2017Guhap23713 Revocation of Corporate Tax Imposition, etc.

Korean Private School Promotion Foundation

Law Firm Squa, Attorneys Kim Jae-hoon, Counsel for the plaintiff-appellant

Head of Dong Daegu Tax Office

Government Law Firm Corporation, Attorneys Soh Ho-ho et al.

July 5, 2018

September 20, 2018

1. On November 7, 2016, the Defendant’s corporate tax of 5,681,201,650 (including additional tax of 2,125,339,067) imposed on the Plaintiff for the business year of 2011; corporate tax of 3,608,724,840 (including additional tax of 1,184,321,185); corporate tax of 2013; corporate tax of 5,275,339,790 (including additional tax of 1,450,689,757); corporate tax of 2014, corporate tax of 4,220,834,120 (including additional tax of 896,819,222); and additional tax of 57,61,679,79,79,379,7539,79,759, etc. (including additional tax of 2015).

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

The same shall apply to the order.

1. Details of the disposition;

A. On December 4, 1989, the Plaintiff is a non-profit corporation established pursuant to the Korea Private School Promotion Foundation Act (hereinafter “the Korea Private School Foundation Act”) for the purpose of operating and managing affairs concerning the creation and financing of funds for the educational environment of private schools in a rational manner.

B. The Plaintiff established the Private School Promotion Fund pursuant to the Private School Foundation Act and operated a business of financing funds necessary for the improvement, repair, and expansion of the property of private school institutions and educational facilities and equipment (hereinafter “the instant loan business”).

C. Upon reporting corporate tax from 2011 to 2015, the Plaintiff filed a report on all interest income accrued from the instant loan project as its reserve fund for its proper purpose business (reserve fund for private school facility loans) and included it in its deductible expenses.

D. The Plaintiff has used the reserve fund for proper purpose business (interest income) included in the deductible expenses as financial resources for loan business for re-financing.

E. From May 2, 2016 to June 3, 2016, Daegu regional tax office conducted a regular tax investigation with respect to the Plaintiff, and as a result, on July 26, 2016, the Plaintiff notified the Plaintiff of the result of tax investigation that the instant loan business constitutes a profit-making business and does not constitute a proper purpose business prescribed in Article 29 of the Corporate Tax Act and Article 56 of the Enforcement Decree of the same Act. As such, the Plaintiff denied all the reserves for the proper purpose business appropriated as deductible expenses from 2011 to 2015, and notified the Plaintiff of the result of tax investigation that the Plaintiff would impose the same

F. On August 26, 2016, the Plaintiff filed a request for pre-assessment review with the National Tax Service, but the National Tax Service decided not to accept the said request on October 28, 2016.

G. On November 7, 2016, the Defendant issued a disposition imposing corporate tax and additional tax on the Plaintiff for the business year from 2011 to 2015 (hereinafter “instant disposition”).

H. On February 6, 2017, the Plaintiff appealed to the Tax Tribunal for the revocation of the instant disposition. However, the Tax Tribunal rendered a decision to dismiss the said claim on July 25, 2017. The statutes related to the instant disposition are as shown in the attached Form.

【Ground of recognition】 The fact that there has been no dispute, Gap's 1 through 6 (if there is an additional number, including a branch number; hereinafter the same shall apply), Eul's 2 and 4, the purport of the whole pleadings and arguments

2. Summary of the parties' arguments

A. The plaintiff

1) The instant loan business is a non-profit public corporation’s loan business operated by the Plaintiff for its business purposes under the supervision and control of the Ministry of Education, and is a non-profit-making business and proper purpose business with no profitability. The Supreme Court has determined that the loan business is non-profit-making business with respect to the loan business operated by the Small and Medium Business Corporation for the purpose of supporting small and medium enterprises. Therefore, regarding the instant loan business, Article 29(1) of the former Corporate Tax Act (amended by Act No. 13555, Dec. 15, 2015; hereinafter referred to as the “former Corporate Tax Act”) and Article 29(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 26068, Feb. 3, 2015; hereinafter referred to as the “former Enforcement Decree of the Corporate Tax Act”). The instant loan business is separate from the Plaintiff’s private loan promotion fund, which is its own business and its own profit-making business.

3) Article 29(1) of the former Corporate Tax Act and Article 56(5) of the Enforcement Decree of the same Act are construed as allowing inclusion in deductible expenses through the establishment of reserves for proper purpose business as a whole, insofar as the proper purpose business falls under non-profit business. In other words, a private school promotion fund creation project constitutes a non-profit business with the Plaintiff’s proper purpose business and constitutes a typical case where inclusion in deductible expenses is allowed pursuant to the above provision. Article 56(6) of the Enforcement Decree of the same Act is merely a provision to additionally expand or clarify cases where inclusion in deductible expenses is allowed under Article 29(1) of

4) Therefore, the instant disposition that deemed the instant loan project as a profit-making business and cannot be included in the deductible expenses by establishing a considerable amount of interest income accrued from the said project as a reserve for its proper purpose business.

B. Defendant

1) The former Corporate Tax Act explicitly states that interest income is profit-making business of a nonprofit corporation, the loan business of this case is continuing and repeated, and the plaintiff also filed a corporate tax return including the interest income accrued from the loan business of this case, the Supreme Court Decision 2003Du12455 Decided September 9, 2005 presented by the plaintiff is different from this case, and it is merely applicable to this case, the Minister of Education applies differently from the loan interest rate, the general management and supervision right to the plaintiff, personnel rights to appoint the president, and matters related to the operation of the fund, etc., even if the Minister of Education has the authority to approve the loan business of this case, it is merely a government's exercise of rights to the plaintiff as a contributor, and it is not a basis for determining whether the loan business of this case is a profit-making business of this case, and all of the relevant regulations and all of the relevant regulations. Therefore, the loan business of this case should not be included in deductible expenses under the Corporate Tax Act.

2) In order to consider the act of accumulating funds in the Plaintiff’s internal fund as the expenditure, there must be legal grounds, but Articles 56(6)2 and 2(1)8 of the Enforcement Decree of the Corporate Tax Act do not have any provision on the Private School Promotion Fund, and thus, it cannot be deemed as a non-profit-making business on the ground that it becomes the financial resources of the

3) The purpose business that is allowed to include in deductible expenses pursuant to Article 29(1) of the former Corporate Tax Act refers to "business other than profit-making business". Thus, the loan business of this case, which is a profit-making business, does not correspond to this business, and the above inclusion in deductible expenses is premised on "disinvestment in the above business as a profit-making business". However, the plaintiff re-investment in the interest income accrued from the loan business of this case in the above business, which is a profit-making business, and this is only one business

4) In addition, since interest income from the instant loan business cannot be subject to follow-up management under Article 29(4)4 of the former Corporate Tax Act, the said income cannot be subject to inclusion in deductible expenses.

A. Facts of recognition

The following facts shall be acknowledged by adding up the whole purport of the pleadings to the statements in Gap evidence No. 13, Eul evidence No. 13, and the following facts.

1) According to the Private School Foundation Act, the purpose of the Plaintiff is to contribute to the promotion of private school education by supporting the improvement of educational environment of private school institutions (Article 1). The Plaintiff establishes a Private School Promotion Fund to support private school institutions (Article 17). The above Fund shall be raised with Government contributions, corporations, organizations or individuals contributions, funds and earnings generated from the operation of the Fund. The Fund shall be financed with funds necessary for the improvement of educational environment and educational programs of private school institutions, the financing of funds necessary for the improvement of educational environment of private school institutions and educational programs, the training and research projects for the improvement of private school institutions (Article 19). The Foundation shall operate and manage the funds to support private school institutions (Article 6(1). The Fund shall be 17); the Fund shall be funded with the establishment of a Private School Promotion Fund in order to raise funds necessary for the improvement of private school education facilities and equipment; the Fund shall be funded with the operation and management of the funds by private school institutions; the Fund shall be funded with the approval of the Minister of Education under Article 30(1).

2) Plaintiff’s report of corporate tax

The Plaintiff, from 2011 to 2015, established interest income generated from the instant loan projects as reserves for its proper purpose business as stated in Table 1 below, and filed a corporate tax return as stated in Table 2 below.

Table 1 Establishment details of proper purpose business reserve by each business year (unit: 00,000 won)

A person shall be appointed.

Table 2: Details of report of corporate tax by business year (unit: 00,000 won)

A person shall be appointed.

2) Determination of the loan interest rate of the instant loan business and establishment of the Private School Promotion Fund

A) Matters concerning the loan interest rate, repayment period, overdue interest rate, etc. of the instant loan project shall be determined by the method of implementation with the approval of the Minister of Education on the Plaintiff’s request.

B) When the Plaintiff borrows government funds, the loan interest rate of the instant loan project is calculated by applying the weighted average interest rate to the loan interest rate of the Public Capital Management Fund in the pertinent year, and has been implemented with the approval of the Minister of Education. The loan interest rate of the instant loan project has been compared only with the loan interest rate from 2011 to 2015. C) The accumulated earned surplus accrued from the instant loan project as of the end of 2015 is KRW 303,636,157,018.

D) The trend of the annual change in the scale and proportion of the Private School Promotion Fund shall be as follows:

A person shall be appointed.

E) The details of the loan application and the execution of the loan to the plaintiff of the private school institution are as shown in Table 4 below.

A person shall be appointed.

C. Whether the loan business of this case is subject to corporate tax immediately because it falls under profit-making business

Article 3 (1) of the former Corporate Tax Act provides that "income of a non-profit corporation for a business year" shall be subject to corporate tax, and Article 3 (2) of the same Act provides that "income of a non-profit corporation for a business year shall be income generated from the business or revenue (hereinafter "profit-making business") falling under any of the following subparagraphs, and Article 16 (1) of the Income Tax Act provides that "interest income under Article 16 (1) of the Income Tax Act" shall be "income from the loan business of this case". In the interpretation of the provision of this Act, the interest income generated from the loan business of this case shall be deemed to fall under "income in the nature of consideration for monetary use" under Article 16 (1) 12 of the Income Tax Act. Therefore, this part of the plaintiff's assertion is unfair, but it is not directly related to whether the loan business of this case is subject to corporate tax as seen later, so

Meanwhile, in full view of the purport of the entire argument in the statement in subparagraph 1-5 of Eul evidence No. 1-5, the plaintiff can recognize the fact that the amount of interest income from the above loan project is calculated and reported not to be subject to corporate tax from 2011 to 2015, but to be included in the deductible expenses and calculated corporate tax. Article 29 of the former Corporate Tax Act also provides for separate requirements, rather than determining whether it is applied according to business profitability, with respect to inclusion in deductible expenses. Therefore, as alleged by the defendant, it cannot be said that the inclusion in deductible expenses in deductible expenses under the Corporate Tax Act is not possible immediately on the ground that the loan business in this case constitutes a profit-making business pursuant to Article 3 of the former Corporate Tax Act. The Supreme Court Decision 2003Du12455 Decided September 9, 2005, which both parties set forth, cannot be applied differently to this case and case. Therefore, the defendant's assertion

Ultimately, the problem is not directly related to profit-making business, but varies depending on whether the loan business in this case is included in deductible expenses under the Corporate Tax Act.

(d) The inherent purpose of the incorporation of the earned surplus into the Private School Promotion Fund due to the instant loan project; whether it may be included in the deductible expenses in view of the business reserve;

1) Under the principle of no taxation without law, the interpretation of tax laws shall be interpreted as a legal interpretation, barring any special circumstance, which prevents the requirements for tax exemption or tax exemption, and shall not be extensively interpreted or analogically interpreted without any justifiable reason. In particular, it is reasonable to deem that the strict interpretation of the provision that is obviously preferential in terms of the requirements for reduction or exemption accords with the principle of fair taxation (see, e.g., Supreme Court en banc Decision 82-21, Nov. 23, 1982; Supreme Court Decision 2002Du9537, Jan. 24, 2003; Supreme Court Decision 2011Du2016, Dec. 13, 201); in light of the above legal principles, it is reasonable to include the instant case as a proper business of the Plaintiff; and to include interest income generated from the instant loan as a proper business in deductible expenses in accordance with Article 29(1) of the former Corporate Tax Act.

(1) Article 29 (1) of the former Corporate Tax Act provides that "where a non-profit domestic corporation appropriates reserve funds for proper business purposes as deductible expenses in order to disburse them for the proper purpose business of the corporation or designated donations each fiscal year, they shall be included in deductible expenses within the scope of the sum of the amounts under each of the following subparagraphs, and Paragraph (8) of the same Article provides that "where necessary for the scope of proper purpose business under paragraph (1) and the calculation of income generated from profit-making business, etc. under paragraph (5) of the same Article, the term "business for proper purpose" under Article 29 (1) of the former Enforcement Decree of the Corporate Tax Act shall be prescribed by the Presidential Decree.

Article 2, Paragraph 1 of the Korean Standard Industrial Classification publicly notified by the Commissioner of the Korea National Statistical Office is defined as "business which directly conducts the business for which the purpose of its establishment is determined and which is not included in the proviso of Article 2, Paragraph 1 of the Korean Standard Industrial Classification."

② If the non-taxation on non-profit corporations does not harm the fairness of competition, it is unnecessary to maintain corporate tax on non-profit corporations as it is. In this regard, it is interpreted that Article 29(1) of the former Corporate Tax Act provides that if the non-taxation on non-profit corporations is appropriated as reserve funds for proper purpose business, it shall be included in the calculation of losses within a certain amount, and opens a way of non-taxation on business income of non-profit corporations for proper purpose business. In other words, it is understood that it is intended for non-profit corporations to smoothly implement public services by allowing the inclusion of the non-profit corporations in deductible expenses in advance even before they are appropriated for proper purpose

③ The Private School Promotion Fund is classified into a group of property created with funds from the Government’s contributions as well as the proceeds from the instant loan projects, the contributions of corporations, organizations, or individuals, etc., and accounts are administered separately from the Plaintiff. The Private School Promotion Fund Act stipulates in detail the grounds for establishment, purpose, methods of creation, methods of management and operation, procedures for approval, accounts, purposes of use, etc. The Private School Promotion Fund Act independently provides for private school promotion fund as the Plaintiff’s business. The use of private school promotion fund (Article 19) and its operation (Article 20) are different from the Plaintiff’s business. The use of private school promotion fund is not limited to the instant loan business. In light of the fact that projects necessary for the structural improvement of private school institutions, projects for the establishment and operation of professional engineers of private school institutions, projects for the establishment and operation of funds, projects for the operation of private school institutions, and projects for the establishment and operation of funds, and projects for the use of funds, etc., it is difficult to set aside funds from the private school promotion fund of this case.

④ The purpose of the Plaintiff is to contribute to the promotion of private school education by supporting the improvement of educational environment of private school institutions. The Plaintiff’s business including the creation, operation, and management of the Private School Promotion Fund is to support private school institutions. As such, the public nature of the Plaintiff’s establishment and operation, the establishment, creation, etc. of the Private School Promotion Fund is recognized, and the formation of the Fund itself cannot be deemed to have the profitability or profit-making purpose. As seen earlier, the instant loan business itself constitutes profit-making business, but it is merely a method of using the Private School Promotion Fund, and it is nothing more than a profit-making purpose, and the private school promotion fund is basically for raising funds for the support of the Plaintiff’s private school foundation. Therefore, the private school promotion fund cannot be deemed to have profitability based on the above profitability.

(5) Meanwhile, Article 56 (6) of the former Enforcement Decree of the Corporate Tax Act (hereinafter referred to as "the provisions of this case") provides that "the amount under each of the following subparagraphs shall be deemed to have been disbursed or used for the proper purpose business by stipulating that "the amount shall be deemed to have been disbursed or used for the proper purpose business". Article 56 (2) 2 of the former Enforcement Decree of the Corporate Tax Act provides that "the corporation established under the Special Act (including any organization deemed a corporation under Article 13 of the Framework Act on National Taxes among funds established and operated by the relevant corporation) shall be the amount accumulated as funds or reserve funds in accordance with the Acts and subordinate statutes for the proper purpose business of non-profit domestic corporations operating the health insurance fund, pension management mutual aid fund, and mutual savings fund under the Act on the Structural Improvement of Agricultural Cooperatives and Fisheries Cooperatives, and the Depositor Protection Fund under the Community Credit Cooperatives Act." Article 2 (1) 8 of the former Enforcement Decree of the Corporate Tax Act provides for each business through private school promotion fund under the Private School Foundation Act.

However, under the premise that the provisions of Article 29(1) through (4) of the former Corporate Tax Act apply, the provisions of this case take the form of deemed provisions which stipulate the amount to be paid for the proper purpose business as the amount of expenses. Article 29(8) of the former Corporate Tax Act only delegate the scope of the proper purpose business and the calculation of income generated from profit-making business to the Presidential Decree, and does not delegate the scope of the amount to be paid for the proper purpose business. Article 29(1) of the former Corporate Tax Act provides that where the proper purpose business reserve fund is appropriated as deductible expenses, the amount shall be included in deductible expenses. Article 29(1) of the former Corporate Tax Act provides that, in order to increase the amount of expenses for the proper purpose business of research and development business, the provisions of the former Corporate Tax Act provides that the medical corporation shall be included in deductible expenses for the purpose of the expansion of expenses for the proper purpose business of research and development business and the provisions of Article 29(1)8 of the former Enforcement Decree of the Corporate Tax Act provide that the expenses for the proper purpose business shall be included in deductible expenses.

(6) Article 29(4)4 of the former Corporate Tax Act provides that where the reserve funds for proper purpose business are not used for the proper purpose business by no later than five years after the end of the business year in which the reserve funds for proper purpose business are appropriated as deductible expenses, the balance shall be included in the gross income for the purpose of calculating the income amount for the business year in which the relevant cause occurs. According to the private school promotion fund, the funds appropriated as reserve funds for proper purpose business unlike the loan business in this case as well as the funds for various kinds of businesses to support private school institutions and the Plaintiff’s public nature and supervision are conducted by the Ministry of Education, there is no circumstance to deem that it is impossible to manage or control when the funds appropriated as reserve funds for proper purpose business unlike the funds proposed by the Plaintiff are used for the proper purpose business, it is difficult to deem that it is difficult to ascertain whether the funds appropriated as reserve funds for proper purpose business have been disbursed for the proper purpose business for five years. Furthermore, according to the tax base and tax invoice of corporate tax submitted by the Plaintiff and the statement of proper purpose reserve funds (No.

4. Conclusion

If so, the plaintiff's claim shall be accepted for the reasons and it is so decided as per Disposition.

The presiding judge, judge, assistant judge

Judges No. 54

Judges Kim Gung-ho

1) The former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22812, Mar. 31, 2011)

2) The former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 25194, Feb. 21, 2014)

3) former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 27828, Feb. 3, 2017)

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.