Korea Local Administration Mutual Aid Association (Law Firm Squa, Attorneys Kim Jong-sub et al., Counsel for the plaintiff-appellant)

Head of Yongsan Tax Office

April 28, 2017

1. On May 15, 2014, the Defendant’s rejection disposition against the Plaintiff at KRW 374,972,628 of the corporate tax for the business year 2010 shall be revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a non-profit domestic corporation (hereinafter “non-profit corporation”) established pursuant to the Korea Local Administration Mutual Aid Association Act and established and operated an efficient mutual aid system for public officials of local governments or persons who are or were engaged in local administrative affairs, thereby promoting their stability of living and promotion of welfare.

B. The Plaintiff included KRW 240,392,668,398 (=205,504,862,880 as retirement benefit reserve + KRW 30,443,295,340 as well as KRW 4,444,510,178 as well as KRW 239,180,77,128 as well as KRW 1,211,891,270 as well as KRW 270 as well as KRW 30,443,295,340 as well as KRW 14,44,510,178 as well as KRW 1,270 as well as KRW 239,180 as well as KRW 239,77

C. On March 27, 2014, the Plaintiff: (a) included the amount of the reserve fund for the proper purpose business in total as deductible expenses in KRW 240,392,668,398; (b) included the amount of the reserve fund for the proper purpose business as deductible expenses; and (c) included the remainder in the reserve fund for the proper purpose business in KRW 4,444,510,178; and (d) included the amount of the reserve fund for the proper purpose business within the limit of the reserve fund for the proper purpose business; (b) included the amount of KRW 235,948,158,220 in the amount of the reserve fund for the proper purpose business as deductible expenses; and (c) subsequently, the Plaintiff corrected the statement of the reserve fund for the proper purpose business for the proper purpose business in total, within the limit of the reserve fund for the proper purpose business for the proper purpose business; and (d) subsequently, (e) changed the amount of KRW 1,211,891,270 as deductible expenses.

The reserve funds for proper purpose business not exceeding 240.3 billion won in the amount of the reserve funds for proper purpose business originally reported under the tax adjustment included in the main sentence: The reserve funds for proper purpose business not exceeding 2,39.1 billion won: 2,29.1 billion won in the amount of the reserve funds for proper purpose business: Interest cost of KRW 240.3 billion in the amount of the reserve funds for proper purpose business for proper purpose business: 2,35.9 billion won in the calculation of losses: No amount exceeding 4.4 billion won in the calculation of losses:

D. On May 15, 2014, the Defendant issued a rejection disposition against the Plaintiff’s request for correction (hereinafter “instant rejection disposition”) on the ground that “the Plaintiff is a non-profit corporation established under the Korea Local Administration Mutual Aid Association Act, and is engaged in mutual aid business for the purpose of promoting mutual benefits among its members and mutual aid, etc. according to the purpose of its establishment, and the additional dues, which are expenses paid for the proper purpose business sector, shall not be treated as losses of the profit-making business sector.”

E. The Plaintiff appealed and filed an appeal with the Tax Tribunal on July 29, 2014, but was dismissed on April 14, 2016.

[Reasons for Recognition] A without dispute, Gap evidence 1 through 10, Gap evidence 23-2, the purport of the whole pleadings

2. Whether the rejection disposition of this case is legitimate

A. Summary of the parties' assertion

1) Plaintiff

A) The primary argument

Since the surcharge of this case is paid to members in return for the payment of contributions from members, the surcharge of this case is in the nature of the cost of financing, and the surcharge to be paid by the plaintiff is in the relation of operating profit of the charge and the surcharge is in the relation of responding to profit and expense. Thus, the surcharge of this case constitutes the plaintiff's profit and loss of profit

Therefore, the rejection disposition of this case made on different premise is illegal.

B) Preliminary assertion

The payment of a surcharge does not constitute a type of profit-making business [the payment of a certain amount by requiring the occurrence of an accident or slope, which is a non-profit-making business under Article 2 (1) 5 (b) of the Enforcement Decree of the Corporate Tax Act] of the mutual aid business (the nature of the insurance). It is merely a interest paid in return for the deposit of charges. Therefore, it should be included in the loss of profit

If the payment of the surcharge constitutes a benefit business, the charge management business falling under the "Fund Creation Project" (non-profit-making business under Article 2 (1) 5 (b) of the Enforcement Decree of the Corporate Tax Act) cannot also be deemed a profit-making business, and thus, it is unlawful to levy a profit from the charge management business as a profit-making business.

2) Defendant

A) The payment of the instant surcharge itself has the same nature as the Plaintiff’s dividends to its members, so it cannot be deemed as expenses for profit-making business. Of the amounts appropriated as reserves for the proper purpose business under the Corporate Tax Act, only within the maximum amount can be recognized as losses pursuant to special cases under the Corporate Tax Act. Even if the instant surcharge payment costs constitute accounting expenses, the payment of the instant surcharge is similar to the “distribution of profits” to its members, and the “capital transaction” such as the disposal of earned surplus is not included in deductible expenses under the Corporate Tax Act, so it cannot be deemed as deductible expenses under the Corporate Tax Act.

B) In accordance with the Corporate Tax Act and subordinate statutes, in the case of interest paid by a corporation, if the interest corresponding to the period which has already lapsed is appropriated as the loss for the concerned fiscal year in the settlement of accounts, it shall be deemed as the loss for the fiscal year of the appropriated fiscal year, and it shall not be recognized as the loss because the amount of the instant penalty was

C) In the past, the Plaintiff as a nonprofit corporation has appropriated the reserve fund for essential business as deductible expenses in order to promote the stability of the lives of its members and the promotion of their welfare. The Plaintiff’s assertion that the amount of the surcharge should be included in the deductible expenses as interest expenses after the business year 2010, which has increased to the extent that it exceeds the limit of the reserve fund for essential business, constitutes a behavior objectively contradictory to the Plaintiff who is liable for tax payment, the behavior is attributable to the Plaintiff’s severe faith, and the Defendant’s trust is worth being protected. Therefore, the Plaintiff’s assertion is contrary

D) Even if the instant surcharge is recognized as deductible expenses, there is no error in the calculation of the instant surcharge inasmuch as only the portion of the interest cost, such as the charge, which is the principal character, cannot be specified among the instant surcharge, and thus, it cannot be included as deductible expenses as interest expenses.

B. Relevant statutes

The entries in the attached Table-related statutes shall be as follows.

C. Determination

1) Deductible expenses for profit-making business of a nonprofit corporation

A) The former Local Administration Mutual Aid Association Act (amended by Act No. 11491, Oct. 22, 2012; hereinafter “Mutual Aid Association Act”) provides that a person who intends to become a member because he/she is a public official working in a local government or a person retired from his/her position who is eligible to become a member of the Mutual Aid Association while working for the local government, etc., or a person who is prescribed by the articles of association shall submit an application for membership, obtain the eligibility on the date when the first contribution is paid, and the member shall pay the first contribution and cooperate in the operation of the Mutual Aid Association. The member shall have the right to use the benefits and the rent and the welfare facilities as prescribed by the articles of association, and if he/she loses his/her eligibility or withdraws from the Mutual Aid Association upon its application, the Mutual Aid Association shall be entitled to claim the return of the contribution, etc. paid by him/her as prescribed by the articles of association (Article 7); the Mutual Aid Association shall conduct profit-making business (Article 16) to the extent necessary to achieve its objective.

B) Meanwhile, Article 29(1) of the Corporate Tax Act provides that where a non-profit corporation appropriates reserve funds for proper purpose business to its deductible expenses for each fiscal year in order to spend the reserve funds for proper purpose business of the corporation, it shall be included in deductible expenses within a certain limit. Paragraph (3) 4 provides that where the reserve funds for proper purpose business is not used for proper purpose business by the date on which five years elapse from the end of the fiscal year in which the reserve funds for proper purpose business are appropriated to deductible expenses, the balance shall be included in the gross income of the fiscal year in which the relevant cause occurs. Such provision provides that the reserve funds for proper purpose business shall not be included in deductible expenses even before the amount appropriated as reserve funds for proper purpose business is appropriated as deductible expenses, instead of allowing the non-profit corporation to include the reserve funds for proper purpose business in deductible expenses, the reserve funds for proper purpose business shall be included in deductible expenses within five years from the end of the fiscal year in which the reserve funds for proper purpose business is appropriated as deductible expenses (see Supreme Court Decision 2016Du59249, Mar. 9, 2017).

C) In light of the above provisions of the statutes and the purport of the reserve fund for proper purpose business, where a non-profit corporation, a mutual aid association runs a profit-making business with the charges, etc. received from its members and pays the surcharges collected by adding them to the amount equivalent to the charges paid by its members, even if such surcharges are paid for a profit-making business operated by the mutual aid association for the purpose of carrying out the proper purpose business (Article 16(2) of the Mutual Aid Association Act), since corporate tax is imposed on income accrued from profit-making business (Article 16(2) of the Mutual Aid Association Act), it should be recognized as losses related to profit-making business if expenses incurred in relation to the profit-making business of the mutual aid association, which is a non-profit corporation. On the contrary,

2) Whether the instant surcharge is a cost corresponding to the Plaintiff’s profit-making business

A) The principle of response to profit and expenses refers to the calculation and indication of realizing profit and the cost, expenses, and losses related to the profit-making in the form of or on a fixed basis. The purpose of this principle is to prevent distortion of awareness of profit and expenses by allowing the same transaction or case to simultaneously recognize profit and expenses. Although the Corporate Tax Act does not explicitly provide for it, it is supported by Article 14(1) of the Corporate Tax Act, which provides that “the income of a domestic corporation for each business year shall be the amount calculated by deducting the total amount of losses belonging to the business year from the total amount of earnings belonging to the business year concerned.” The method of recognizing expenses in accordance with the principle of response to profit and expenses is the method of recognizing the expenses when the direct causal relationship with the acquisition of profit-making (e.g., cost of sales or sales) is established, but it is reasonable and systematic allocation method (e., depreciation costs, etc. of tangible assets), and where the cost-making activity is deemed to have contributed to the profit-making activity for a certain period of time, it can not be known that the fixed asset is not immediately acquired or any other asset.

On the other hand, a profit-making corporation has equity capital and other capital by raising funds for profit-making business. Where shareholders raise capital, dividend income shall be deducted within a certain scope for adjustment of double taxation; where other persons raise capital, corporate tax shall be imposed on the creditor as to the amount obtained by deducting the interest paid; and where a non-profit corporation runs a profit-making business with contributions from its members and distributes part of the profits to its members, if such contributions meet certain requirements, it may be deemed that they are used for proper purpose business if they constitute consumption of non-profit corporations, and such contributions constitute additional deductible expenses such as proper purpose business for profit-making business. If a partner of a non-profit corporation has the nature of a loan that is a non-profit corporation, it shall be deemed that the non-profit corporation receives interest income from its members in proportion to the amount of interest paid from profit-making business, and thus, it shall be deemed that the non-profit corporation bears corporate tax in proportion to the amount of interest paid by its members who are members of a non-profit corporation under the income tax law.

In addition, even if there is a special penalty in accordance with the fund management performance among the amounts paid by the members, it is merely a method of determining the price for the original capital. Even if there are only the principal and no additional penalty in the financial statements of a non-profit corporation, or there are only the additional penalty in which it is impossible to verify some principal, etc., the non-profit corporation has a conflict of interest with the members in relation to the interest paid, and there is no possibility of false inclusion in the amount. If there is a lack of verification of the appropriateness of financial statements through external audit, it shall not be deemed that it is impossible to believe the entire data submitted by the taxpayer, or that there is no possibility of mistake, unless there is any special circumstance, such as the fact that the taxpayer is not the principal, or that there is no possibility of mistake.

Therefore, it is reasonable to view that, when a non-profit corporation returns charges received from its members under certain conditions, such as the retirement, cancellation, or maturity of its members and pays additional charges calculated according to the rate of the member's contribution, payment period, and agreement, if such additional charges are recognized as interest expenses, the interest expenses may be included in the deductible expenses for profit-making business of the mutual-aid association.

B) In full view of the purport of the entire pleadings, the following facts are recognized in the statements in Gap evidence Nos. 3, 13, 15, 21, 27, 28, and 29.

(1) The Plaintiff has invested in various financial products, real estate, etc. with financial resources, such as the retirement benefit charge, Han-man’s deposit charge, etc. received from its members (as of December 31, 2010) and paid a surcharge to its members.

(2) In the case of retirement benefits, a person who is entitled to join the Plaintiff as a member applies for membership and pays the first contribution (Article 5 of the Articles of Incorporation); a member bears the obligation to pay contributions and acquires the right to receive benefits and other benefits (Article 6(1) and (2) of the Articles of Incorporation); a member selects the previous contribution units within 100 units per month (Articles of Incorporation Articles of Incorporation Articles 36 and 37); and a member shall pay the contribution amount of KRW 10,00 per month (Articles of Incorporation Articles of Incorporation Articles of Incorporation 36 and 37); a member shall receive retirement benefits calculated by adding an amount calculated by adding an amount calculated by the retirement benefit rate to the contributions paid until he/she retires (Article 26(2)1(a) of the Articles of Incorporation; Article 7(1) of the Regulations on the Payment of Mutual Aid Benefits); and a member shall receive retirement benefits applying the retirement benefit rate of an ex officio (Article 31 of the Articles of Incorporation; Article 7(2)2, 34 and (2) of the Articles of Incorporation).

In the case of Han-man's Deposit Money, a member of the plaintiff or a person who was a member of the plaintiff becomes a member of Han-man's Deposit Money (Article 26 (2) 3 of the Articles of Incorporation, Articles 4 and 5 (1) of the Korea-man's Deposit Benefits Rules). If a member makes a lump sum payment with one million won within the limit of 50 million won from 1 million won to 500 million won (Articles 6 and 7 of the Korea-man's Deposit Benefits Rules). In the case of maturity payment, the charge and an additional amount are to be paid en bloc at the maturity payment date. In this case, the additional rate is higher than the average interest rate of one-year fixed deposit with the maturity of the upper three commercial banks plus 1.0% P in the order of the International Bank's equity capital ratio (Article 8 (1) 3 and 15 (1) of the Korea-man's Deposit Benefits Rules), and Article 12 of the Korea-man's Deposit Benefits Rules is added to the early cancellation payment rate (Article 2).

(3) In the year of 2010, the Plaintiff accounted for the total amount of KRW 3,57,210,520,351 as its capital, and the total amount of KRW 1,134,870,682,730 as its debt (the financial status table).

(4) The Plaintiff’s amount of reserve requirement transferred for business year 2010 shall be KRW 240,392,668,398 (including the instant additional amount) calculated by subtracting KRW 1,134,870,682,730 from the balance of reserve requirement as of the end of the business year 2010 at the same time (the balance of reserve requirement set aside for the payment of additional dues to members) from the total amount of additional dues as of the end of the business year 2010 (Cumulative total of additional dues to be paid to members at the time). The amount of reserve requirement transferred is reflected in the Plaintiff’s income statement in the business year 2010.

C) Comprehensively considering the following circumstances, the Plaintiff established an amount calculated by applying a certain rate to the instant surcharge in accordance with the prior agreement regardless of its operation performance as consideration for the deposit of the instant surcharge. As such, the method of calculating the instant surcharge is essentially similar to the payment of interest on the loan, regardless of its operation performance or possible disposal profit, and the amount calculated by applying the predetermined rate to the amount and the payment period for the instant surcharge is calculated as the instant surcharge. As such, it appears to be different from the dividend of the instant surcharge. ② The instant surcharge is merely subject to interest income tax pursuant to subparagraph 12 of Article 16 of the Income Tax Act, etc. as consideration for the use of money, and is not subject to dividend income. As such, from the Plaintiff’s perspective of paying the instant surcharge, it is logical to view that the instant surcharge amount constitutes interest expense, and is different from the Plaintiff’s dividends for the instant member (the same shall apply in consideration of the fact that the amount of surcharge is calculated according to the agreed rate regardless of its operation performance). ③ The Plaintiff’s method of operating the instant surcharge should be deemed to be different from the Plaintiff’s investment in real estate.

D) Meanwhile, where a nonprofit corporation operates a profit-making business, Article 113(1) of the Corporate Tax Act provides that the separate accounting of assets, liabilities, and profits and losses shall be made separately from those belonging to the pertinent profit-making business and those belonging to other business than the profit-making business. Article 113(4) of the Corporate Tax Act and Article 156 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010) provides that where assets belonging to other nonprofit corporations are disbursed or transferred for profit-making business under Article 113(3) of the Enforcement Rule of the Corporate Tax Act and Article 76 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010), the value of assets based on the market price of the relevant assets shall be accounted for as capital. However, even if the charges are accounted for as capital for profit-making business, it cannot be deemed that the Plaintiff did not have any obligation to pay for the Plaintiff’s capital and additional charges.

3) Time when interest expense is recognized as deductible expenses and whether it is appropriated as deductible expenses

Article 70 (1) 2 of the Enforcement Decree of the Corporate Tax Act, upon delegation of Article 40 (2) of the Corporate Tax Act, provides that "in the case of interest and discount paid by a corporation, the business year in which losses accrue shall be the business year in which the date falling under the receipt date under Article 45 of the Enforcement Decree of the Income Tax Act (Article 45 (9) of the Enforcement Decree of the Income Tax Act provides that in the case of excess refund of a workplace mutual-aid association, the date of payment of excess interest and additional refund interest pursuant to the agreement shall be the receipt date of interest income): Provided, That in the settlement of accounts, where interest and discount on the period that has already lapsed is appropriated as deductible expenses for the business year concerned, it shall be deemed as deductible expenses of the calculated business year." Therefore, where a nonprofit corporation pays an excess refund of a workplace mutual-aid association, the interest paid may be included in deductible expenses on the date of actual payment, but if such interest is appropriated as deductible expenses for the

Meanwhile, matters for report adjustment must be reflected under tax-related Acts, so even if the corporation did not reflect them as deductible expenses at the time of settlement adjustment, it should be recognized as deductible expenses. However, in the case of matters for settlement adjustment, the corporation should choose whether the corporation would be recognized as deductible expenses in advance or as deductible expenses at the time of settlement adjustment. Thus, if a non-profit corporation does not reflect deductible expenses, which are matters for settlement adjustment, in the settlement of accounts, in the settlement of accounts, even if the non-profit corporation did not reflect other items that are matters for settlement adjustment, it can be recognized as deductible expenses only at the time of settlement settlement determination. Thus, even if the non-profit corporation did not reflect the amount of settlement adjustment in the settlement of accounts, it cannot be replaced by the reflection of new items for deductible expenses, which are not reflected in the settlement of accounts at the beginning settlement of accounts, within the scope of the denial amount, unless there are special circumstances. However, if a corporation misleads the legal evaluation of items for settlement adjustment of deductible expenses and reflects items that are different from the items for settlement adjustment of accounts, it can be deemed as deductible expenses within the scope of legitimate matters (see Supreme Court Decision 2013Du4.

Therefore, even if a non-profit corporation erroneously appropriated the interest corresponding to the excess repayment of a workplace mutual-aid association that is already paid to its members as the reserve for its proper purpose business, there is a conflict of view as to whether a non-profit corporation should regard the amount corresponding to the period already expired as the interest paid or as the amount to be used for the proper purpose business of the workplace mutual-aid association that is already paid to its members, and these two settlement adjustment items are the same as the specific deductible expense items in which the non-profit corporation intends to recognize the amount to be paid to its members as deductible expenses, and the same purpose is identical, substance is similar, and the non-profit corporation originally intends to reflect as deductible expenses. Thus,

According to the above facts, from the total amount of the surcharge at the end of the 2010 business year which the Plaintiff recognized as the principle of accrual, the amount calculated by subtracting the balance of the reserve requirements up to that time from the total amount of the surcharge at the end of the 2010 business year until the time (including the surcharge in this case) was transferred to the account of non-profit corporation reserve funds. The Plaintiff can find that the amount of the surcharge in this case was reflected as the expense item in the Plaintiff’s profit and loss statement finalized through the settlement of accounts for the 2010 business year. Thus, the amount of the surcharge in this case can be deemed to have been appropriated as the unpaid interest corresponding to the 2010 business year based on the principle of accrual. Thus, the amount of the surcharge in this case should be recognized as losses pursuant to the proviso of Article 70(1)2 of the Enforcement Decree of the Corporate Tax Act (the defendant's assertion to the effect that the amount equivalent to the surcharge in this case constitutes the cumulative amount of the surcharge in this case to be paid at the time of temporary withdrawal from the office. However, the defendant's assertion to the above 2010137.

4) Whether the plaintiff's assertion violates the principle of good faith

The principle of trust and good faith related to the law of substantial taxation, which strongly acts under the principle of legality, shall be applied only when it is deemed necessary to protect specific trust even if the principle of trust and good faith is sacrificeed to the principle of trust and good faith. Thus, in order for taxpayers to apply the principle of trust and good faith, there is an objectively contradictory behavior, the behavior was derived from the taxpayer's severe faith, and the tax authorities' trust caused thereby should be protected (Supreme Court Decision 2006Du14865 Decided April 23, 2009).

In addition to the facts acknowledged earlier, it seems that the Plaintiff’s appropriation of member trust funds to deductible expenses within the limit of the reserve fund for the proper purpose business without treating them as deductible expenses for the proper purpose business within the limit of the reserve fund for the proper purpose business is in accordance with the tax practice of the tax authority that recognized only the amount equivalent to the additional funds for the proper purpose business as deductible expenses. Before the business year 2010, the amount equivalent to the additional funds is not included in deductible expenses as interest expenses, and even if it is included in deductible expenses as the amount of the proper purpose business, there is no big difference in the business income calculation of the Plaintiff’s profit even if it is included in deductible expenses, so it seems that the Plaintiff did not assert that the additional funds should be included in deductible expenses as interest expenses. Therefore, it is difficult to view that the Plaintiff’s assertion in this case after the business year 2010 is objectively contradictory or due to the Plaintiff’s act of worship.

(v)Calculation of the amount of legitimate tax;

If Gap evidence No. 26 added the purport of the whole argument, the plaintiff completed a review of appropriateness of the financial statements of 2010 year by the external audit of ○○ Accounting Corporation, and the plaintiff was found to have filed a tax return based on the financial statements that received external audit. The plaintiff is found to have kept separate accounts of the members' shares in the business year 2010 as capital and the reserve requirements (the amount accumulated for the payment of additional dues) as mentioned above.

The instant surcharge shall be calculated based on the amount on the financial statements verified through external audits after the Plaintiff’s settlement of accounts and, in the absence of objective data to recognize any error in such calculation, it cannot be deemed that there is an error in the calculation of the instant surcharge.

Therefore, the Plaintiff’s legitimate corporate tax amount for the business year 2010 shall be KRW 13,462,127,069 as listed below, and the initial determined tax amount shall exceed KRW 374,972,628 as stated below, and the Plaintiff’s rejection disposition rejecting the reduction of KRW 374,972,62,628 as to corporate tax for the business year 2010 is unlawful (it is against the Defendant’s assertion that the amount of the surcharge was erroneous in the calculation of the amount of the surcharge in this case, as so argued by the Defendant, even though the amount of the surcharge in this case is erroneous in the calculation of the amount of the surcharge in its own account as to the deductible expenses, the amount of the surcharge in this case should be recognized as deductible expenses, on the premise that the Defendant did not recognize the surcharge in this case, and thus, the amount of the surcharge in this case shall be revoked by including the initial determined tax amount and the amount of the surcharge in Korea, and the amount of the surcharge in this case shall not be calculated as deductible expenses.

A person shall be appointed.

6) Sub-decisions

Since the instant disposition is unlawful, it should be revoked (as long as the Plaintiff’s primary assertion is accepted, it shall not be determined as to the conjunctive assertion).

3. Conclusion

Therefore, the plaintiff's claim is reasonable, and it is decided as per Disposition.

[Attachment]

Judges Hah Tae-hun (Presiding Judge)

(1) KRW 4,444,510,178, except for the reserves for retirement benefits and the reserve for deposit of Han-man’s money, is the total sum of death benefits, recuperation benefits, disaster compensation benefits, family death benefits, childbirth benefits, and special additional dues.

2) In such cases, 1,211,891,270 won (240,392,668,398 - 239,180,777,128) exceeding the limit was included in deductible expenses as reserve funds for essential business purposes are included in deductible expenses in total within the limit, and as such, 1,211,891,270 won (239,180,77,128) exceeding the limit was included in deductible expenses at the initial return.