[1] Requirements for taxation of the value of business rights as a merger evaluation marginal profit in the case of a merger of corporations, and the method for determining whether the value of business rights in this case can be inferred only on the basis that the business rights are calculated in accordance with the corporate accounting standards (negative)

[2] In order to recognize a merger as a business right under tax law, whether a separate and active calculation process should be accompanied in calculating the amount of excess earnings (negative) / The standard time to determine whether a merger is assessed under tax law (=the time at which the merger is made), and whether the merger corporation’s loss has been expanded after the merger can be viewed differently (negative)

[3] In a case where Company A, a KOSDAQ-listed corporation, merged Company B, an unlisted corporation, included the difference between the value of new stocks through merger and the net asset value in the account book as a goodwill pursuant to the corporate accounting standards, and the tax authority imposed corporate tax on Company A by deeming that the above amount should be included in the gross income from the merger evaluation marginal profit, the case holding that the lower court erred by misapprehending the legal doctrine, which held that it is difficult to view that

[1] According to the proviso of Article 17(1)3 of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009); Articles 12(1)1, 15(2), and 24(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010); in the case of a corporate merger, in order to impose the value of business rights as a merger evaluation marginal profit, the merged corporation can be deemed to have paid the price by evaluating its business value by deeming the name, etc. of the merged corporation as an intangible asset value that can obtain excess profits from the merged corporation. Determination of the value of business value should be made objectively by comprehensively taking into account various circumstances such as the process and motive of the merger; the current business status of the merged corporation and the merged corporation after the merger; and details of tax return after the merger. It cannot be inferred that the business right is calculated in accordance with corporate accounting standards.

[2] Whether the value of business rights at the time of the merger can be taxed as a merger evaluation marginal profit under the former Corporate Tax Act (amended by Act No. 9898 of Dec. 31, 2009) should be examined not whether the merger marginal profit exists but whether the merged corporation can be deemed to have paid consideration by evaluating the business value of intangible property of the extinguished corporation.

In particular, it is possible to appropriately determine the valuation value of intangible assets from the total cost of merger to the amount obtained by deducting the net asset value from the net asset value of the total cost of merger. Therefore, in order to recognize it as a business right under tax law, a separate and active process of calculating the cost of merger does not necessarily require to be accompanied. Furthermore, the determination of the business right under tax law should be determined at the time of merger as at the time of merger, and it is difficult to view it differently solely on the fact

[3] In a case where Company A, a KOSDAQ-listed corporation, merged Company B, an unlisted corporation, and included the difference between the value of new stocks and the net asset value of the merger in the account book according to corporate accounting standards, and the tax authority imposed corporate tax on Company A on the ground that the aforementioned amount should be included in the gross income from the merger evaluation, the case held that the judgment below erred by misapprehending the legal principles, which determined that: (a) in light of the details and motive of the merger, the merger and the business status of the merged corporation and the merged corporation; (b) it is reasonable to deem that Company A paid for consideration by recognizing the business value as a whole intangible property, such as transactional relations held by Company B at the time of the merger; and (c) it is possible to appropriately determine the valuation of intangible assets as the total value of the merger with the net asset value deducted from the total net asset value of the merger; and (d) it is difficult to view that the appraisal of business rights under the tax law was made at the time of the merger; and (b) it is difficult to deem otherwise as the loss of the merged corporation after the merger.

[1] Article 17 (1) 3 (see current Article 17 (1) 5) of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009); Article 12 (1) 1, Article 15 (2) (see current Article 17 (1) 5 of the Corporate Tax Act); Article 24 (4) / [2] Article 17 (1) 3 (see current Article 17 (1) 2 (a)) of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009); Article 17 (2) 5 (see current Article 17 (1) 2 (see current Article 17 (1) 5); Article 18 (2) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22184, Jun. 8, 2010); Article 24 (1) 4 (2) of the former Enforcement Decree of the Corporate Tax Act (see current Article 17 (2) 4(1) of the Corporate Tax Act)

Seoul Rik Co., Ltd. (Law Firm LLC, Attorneys Kang Tae-tae et al., Counsel for the defendant-appellant)

The director of the North Incheon National Tax Office

Seoul High Court Decision 2016Nu67020 decided July 5, 2017

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. A. In case where the merged corporation succeeds to the evaluation of assets from the merged corporation, the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same shall apply) shall be deemed as a merger evaluation marginal profit [Article 17(1)3 proviso; Articles 15(2) and 12(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same shall apply] of the value of the assets, the portion exceeding the book value of the merged corporation should be deemed as depreciable assets only if the merged corporation succeeds to the evaluation of the assets of the merged corporation and succeeds to the business value of the merged corporation with the trade name, transaction relationship, and other trade secrets, etc. of the merged corporation (hereinafter “trade name, etc.”).

B. According to the relevant laws and regulations, in order to impose the value of business rights as a merger evaluation marginal profit in the case of a merger of corporations, the merged corporation is deemed as an intangible asset value that can obtain excess profits from the trade name, etc. of the merged corporation and evaluated its business value and paid compensation. The evaluation of business value in this case shall be objectively determined by comprehensively taking into account various circumstances, such as the details and motive of the merger, the current business status of the merged corporation and the merged corporation at the time of the merger, and the details of tax returns after the merger, etc., and the business rights shall not be inferred solely on the basis that the business

(1) In order to be taxed as a merger evaluation marginal profit of a merged corporation, it should be recognized as the assets of the merged corporation in the first place. Even if a corporation creates an intangible business right due to its internal business activity, it is not recognized as an asset under tax law, and it is recognized as an asset of the merged corporation only if it satisfies the requirements under the former Enforcement Decree of the Corporate Tax

Tax law and corporate accounting have different purposes and purposes and separately provided for in the corporate tax law. In the event of a merger, the requirements for recognition of goodwill are also included in such cases. The requirements for evaluation of business value with respect to goodwill under the Enforcement Decree of the Corporate Tax Act were introduced to be limited to the recognition of goodwill under the tax law at the time of amendment of the Enforcement Decree of the Corporate Tax Act on December 31, 1998, and the framework for the imposition of the merged taxation is also maintained under Article 80-3(2) of the Enforcement Decree of the Corporate Tax Act as amended on June 8, 2010.

(2) In the case of a merger, the issue of requirements for recognizing a business right as an asset under the tax law is different from the issue of whether it is appropriate to calculate the business right in excess of the net asset value of the merger price when determining the appropriateness of the specific method of assessment. Therefore, requiring the evaluation of the business value of a trade name, etc. is inconsistent with the case law that affirms the appropriateness of the evaluation of the business right according to the difference

(3) The taxation of merger evaluation marginal profit is imposed upon the acquisition of profits generated from tangible and intangible assets held by the merged corporation prior to the merger with a certain requirement. As such, Article 15(2) of the former Enforcement Decree of the Corporate Tax Act only refers to the calculation method under which Article 12(1)1 of the former Enforcement Decree of the Corporate Tax Act is accepted, and there is no relation to the capital reserve [Article 16(1)2(a) of the former Corporate Tax Act] under the concept. The merger marginal profit, which is the simple difference between the net asset value transferred by the merged corporation and the face value of the merged stocks, cannot be the requirement for taxation of merger evaluation marginal

2. A. According to the reasoning of the lower judgment and the record, the following facts are revealed.

(1) On September 16, 2008, the Plaintiff was a KOSDAQ-listed corporation that engages in the manufacture and sale of electronic and electronic equipment parts, and merged Dacowal Co., Ltd. (hereinafter “Dacowal”) which is an unlisted corporation, and completed the merger registration around that time. Pursuant to the relevant laws and regulations at the time, the Plaintiff calculated the merger ratio based on the Plaintiff’s average of the value of the Plaintiff’s own share and Dacoal’s asset and the profits value, based on the average of the value of the assets and profits of the Plaintiff as of June 24,

(2) The Plaintiff, in accordance with the corporate accounting standards, included approximately KRW 15.7 billion, which is the difference between the value of new stocks that are merged and the net asset fair value, in the account book.

(3) Considering that the above KRW 15.7 billion should be included in the gross income for the business year 2008, the Defendant imposed corporate tax of KRW 1.1 billion (including additional tax) on March 13, 2014 on the Plaintiff on March 13, 2014 (hereinafter “instant disposition”).

B. The lower court determined that the instant disposition was unlawful on the following grounds.

(1) The taxation of merger evaluation marginal profit requires merger marginal profit. In this case, the taxation of merger marginal profit is illegal regardless of whether the total face value of the new stocks through merger exceeds the net asset value of the multi-family well-being, and there is no merger marginal profit.

(2) In light of the fact that the merger cost was calculated in accordance with the relevant provisions, and the part having asset value among the sales rights in the accounts can be recognized as business rights under tax law, but there was no direct perception or evaluation on the sales rights in excess of profit-making profits, it is difficult to deem that the business rights the Plaintiff calculated in the account to constitute business rights recognized as assets under tax law.

3. However, we cannot accept the judgment of the court below for the following reasons.

A. As seen above, the merger marginal profit cannot be the requirement for taxation of merger marginal profit. Therefore, whether the value of business rights can be taxed as a merger marginal profit under the former Corporate Tax Act is not the existence of merger marginal profit, but it should be examined whether the merged corporation can be deemed to have paid the consideration by evaluating the business value of intangible assets of the extinguished corporation in accordance with the foregoing legal doctrine.

B. Furthermore, according to the reasoning of the lower judgment and the record, the following circumstances are revealed.

(1) In the year 2006 and 2007, the Plaintiff was faced with a crisis, such as the possibility of delistinging a large amount of deficit by recording a large amount of loss, and there was a need to find a new business power to overcome this.

(2) On the other hand, the Plaintiff, an affiliate of the Plaintiff, has set a high operating profit rate of 12.5% and 20.9% as well as the rapid growth of sales in the business year 2006 and 20.9%, while the Plaintiff, among approximately 5.1 billion won in total of the assets as of the end of 2007, over KRW 3.9 billion, cash assets and sales claims, and tangible assets, including machinery, account for approximately KRW 28 billion. However, in 206 and 2007, the Plaintiff reported a large amount of income in succession without compensation. Such circumstances were reflected in calculating the profit value of multi-family stocks in accordance with the relevant provisions.

(3) The Plaintiff, as well as 15.7 billion won, which is the difference between the merger cost and the net asset value succeeded to from Dacowal, was appropriated as business rights in the account book, and when each corporate tax is returned from 2008 to 2011, the Plaintiff voluntarily appropriated it as business rights, which are assets under tax law, and processed the total amount of KRW 15.7 billion as depreciation costs in four years during the above four years. There was no revised report even if several years have elapsed prior to the instant disposition by the Defendant.

C. Examining the aforementioned details and motive of the merger, the current business status of the merged corporation and the merged corporation at the time of the merger, and the details of tax return after the merger in light of the aforementioned legal principles, there is a large room to deem that the Plaintiff was merged by paying for consideration by recognizing the business value as a whole intangible property, such as transactional relationship, which had multi-Coamer at the time of the merger. In particular, regarding the merger ratio, it is possible to comply with relevant provisions, such as the Securities and Exchange Act, and to appropriately determine the appraised value of intangible property from the total merger price less the net asset value from the total merger price. Therefore, in order to recognize it as a business right under tax law, a separate active calculation process should not be accompanied in calculating the amount of the merger price. In addition,

4. Nevertheless, the lower court, without examining these circumstances specifically, determined that the instant disposition was unlawful on the erroneous premise, deeming that the operating right under tax law is not recognized. In so doing, the lower court erred by misapprehending the legal doctrine on the requirements for recognition of operating right under tax law at the time of merger and failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The

5. The defendant's appeal is with merit, and the judgment below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench

Justices Kim Chang-suk (Presiding Justice)