Whether an executive bonus constitutes a loss;

Among the performance bonus paid to the executive officers of this case, the part of the performance bonus paid in excess of the payment rate prescribed by the plaintiff's provision on the payment of executive compensation shall not be included in deductible expenses

Article 43 (Non-Inclusion of Bonuses in Deductible Expenses)

Suwon District Court 2018Guhap62059 Revocation of Disposition of Imposing Corporate Tax

Co.******

***The Director of the Tax Office

August 22, 2018

September 19, 2018

1. The plaintiff's claim is dismissed.

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

The disposition of imposition of corporate tax of 250,177,803, corporate tax of 2011, corporate tax of 2010,177,803, corporate tax of 393,825,540, corporate tax of 2012, corporate tax of 2012, corporate tax of 366,020,966, corporate tax of 2013, corporate tax of 2013, and 325,056,469, corporate tax of 2015 shall be revoked.

1. Details of the disposition;

A. On August 7, 2001, the Plaintiff is a legal entity established for the purpose of manufacturing and selling various electronic equipment. The Plaintiff’s executive officers include the representative director Kima, in-house directors most bb, and in-house auditors (hereinafter collectively referred to as “instant executive officers”).

B. The director of the Central Regional Tax Office conducted an investigation of corporate tax against the Plaintiff, and deemed 14,987,000,000 won, out of the amount paid as bonus (basic bonus and performance bonus) to the instant executives from 2011 to 2015, as bonus paid at will without specific payment regulations, and notified the Defendant of the imposition of KRW 4,374,305,000 in total amount of corporate tax to the Plaintiff in deductible expenses pursuant to Article 26 of the Corporate Tax Act and Article 43(2) of the Enforcement Decree of the Corporate Tax Act. Accordingly, on March 13, 2017 and May 2, 2017, the Defendant imposed and notified each of the following corporate tax on the Plaintiff.

C. After receipt of an objection, the Plaintiff filed a request for review with the Commissioner of the National Tax Service on October 27, 2017. The Commissioner of the National Tax Service recognized the Plaintiff’s bonus paid in accordance with the Plaintiff’s provision on the payment of executives’ remuneration as deductible expenses on December 21, 2017 and decided that “the Plaintiff’s tax base and tax amount were corrected by recognizing the Plaintiff’s bonus paid in accordance with the Plaintiff’s provision on the payment of executives’s bonus as of December 21, 2017, and it is difficult to deem that the Defendant paid the bonus in excess of the payment rate prescribed in the provision on the payment of executives’ remuneration as of total of KRW 14,987,000,000 with the exception of KRW 4,506,740,000,000,000 - 4,506,045,740,000 won, as of January 4, 2018.”

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 4, Eul evidence Nos. 1 through 3 (including branch numbers), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

The Plaintiff’s payment of each of the instant executives as performance bonus from 2011 to 2015 constitutes the basic salary paid according to the standards for the ratio of remuneration between executives decided at a general meeting of shareholders, not actually bonuses. Although performance bonus was paid in excess of the limit of the executive’s remuneration regulations decided at a general meeting of shareholders, it cannot be deemed that it was excessive or unjustly paid, the entire bonus should be included in deductible expenses. Nevertheless, the Defendant’s disposition that excluded the bonus corresponding to the excess portion from deductible expenses solely on the ground that it exceeded the limit of the executive’s remuneration regulations was unlawful.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Facts recognized

A) On August 4, 2009, the Plaintiff held a temporary general meeting of shareholders and passed a resolution on the payment rules for executive officers’ remuneration with the following contents.

B) From January to January 2015, the Plaintiff held a board of directors each year from 2011 to 2015, and passed a resolution on the determination of the basic salary and the basic bonus of directors and auditors for the pertinent year within the scope of the remuneration limit stipulated by the Plaintiff’s Regulations on the Limits on the Remuneration for Officers. In December each year, the Plaintiff passed a resolution on the determination of the performance bonus of directors and auditors for the pertinent year within the scope of the remuneration limit stipulated by the Plaintiff’s

C) Meanwhile, from 2011 to 2015, the Plaintiff submitted to the National Tax Service a withholding receipt for wage and salary income, stating the Plaintiff’s payment and bonus to the instant executive officers, separately.

[Ground of recognition] Facts without dispute, evidence prior to the dispute, entry of Eul evidence No. 4, purport of the whole pleadings

2) Determination

A) Article 19 of the Corporate Tax Act provides that "deductible expenses shall be the amount of losses incurred from transactions that reduce the net assets of a corporation (Paragraph 1). The above deductible expenses shall be expenses incurred in connection with the business of a corporation, other than those otherwise prescribed by the Corporate Tax Act or other Acts, which are ordinarily or directly related to profit (Paragraph 2), and matters necessary for the scope and classification of losses shall be prescribed by Presidential Decree (Paragraph 4). Article 26 of the Corporate Tax Act provides that "the amount deemed excessive or unjust as prescribed by Presidential Decree among the following losses shall be excluded from deductible expenses in calculating the amount of income of a domestic corporation for each business year." Article 43 (2) of the Enforcement Decree of the Corporate Tax Act provides that "the amount in excess of the amount paid by the standards for payment of benefits determined by the articles of incorporation, the general meeting of shareholders or the general meeting of members" shall not be included in deductible expenses.

B) As above, Article 26 subparag. 1 of the Corporate Tax Act provides that personnel expenses deemed excessive or unreasonable shall be determined by Presidential Decree, and Article 43(2) of the Enforcement Decree of the Corporate Tax Act provides that “the amount paid in excess of the payment standards determined by the articles of incorporation, the general meeting of shareholders, or the board of directors shall not be included in deductible expenses from among bonuses paid to executives.” Thus, the amount paid in excess of the payment standards determined by the articles of incorporation, the general meeting of shareholders or the board of directors shall not be included in deductible expenses as excessive or unfair personnel expenses under Article 26 subparag. 1 of the Corporate Tax Act. Accordingly, among performance bonuses paid to the executives of this case from 2011 to 2015, the portion of performance bonuses paid by the Plaintiff in excess of the payment rate stipulated by

C) On this issue, the Plaintiff stipulates that Article 26 of the Corporate Tax Act does not include excessive or unreasonable losses in deductible expenses, and Article 43(2) of the Enforcement Decree of the Corporate Tax Act regulates the act of reducing corporate tax taxable income by paying excessive bonuses to the executives. Thus, if bonus paid to the executives is appropriate in consideration of the provision of labor, and it is not for reducing corporate tax taxable income, and it is not deemed that bonus is excessive or unreasonable, the Plaintiff asserts that even if it has been paid in excess of the limit of remuneration for the executives resolved at the general meeting of shareholders, it should be included in deductible expenses in calculating the corporation’s income for the pertinent business year.

Therefore, as seen earlier, Article 26 of the Corporate Tax Act provides that "amount deemed excessive or unreasonable as prescribed by Presidential Decree" shall not be included in the calculation of losses. Thus, in cases where bonuses paid to an officer meet the requirements under Article 43 (2) of the Enforcement Decree of the Corporate Tax Act, it shall not be included in the calculation of losses because the bonus paid to an officer constitutes excessive or unfair losses, and as so claimed by the Plaintiff, it is against the language and structure of the provisions related to the Corporate Tax Act and the Enforcement Decree of the Corporate Tax Act and the Corporate Tax Act and Article 43 (2) of the Enforcement Decree of the Corporate Tax Act to determine whether to include in the calculation of losses, even though the bonus paid to an officer falls under the requirements under Article 43 (2) of the Enforcement Decree of the Corporate Tax Act, as so claimed by the Plaintiff, further determination of whether to include in the calculation of losses shall be made.

3. Conclusion

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