Whether interest on bank loans can be deducted as necessary expenses when calculating transfer margin.

Interest on loans from necessary expenses deductible from the transfer value of an individual's transfer income shall not be deducted because it is not listed in the Income Tax Act.

Article 97 of the former Income Tax Act (Calculation of Necessary Expenses in Transfer Income)

1. The plaintiff's appeal is all dismissed.

2. The costs of appeal are assessed against the Plaintiff.

The judgment of the first instance shall be revoked. The imposition of capital gains tax of KRW 11,516,580 against the plaintiff on July 8, 2005 by the defendant shall be revoked.

1. Quotation of judgment of the first instance;

The reasons why a member should explain this case are as follows, except for adding the following judgments to the matters newly asserted by the plaintiff in the trial, and therefore, it is identical to the reasons for the judgment of the court of first instance. Thus, this is cited in accordance with Article 8(2) of the Administrative Litigation Act and Article 420 of

2. Additional matters to be determined;

A. The plaintiff's assertion

The plaintiff asserts that the disposition of this case by the defendant is unlawful in violation of Article 11(1)(the principle of equality), Article 23(1)(the guarantee of property rights), and Article 37(2)(the principle of excessive prohibition) of the Constitution.

B. Determination

(1) The essence of capital gains tax is capital gains, i.e., an increase in the objective value of the owned asset, and capital gains tax, which is subject to taxation, is a profit tax imposed on the profits earned from the production factors owned by one of them by liquidation and taxation of the increased profit during the ownership period as an opportunity to leave the owner’s loss, by nature, and in view of the purport that Article 95 of the former Income Tax Act, which is a relevant legal provision, provides for the amount obtained by deducting necessary expenses from the transfer value, the necessary expenses to be deducted from the transfer value shall be determined by deducting the necessary expenses from the transfer value. In light of the purport that Article 97 of the former Income Tax Act provides that the necessary expenses to be deducted from the transfer value shall be determined by the cost of acquiring the transferred asset corresponding to the transfer value due to the nature of Article 97 of the former Income Tax Act, the installation cost, improvement cost, and capital expenditure and transfer cost incurred in increasing the objective value of the asset

(2) Therefore, the Defendant’s disposition of this case is lawful to impose capital gains tax calculated without deducting from capital gains as necessary expenses the interest expenses of loans, which are not charged as necessary expenses from the transfer value under each subparagraph of Article 97(1) of the former Income Tax Act and Article 163 of the former Enforcement Decree of the Income Tax Act, on the Plaintiff. This cannot be deemed to violate the constitutional principles as asserted by the Plaintiff

4. Conclusion

Therefore, the judgment of the first instance court is legitimate, and the plaintiff's appeal is dismissed. It is so decided as per Disposition.

(Court of First Instance)

Seoul Administrative Court Decision 2006Gudan2018 decided July 18, 2006

The plaintiff's claim is dismissed.

Litigation costs shall be borne by the plaintiff.

The defendant's disposition of imposition of capital gains tax of 11,516,580 won for the year 2004 against the plaintiff on July 22, 2005 (the amount of KRW 11,515,580 for the written complaint seems to be a clerical error) shall be revoked.

1. Details of the disposition;

가. 원고 2002. 7. 20. 신○○로부터 ○○시 ○○구 ○○동 ○○번지 ○○○○○아파트 103동 609호 38평형 아파트(이하 '이 사건 아파트'라 한다)를 3억원에 매수하기로 계약하되 매매대금의 지급은 신○○이 이 사건 아파트를 담보로 소외 ○○화재해상보험주식회사(이하 '○○화재'라 한다)로부터 대출받은 2억 5천만원을 원고가 인수하고 나머지 대금 5,000망눤을 지급하기로 약정하고 이 사건 아파트에 대하여 2002. 8. 23. 원고의 명의로 소유권이전등기를 경료하였다.

B. On February 16, 2004, Plaintiff 335,000 won transferred the apartment house of this case to Kim○○, and on May 31, 2005, Plaintiff 29,527,63 won from September 25, 2002 to February 16, 2004 (hereinafter “the interest payment of this case”) and KRW 36,122,057, including acquisition tax and registration tax, were included in the necessary expenses and filed a final return of capital gains tax. Accordingly, on July 22, 2005, the Defendant rendered a final return of capital gains tax by deeming that the interest payment of this case paid to the Plaintiff for the said loan does not constitute necessary expenses for transferred assets as stipulated in the relevant Acts and subordinate statutes, and thus, rendered the disposition of this case imposing capital gains tax as stated in the purport of the claim.

[Reasons for Recognition: Evidence No. 1, Evidence No. 2-1, 2, A3 through 15, Evidence No. 16-1, 2, A17, 18, Evidence No. 1-1, 2, and 3, and the purport of the whole pleadings]

2. Whether the disposition is lawful;

A. The plaintiff's assertion

The Plaintiff acquired a seller’s financial institution’s loan from the seller in lieu of the payment of the purchase price at the time of the acquisition of the apartment house of this case, and disbursed 29,527,633 won as interest on the loan. Although the above interest expense 29,527,633 won is considered as necessary expenses to be deducted from the transfer income, the disposition of this case otherwise reported is not only a violation of the substance over form principle under Article 14(2) of the Framework Act on National Taxes and double taxation under Article 16(1) of the Framework Act on National Taxes, but also a violation of the substance over form principle under Article 14(2) of the Framework Act on National Taxes and the basic taxation principle under Article 16(1) of the Framework Act on National Taxes. In the interpretation and application of the tax law, the taxpayer’

(b) Related statutes;

former Income Tax Act (amended by Act No. 7289 of Dec. 31, 2004)

Article 97 (Calculation of Necessary Expenses in Transfer Income)

(1) In the calculation of gains on transfer of a resident, the necessary expenses to be deducted from the transfer value shall be as follows:

1. Acquisition value:

(a) In case of assets as prescribed in Article 94 (1) 1 and 2, the standard market price at the time the assets are acquired: Provided, That in case where the assets concerned fall under any of subparagraphs of Article 96 (1), it shall be based on the actual transaction price required for the acquisition of such assets;

(b) In case of assets listed in subparagraphs 3 through 5 of Article 94, the actual transaction price required for the acquisition of the relevant assets;

(c) In case of the proviso of item (a) or (b), where it is impossible to confirm the actual transaction price at the time of acquisition, the price under Article 114 (5);

2. Equipment expenses and improvement expenses determined by the Presidential Decree;

3. Capital expenses as determined by the Presidential Decree;

4. Transfer expenses determined by the Presidential Decree.

(3) The calculation of necessary expenses for capital gains under paragraphs (1) and (2) shall be as follows:

1. Where the acquisition value is based on the provisions of subparagraph 1 (a) (proviso) or (b) of paragraph (1), the necessary expenses shall be the sum of the amount under paragraph (1) 1 (a) (where it falls under paragraph (2), the amount under paragraph (2)) and the amount under subparagraphs 2 through 4 of the same paragraph; and

2. In cases other than subparagraph 1, the necessary expenses shall be the amount calculated by adding the amount under the main sentence of subparagraph 1 (a), (c), (7) or Article 114 (5) to the amount as prescribed by the Presidential Decree by assets.

former Income Tax Act (amended by Presidential Decree No. 18297 of Feb. 28, 2004)

§ 163. Necessary expenses of transferred assets

(1) The term “actual transaction price required for acquisition” in the proviso of Article 97 (1) 1 (a) and (b) of the Act means the sum of the following amounts:

1. Values correspond to the cost for acquisition computed by applying mutatis mutandisArticle 89 (1) (including the discounted debt estimated by the present value under Article 89 (2) 1, but excluding the amount exceeding the market price under the unfair act and calculation);

2. With respect to assets for which acquisition litigation is concerned, the amount of the litigation expenses, compromise expenses, etc. directly required to secure the ownership thereof, excluding those included in the necessary expenses in calculating the income amount of each year paid;

3. In applying subparagraph 1, where the transaction price is determined by adding the amount corresponding to the cost for acquisition under the method of payment under an agreement between the parties concerned, the amount equivalent to the relevant interest shall be included in the cost for acquisition: Provided, That the amount equivalent to the interest additionally accrued due to the delay in the time for payment

(2) Where the discounted debt estimated by present value under Article 89 (2) 1 is included in the cost for acquisition under paragraph (1) 1, if the depreciation amount of the said discounted debt estimated by present value is included or is to be included in the necessary expenses in calculating the real estate rental income, the business income or forest income for each year during the period of holding the transferred

(3) The term “capital expenses as prescribed by the Presidential Decree” in Article 97 (1) 2 of the Act means one of the following subparagraphs:

1. Capital expenses computed by applying mutatis mutandisArticle 67 (2);

2. Where litigation is instituted after the transfer is acquired, the amount of the litigation expenses, the expenses of reconciliation, etc. directly required to secure the ownership, excluding the amount included in the necessary expenses in calculating each income amount of the year such was paid.

3. Expenses paid for the alteration, improvement or convenience of the use of transferred assets;

4. Expenses corresponding to subparagraphs 1 through 3, as prescribed by the Ordinance of the Ministry of Finance and Economy.

(4) The term “capital expenditure as determined by the Presidential Decree” in Article 97 (1) 3 of the Act means one of the following:

1. Capital expenditure amount calculated by applying mutatis mutandisArticle 67 (2);

2. If litigation is instituted after the transfer is acquired, the amount of the litigation expenses, reconciliation expenses, etc. directly required for securing the ownership, excluding those included in the expenses necessary for the calculation of each income amount of the year such was paid.

(5) The term “transfer expenses, etc. prescribed by the Presidential Decree” in Article 97 (1) 4 of the Act means:

1. Expenses paid directly for a transfer of assets falling under any subparagraph of Article 94 (1) of the Act, and securities transaction tax paid under the Securities Transaction Tax Act;

2. In acquiring assets under Article 94 (1) 1 of the Act, the losses accruing from sale by transferring the national housing bonds and land development bonds purchased under Acts and subordinate statutes, etc. to the financial institutions, etc. prescribed by the Ordinance of the Ministry

(6) The term “amount prescribed by the Presidential Decree” in Article 97 (3) 2 of the Act means the amount falling under each of the following subparagraphs:

1. Land:

Individual officially assessed land price, X3/100 (in the case of unregistered transferred assets under Article 104 (3) of the Act; 3/1,000); and

2. Buildings:

(a) Building under Article 99 (1) 1 (c) of the Act (including its appurtenant land):

Value X3/100 (in the case of unregistered transferred assets under Article 104 (3) of the Act; 3/1,000) at the time of its acquisition;

(b) Buildings other than item (a):

Value X3/100 (in the case of unregistered transferred assets under Article 104 (3) of the Act; 3/1,000);

3. Assets under Article 94 (1) 2 (b) and (c) of the Act (excluding the unregistered transferred assets under Article 104 (3) of the Act):

Standard market price X7/100 at the time of its acquisition.

4. Assets other than those of subparagraphs 1 through 3:

Standard market price X1/100 at the time of its acquisition.

C. Determination

According to the above facts, the interest paid in this case is financial interest expenses for acquiring apartment of this case, and Article 97 (1) of the former Income Tax Act provides that the necessary expenses to be deducted from the transfer value in calculating the transfer margin of a resident only shall be the acquisition value (No. 1), facility expenses and improvement expenses (No. 2), capital expenses (No. 3), and transfer expenses (No. 4). Such provision shall be deemed a listed provision. Such provision shall be deemed a listed provision. The interest paid in this case shall not be deducted from the transfer value as necessary expenses deducted from the transfer value under each subparagraph of Article 97 (1) of the former Income Tax Act, Article 163 of the former Enforcement Decree of Income Tax Act, and Article 163 of the former Enforcement Decree of Income Tax Act, which cannot be deducted from the transfer income. Accordingly, the disposition in this case made to the plaintiff who is not a business operator cannot be considered as a double taxation, and it does not violate the principle of substantial taxation and the principle of basis taxation, as well as legitimate disposition that does not go against the principles

3. Conclusion

Thus, the plaintiff's claim of this case seeking revocation on the premise that the disposition of this case is unlawful is dismissed as it is without merit.