Gangwon-do Co., Ltd. (Law Firm Jinjin, Attorneys Gyeong-sik et al., Counsel for the defendant-appellant)

Head of Seocho District Tax Office (Law Firm Dcaro temperature, Attorneys Seo Jong-ho et al., Counsel for the plaintiff-appellant)

April 27, 2016

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of imposition of KRW 12,980,000,000 for the business year of 2008 against the Plaintiff on February 13, 2013 is revoked.

1. Details of the disposition;

A. On June 24, 2008, Gangnam Co., Ltd. (hereinafter referred to as "Granchi") purchased the purchase price of KRW 468.66 billion ( KRW 651,586.041 per share) and KRW 100 ( KRW 719,200 per share) of a foreign corporation (the location of the head office shall be Malaysia; hereinafter referred to as hereinafter referred to as Malaysia) in a foreign corporation on June 24, 2008, and paid KRW 58 billion in a CD down payment on the same day (hereinafter referred to as "the first contract of this case").

B. Around September 29, 2008, HSM entered into a contract with the CDL and the initial purchase price of KRW 4,1168,680,692 ( KRW 572,331.31 per share) with the content that the date on which the settlement of purchase price was completed is changed to November 28 of the same year (hereinafter “instant contract”) and paid the down payment of KRW 1 billion in installments on October 24 of the same year and on November 31 of the same year.

C. The Plaintiff succeeded to the status of a party to the instant secondary contract on November 26, 2008, but failed to pay the remainder of the purchase price to the CDA by the 28th day of the same month, which is the date on which the settlement of purchase price was completed.

D. Meanwhile, there was a provision to the effect that the contract of this case was impossible to return the down payment, and in the contract of this case, there was a provision to the effect that the contract of this case was confiscated by the seller's default as a penalty for penalty.

E. The Defendant, according to the instant contract Nos. 1 and 2, constitutes a penalty paid in the Republic of Korea due to the cancellation of a contract, among the domestic source income of the CD, as a sum of KRW 59 billion, which is the sum of the down payment amount last reverted to the CEL pursuant to each of the instant contract, but the Plaintiff did not withhold corporate tax from the CDA and paid corporate tax, and on February 13, 2013, issued a disposition to correct and notify the Plaintiff of the corporate tax of KRW 12.98 billion attributed to the business year 2008 (hereinafter “instant disposition”).

F. On May 27, 2013, the Plaintiff filed an objection with the Seoul Regional Tax Office on May 27, 2013, but received a decision of dismissal on July 11 of the same year. On October 18 of the same year, the Plaintiff filed an appeal with the Tax Tribunal, but received a decision of dismissal on July 9, 2015.

[Reasons for Recognition] No dispute exists, each entry of Gap evidence Nos. 1 through 6 (including paper numbers, hereinafter the same shall apply) and the purport of the whole pleadings.

2. Whether the disposition is lawful;

A. The plaintiff's assertion

1) Establishment of withholding obligation

According to Article 21 of the Framework Act on National Taxes and Article 98 of the Corporate Tax Act, a withholding obligation is established for the corporate tax of a foreign corporation withheld at source when the amount of income is paid. The Plaintiff did not receive a down payment on the CD, but did not receive a refund, and the penalty was paid. Therefore, the Plaintiff’s withholding obligation on the CDL corporate tax is not established. Therefore, the instant disposition is unlawful.

2) Scope of withholding obligation

Even if not, the Plaintiff merely succeeded to the status of a party to the instant contract No. 2. Therefore, the Plaintiff is not obligated to withhold corporate tax and pay corporate tax for the penalty incurred under the instant contract No. 1.2. Therefore, the part exceeding corporate tax and additional tax for the penalty of KRW 1 billion among the instant disposition is unlawful.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Establishment of withholding obligation

Article 93 subparag. 11 (b) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) provides that “income prescribed by Presidential Decree as penalty or compensation paid in the Republic of Korea” shall be one of the source income of a foreign corporation. Article 132(10) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22951, Jun. 3, 201) provides that “income prescribed by Presidential Decree” under Article 93 subparag. 10 (b) of the former Enforcement Decree of the Corporate Tax Act refers to the value of money or other goods paid in excess of compensation per se for payment under the original terms and conditions of the contract, regardless of its title, if the contract is paid in breach or termination of the contract on property rights to the foreign corporation, and the domestic place of business and the domestic place of business are not substantially related to the domestic place of business and the transferee is liable to pay the penalty or penalty for breach under Article 93 subparag. 11 of the former Corporate Tax Act for the same business year. 200.

A) Article 93 Subparag. 11(b) of the former Corporate Tax Act regards penalties or indemnities paid in Korea as the source income of a foreign corporation as the subject of corporate tax, and does not impose any restrictions on the method of payment.

B) In a case where the down payment is replaced by penalty or indemnity pursuant to an agreement between the parties, the transferee would be liable to collect part of the amount paid as the down payment again. However, it would be reasonable for the parties to the contract to bear the liability for it as the corporate tax. In addition, the transferee who entered into a contract with a foreign corporation would also be able to enter into an agreement, such as reserving part of the down payment in advance in preparation for the case of cancellation due to the breach of the contract. Furthermore, barring any other special circumstances, the transferee who was confiscated the down payment may claim the return of the part of the down payment to the foreign corporation and execute it. However, the tax authority, which did not have the right to impose or collect the corporate tax on the source income, is virtually impossible to impose or collect corporate tax on the foreign corporation, unless the foreign corporation has any property in the Republic of Korea. Accordingly, it cannot be deemed that the transferee is the withholding agent where the down payment is replaced by penalty or indemnity, and thus, it does not contravene the essence of the taxation convenience and the tax collection system.

C) In general, the agreement to confiscate down payment when one party violates the contract, in principle, in a case where the contract is rescinded due to the breach of the contract by one party, the other party shall return the down payment to the original state following the rescission of the contract, and the other party shall compensate the other party for damages arising from the rescission of the contract. However, by an agreement to confiscate the down payment in advance, it is only meaningful to omit the unnecessary process of returning the down payment and paying the damages by hand.

D) If it is deemed that the original taxpayer did not have the obligation to withhold corporate tax on the ground that the down payment was not paid to the original taxpayer even though the down payment was confiscated according to the agreement to confiscate down payment, this is more so in light of the fact that the nature of the taxation claim depends on the intent of the parties concerned, and thus unfair, in particular, the withholding agent has the status of exercising the right to collect tax on behalf of the State.

E) The Plaintiff is exempted from withholding tax on the non-resident’s income. As such, the Plaintiff asserts that the meaning of the “payment” should be interpreted identical to or analogically applied to the Income Tax Act in this case, and thus, Articles 127(1)5(b) and 21(1)10 of the former Income Tax Act (wholly amended by Act No. 9897, Dec. 31, 2009) stipulate that where the down payment, among the penalty paid due to breach or termination of a contract, is replaced by penalty or indemnity, the resident’s withholding tax on the non-resident’s income should be exempted. However, this is only a policy exception provision to relieve the difficulty of performing the obligation ordinarily experienced by the withholding agent, and the purport of the “payment” should not be deemed to be the requirement for the establishment of withholding tax, and even if the down payment is replaced by forfeiture of the down payment, the Plaintiff’s interpretation and interpretation of the said provision should not be accepted by analogy 2015 through the application of the said Act without the principle of no taxation without law.

2) Scope of withholding obligation

A) Considering the following circumstances, it is reasonable to view that both the parties to the First and Second Contracts are the Plaintiff, taking into account the overall purport of the entries and arguments in the evidence Nos. 10 through 20 and the overall purport of the pleadings.

① The principle of substantial taxation prescribed in Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010) refers to a person to whom the actual income, profit, property, transaction, etc. belongs, if there is a separate person to whom the actual income, etc. belongs, unlike the nominal person to whom such income, profit, property, transaction, etc., belongs, the person to whom the actual income, etc., belongs, is not the nominal person to whom the nominal person is liable for tax payment (see, e.g., Supreme Court Decision 201

② On June 24, 2008, the date of the instant first contract, the Plaintiff borrowed KRW 72 billion from the KB investment securities, and remitted KRW 58 billion to the KMC account, and on the same day, JM paid the said KRW 58 billion to the CD as the down payment under the instant first contract.

③ As of the business year 2008, the Plaintiff’s major shareholders were Nonparty 1 and Nonparty 2, who is his spouse, and Nonparty 1 and Nonparty 2, whose total share ratio was 82%, and the Plaintiff’s total share ratio was 80%. In addition, at the time of the first and second contract, Nonparty 1 was Nonparty 1, the representative director of Gangnam A, who was Nonparty 1, and Nonparty 1 was the Plaintiff’s director at the time of the first contract of this case, and was appointed as the Plaintiff’s representative director on June 30, 2008, six days after the date of the first contract of this case. In other words, it is the same as the composition of the Plaintiff’s major shareholders and executive officers.

④ In the instant contract Nos. 1 and 2, there is a provision that the Plaintiff may transfer the contractual status to the Plaintiff by giving written notice of the CDA’s CD. As such, the Plaintiff was expected to succeed to the contractual status from the beginning, and actually succeeded to the contractual status of the Plaintiff. Nevertheless, the Plaintiff did not enter into a contract with the Plaintiff, which entered into an agreement with the Plaintiff to allow him to succeed to the contractual status after the completion of the contract, and did not provide any explanation as to the reason for the actual succession.

B) Even if the actual parties to the instant contract Nos. 1 and 2 are IMC, considering the aforementioned facts, the evidence, and the purport of the entire pleadings, taking into account the following circumstances acknowledged by comprehensively taking into account, the instant contract No. 2 is a sanction following the nonperformance of the instant contract, which is a contract for adding and increasing the down payment of the instant contract and changing the date of settlement of the purchase price of the instant contract No. 1. 2. The Plaintiff is deemed to have succeeded not only to the status of the parties under the instant contract No. 2 but also to the status of the parties under the instant contract No. 1. 1. Therefore, it is reasonable to deem that the down payment of the instant contract is paid as penalty on the date of settlement of the purchase price of

① The sales price of the instant 1 contract is KRW 468.62,068,692 ( KRW 651,586.041 per share) and the down payment was KRW 58 billion. The down payment was KRW 4,11.68 million ( KRW 572,331.31 per share) and the down payment was KRW 1.00 billion. The down payment of the instant 2 contract was approximately 12% of the sales price, whereas the down payment of the instant 2 contract was more than 0.2% of the sales price of the instant 1 contract. In addition, the price per share of the instant 2 contract is more discounted than that of the instant 2 contract, and this is no more than that of the instant 1 contract, taking into account that the instant 2 contract was concluded due to reasons attributable to D.M., the parties to the instant 2 contract was cancelled, and the down payment was more than that of the instant 1,000,000,000 won at the time of the instant contract.

② In addition to partially increasing the purchase price and changing the date of completion of settlement of the purchase price into November 28, 2008, the second contract of this case is the same as the first contract of this case.

③ Under the 1.1 and 13.2 of the instant contract, there are grounds provisions allowing the parties to change the date of the completion of settlement of purchase price or the date of performance of their obligations by written agreement. Accordingly, the rescission agreement on the instant 1 contract on the date of the instant 2 contract (Evidence A 4-1) appears to have been prepared.

C) Therefore, since the Plaintiff paid a penalty of 59 billion won, it is reasonable to deem that the Plaintiff has a duty to withhold corporate tax on the whole penalty paid to the CDA.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.

[Attachment]

Judges Kim Byung-soo (Presiding Judge) and Park Jong-chul