○” (business registration number 2 omitted), and subsequently constructed a new “○○○○○○○○○○○” (hereinafter “○○○○○○○”, a main complex building consisting of 36 households and 29 households on the ground of 481.7 square meters in Bupyeong-gu, Incheon, Bupyeong-gu, Incheon, upon obtaining a construction permit from the competent authority. Of them, the sales of 29 households of officetels registered as business facilities on the building ledger, was carried out in the first taxable period of value-added tax in 2015 (hereinafter “the instant officetel”).

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

(1) The Plaintiffs deemed that the supply of the instant officetel is subject to value-added tax exemption under Article 106(1)4 of the Restriction of Special Taxation Act (hereinafter “instant tax exemption clause”), and did not file a value-added tax return thereon.

(2) However, according to the notice of taxation data issued by the director of the Central Tax Office that the instant officetel is not eligible for the exemption of value-added tax under the instant tax exemption provision, the director of the Central Tax Office rendered and notified each of the Plaintiffs 1 and 3 of KRW 1,43,903,230 of the value-added tax (including additional tax) in 2014, respectively, on September 11, 2017, and determined and notified the Plaintiff 2 and 4 of KRW 1,356,191,320 of the value-added tax (including additional tax) in 2015, respectively (hereinafter collectively referred to as “instant disposition imposing value-added tax”).

C. Circumstances of the instant global income tax disposition

(1) Plaintiff 1 and Plaintiff 3 calculated the amount of income in the estimation method under the simple expense rate on the ground that the amount of income in 2013, which was the taxable period immediately preceding the 2014 taxable year, 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) and paid the comprehensive income tax for the year 2014, respectively.

(2) The Plaintiff 2 and the Plaintiff 4 calculated the amount of income in the estimation method under the simple expense rate on the grounds that the amount of income in 2014, which was the taxable period immediately preceding 2015, falls short of KRW 36 million, which is the standard amount under Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act, due to the occurrence of sales revenue by the “○○○○○B” in the taxable period immediately preceding 2015, respectively, and filed a return on the comprehensive income tax

(3) After conducting a tax investigation with respect to the plaintiffs, the director of the Central Regional Tax Office of China notified the defendants of the taxation data that the amount of income should be estimated by applying standard expense rate which is not simple expense rate, as the business operator who commenced a new business on the year 2015 in which the sales revenue of the "○○○○○○○○" was generated," and that the amount of income in the relevant taxable period exceeds KRW 150 million, which is the standard amount of income under Articles 143(4)1 and 208(5)2(b) of the former Enforcement Decree of the Income Tax Act, since the business operator who commenced a new business on the year 2015 in which the sales revenue of the "○○○○○○○○○" was generated.

(4) Accordingly, on September 13, 2017, the director of the tax office of North Korea issued a correction and notification of the global income tax of KRW 152,30,550 (including additional tax) for the year 2015, and the global income tax of KRW 218,02,100 (including additional tax) for the year 2014 to Plaintiff 3 on September 18, 2017. The director of the tax office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the branch office of the local income tax of KRW 254,435,540 (including additional tax) for the year 2014; and on September 12, 2017,

2. As to the grounds of appeal by the director of the defendant North Incheon District Tax Office

A. Whether the supply of the instant officetel is subject to value-added tax exemption under the instant tax exemption provision (Ground of appeal No. 1)

(1) According to the instant tax-free clause, the supply of national housing prescribed by Presidential Decree is exempt from value-added tax. 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” (wholly amended by Act No. 13805, Jan. 19, 2016; hereinafter the same shall apply) and Article 2 subparag. 3 of the former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016; hereinafter referred to as “exclusive residential area”) shall be “Housing whose area used exclusively for residential purposes (hereinafter referred to as “exclusive residential area”) is not more than 85 square meters per house or 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 its appurtenant facilities, etc.” under subparagraph 1-2, and separately defines “quasi-housing” as “a building, other than a house, and facilities available as residential facilities, etc.” and delegates its scope and type to 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) as one of “quasi-housing” under Article 2-2 subparag. 4 of the former Enforcement Decree of the Housing Act (wholly amended by Presidential Decree No. 27444, Aug. 11, 2016). The Enforcement Decree of the Building Act stipulating the types of buildings by use [Attachment 1] 14(b) of the Enforcement Decree of the Building Act, which can be divided or divided into one of “office facilities”.

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.

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

(3) Examining the facts in light of the aforementioned legal principles, the instant officetel satisfies the requirements of “office” under the relevant laws and regulations at the time of supply and its public account is also “business facilities,” and thus, it cannot be deemed that the instant officetel constitutes “national housing” under the instant tax exemption provision regardless of whether the scale is below the national housing scale under the Housing Act, or its structure and function was actually used for residential purposes, and whether it was actually used for residential purposes.

(4) Nevertheless, the lower court determined otherwise on the erroneous premise that the issue of whether the instant tax exemption provision constitutes “national housing” should be determined on the basis of the actual usage thereof, and determined that the instant officetel constitutes “national housing” under the instant tax exemption provision, which is deemed unlawful in light of its scale, on the ground that the instant officetel was designed and constructed for residential purposes and actually used for residential purposes, and thus constitutes “national housing” under the instant tax exemption provision. In so determining, the lower court erred by misapprehending the legal doctrine on the interpretation and application of the instant tax exemption provision, thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds of appeal by the Defendant North Incheon National Tax Office on this point is with merit.

B. Whether there exists a justifiable ground to exempt additional value-added tax (Ground of appeal No. 2)

(1) In order to facilitate the exercise of taxation rights and the realization of tax claims, additional tax under tax law is an administrative sanction imposed as prescribed by the Act in cases where a taxpayer violates various obligations, such as a tax return and tax payment, without justifiable grounds. Therefore, it is unreasonable for the taxpayer to be unaware of his/her obligations due to a conflict of opinion due to the significance in tax interpretation beyond the simple scope of land or misunderstanding under tax law, and there is a circumstance where it is unreasonable for the taxpayer to be unaware of his/her obligations, or there is a circumstance where it is unreasonable for the taxpayer to expect the performance of his/her obligations to be caused by neglect of his/her duties. However, such sanctions cannot be imposed in cases where there is a conflict of opinion due to the intention of tax interpretation, but the determination that the taxpayer is exempted from the obligation of tax payment, etc. by interpretation of his/her own name does not constitute merely a land or misunderstanding under law, and thus, it does not constitute a justifiable reason not constitute a violation of the obligation (see, e.g., Supreme Court Decision 2017Du717676, Jun. 27, 2717, 2017).

(2) Examining the following circumstances revealed in the record in light of the legal principles as seen earlier, it is unreasonable to expect the Plaintiffs to report and pay the value-added tax on the supply of the instant officetels, or it is difficult to deem that there is any justifiable reason not to mislead the Plaintiffs into the violation of their duty.

(1) As seen earlier, “officetel,” the public record of which is “business facilities,” cannot be deemed to constitute “national housing” under the instant tax exemption clause, and there is no room to interpret otherwise in light of the language and structure of the relevant statutes.

② Meanwhile, the Tax Tribunal affirmed and denied the instant provision until the Joint Session of December 20, 2017, regarding “whether the supply of officetels is exempt from value-added tax pursuant to the instant tax exemption provision.” However, it is difficult to deem that there was a conflict of opinion due to the intention of tax interpretation solely on the ground that the decision of the Tax Tribunal was not consistent.

③ Rather, the National Tax Service consistently expressed its public opinion that “Article 106(1)4 of the Restriction of Special Taxation Act does not apply to the supply of officetels” through established rules, inquiries, etc.

④ If so, the Plaintiffs were to have been able to sufficiently resolve the question by making inquiries to the National Tax Service, etc., but did not report and pay value-added tax on the supply of the instant officetels on the sole basis of some decisions made by the Tax Tribunal favorable to them without making any such efforts.

⑤ Ultimately, the lower court’s determination that the Plaintiff’s exemption of value-added tax on the supply of the instant officetel is merely a lot or error under a law.

(3) Nevertheless, the lower court determined otherwise, solely on the grounds indicated in its reasoning, that the part of the disposition imposing the value-added tax in this case’s imposition was unlawful. In so determining, the lower court erred by misapprehending the legal doctrine on justifiable grounds for exempting from additional tax, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal by the director of the North Incheon District Tax Office, pointing this out, is with merit.

3. Regarding the plaintiffs' grounds of appeal

A. Whether simple expense rate applies (ground of appeal Nos. 1 and 2)

On the premise that, with regard to the application of simple expense rate under Article 143(4) of the former Enforcement Decree of the Income Tax Act, the lower court rejected the Plaintiffs’ assertion that the instant global income tax imposition disposition, which calculated the amount of income on the sales revenue of housing by estimation method by standard expense rate, is lawful, and that simple expense rate should be applied.

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 on the commencement of business under the Income Tax Act.

B. Whether there exists a justifiable ground to exempt additional tax on global income (ground of appeal No. 3)

The lower court, on the grounds indicated in its reasoning, determined that it is difficult to view the Plaintiffs’ justifiable grounds for failing to properly perform their duty to report and pay global income tax.

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. Conclusion

Therefore, the part of the judgment of the court below against Defendant North Incheon District Tax Office is reversed, and that part of the case is remanded to the court below for a new trial and determination. All appeals by the plaintiffs are dismissed, and the costs of appeal between Plaintiffs 1, 4 and Defendant branch tax office are assessed against the above plaintiffs. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Ahn Jae-chul (Presiding Justice)