In case where a truster, a debtor, entrusted assets to a trustee in lieu of performing the existing debts and designates a creditor as a beneficiary, whether there exists a supply of goods under the Value-Added Tax Act to the beneficiary of the truster distinct from the transfer of trust assets (negative)

A trust under the Trust Act requires a trustee to manage and dispose of property rights for the purpose of trust by transferring a specific property right to a trustee or disposing of it. Therefore, in cases where the trustee supplies goods while managing and disposing of the trust property transferred by the truster, the trustee himself/herself becomes a contracting party as the person to whom the rights and duties to the trust property belongs. Therefore, the person liable to pay value-added tax, at this time, shall be deemed the trustee who transferred the right to use and consume the goods to the opposite contractual party through the transaction, such as the supply of goods, and the fact that the profits and expenses incurred from the management and disposal of the trust property ultimately accrue to the truster or the beneficiary who did not have a direct legal relationship with

As such, the trustee takes over the property right from the truster and supplies goods while managing and disposing of the trust property on the premise of the transfer thereof. Thus, even if the truster, a debtor, entrusted the trustee with the property in lieu of performing the existing obligation and designates the creditor as the beneficiary, such right to benefit shall be deemed to be vested in the creditor under the trust contract, and thus, it cannot be deemed that there exists a separate supply of goods to the beneficiary of the truster, who is distinct from

Article 6 (1) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010; see current Article 9 (1))

Supreme Court en banc Decision 2012Du22485 Decided May 18, 2017 (Gong2017Sang, 1321)

Cheongnam Co., Ltd. (Law Firm LLC, Attorney Shin Jae-young, Counsel for the defendant-appellant)

The director of the tax office.

Seoul High Court Decision 2013Nu28420 decided March 26, 2014

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

The grounds of appeal are examined.

1. Article 6(1) of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010; hereinafter the same) provides that “The supply of goods shall be a delivery or transfer of goods on all contractual or legal grounds.”

A trust under the Trust Act requires a trustee to manage and dispose of property rights for the purpose of trust by transferring a specific property right to a trustee or disposing of it. Therefore, in cases where the trustee supplies goods while managing and disposing of the trust property transferred by the truster, the trustee himself/herself becomes a contracting party as the person to whom the rights and duties to the trust property belongs. Therefore, the person liable to pay value-added tax at this time shall be deemed the trustee who transferred the right to use and consume the goods to the opposite contractual party through the transaction, such transaction, such as the supply of goods, and the fact that the profits and expenses incurred from the management and disposal of the trust property ultimately accrue to the truster or the beneficiary who does not have a direct legal relationship with the opposite contractual party does not change (see Supreme Court en banc Decision 2012Du2485, May 18, 2017).

As such, the trustee takes over the property right from the truster and supplies goods while managing and disposing of the trust property on the premise of the transfer thereof. Thus, even if the truster, a debtor, entrusted the trustee with the property in lieu of performing the existing obligation and designates the creditor as the beneficiary, such right to benefit shall be deemed to be vested in the creditor under the trust contract, and thus, it cannot be deemed that there exists a separate supply of goods to the beneficiary of the truster, who is distinct from

2. A. The reasoning of the lower judgment and the evidence duly admitted by the lower court reveal the following facts.

1) Around 2003, the Plaintiff, an executor of a general construction and housing construction business, entered into a contract for construction work of 27.1 billion won for construction cost (hereinafter “instant contract”). The Plaintiff entered into a contract for construction work of 3rd underground floors and 14th underground floors (house 299 households, commercial building 14 households) above the ground 20th floor (hereinafter “instant main complex building”); among them, the 14 households of 14 households were hereinafter “instant commercial buildings”).

2) Although a lot construction completed the construction of the instant main complex building around 2006, the construction was not paid KRW 14.85 billion out of the construction cost under the instant contract.

3) On July 27, 2006, the Plaintiff entered into a real estate disposal trust agreement (hereinafter “instant trust agreement”) with respect to the 305 unsold real estate units, including the instant commercial building, with respect to the company’s asset trust and the company unsold in lots. The Plaintiff agreed to dispose of the said unsold real estate units by 305 households, and pay the sales price to the company designated as the first beneficiary.

4) Meanwhile, the Plaintiff and Dol Construction agreed that the expected sale price of the said unsold real estate by 305 households shall be 14.85 billion won, which is the amount equivalent to the construction price payable under the instant contract, and that the Plaintiff’s obligation for construction payment for Dol Construction is fully repaid through the instant trust contract.

5) On the premise that the Plaintiff’s conclusion of the instant trust contract by designating the Plaintiff as the preferred beneficiary and concluding it constitutes “supply of goods” under Article 6(1) of the former Value-Added Tax Act, the Defendant deemed 4 billion won, which is the expected sale price of the instant commercial building, as the market price, and issued the instant disposition that corrected and notified the Plaintiff KRW 463,427,640,000, which is the building price, as the tax base, on January 2, 2012.

B. Examining these facts in light of the aforementioned legal principles and the record, even if the Plaintiff, a truster, was to substitute for the obligation to pay the unpaid construction cost for the construction of a lot under the instant trust agreement, and was designated as a priority beneficiary of the instant commercial building, etc. and the construction of a lot, it cannot be deemed that there was a taxable object of value-added tax solely on the ground that there was a transaction of creation of a trust.

Nevertheless, the lower court determined otherwise, on the premise that the Plaintiff, a truster, supplied goods under Article 6(1) of the former Value-Added Tax Act to the Housing Construction, a preferential beneficiary, through the instant trust agreement, that the instant disposition that calculated the tax base based on the amount of construction cost extinguished by the supply of the instant commercial building, is lawful. In so determining, the lower court erred by misapprehending the legal doctrine on the supply of goods under the Value-Added Tax Act, thereby adversely affecting the conclusion of

3. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Jo Hee-de (Presiding Justice)