[1] The meaning of the denial of wrongful calculation under Article 52 of the Corporate Tax Act and the standard of determining economic rationality

[2] In a case where Gap corporation operating casino business, etc. paid the donation of 15 billion won to Byung local government as a ground for entrusting "the contribution to the revitalization of the local economy through the inducement of the normalization of Eul's Tourism Development Project", Eul corporation received the donation from Byung local government and used it for operating funds, and Gap corporation reported and paid corporate tax after including the donation in deductible expenses for the pertinent business year, since Eul corporation's donation constitutes money and valuables donated to local government free of charge, the tax authority imposed corporate tax on Gap corporation by adding the total amount of the donation to deductible expenses in accordance with Article 52 of the Corporate Tax Act on the ground that Eul corporation provided bypassing the donation through the third party local government Byung, a third party in the status of a related party Eul corporation, the case holding that the donation constitutes a statutory donation for which inclusion in deductible expenses is permitted, and it shall not be subject to taxation by readily concluding that Gap's donation and funding

[1] In a case where a corporate body of wrongful calculation under Article 52 of the Corporate Tax Act unfairly avoided or reduces the tax burden by abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act without using a reasonable method of a person having a special relationship, the said corporate body is deemed to have the right to impose taxes, and it is deemed that the said person has the income objectively and reasonably deemed objective and reasonable by the method stipulated in the laws and regulations. In light of the economic person’s position, the said corporate body applies only to a case where it is deemed that the corporate body neglected the economic rationality by calculating an unnatural and unreasonable act. Determination of whether an economic rationality exists should be made based on whether the transaction lacks the economic rationality in light of sound social norms and commercial practices, taking into account the various circumstances of the transaction.

[2] In a case where Gap corporation operating casino business, etc. paid the donation of 15 billion won to Byung local government as a ground for entrusting "the contribution to the revitalization of the regional economy through the inducement of the normalization of Eul Tourism Development Project", Eul corporation received the donation from Byung local government and used the donation for operating funds, and Gap corporation reported and paid corporate tax after including the donation in deductible expenses for the pertinent business year on the ground that the donation constitutes money and valuables donated to local government free to Byung, the tax authority imposed corporate tax on Gap corporation by adding the total amount of the donation to deductible expenses in accordance with Article 52 of the Corporate Tax Act, since Gap corporation provided bypass-up support through the third party local government Byung, a third party who is in the position of a related party Eul corporation, and thereby imposed corporate tax on Gap corporation by excluding the donation in deductible expenses, the case holding that Gap corporation's donation act was made by Byung local government with the other party and beneficiary Byung to achieve the public interest purpose in accordance with the Act on the Collection and Use of Donations, and thus, it cannot be deemed that there was any special purpose of tax avoidance.

[1] Article 52 of the Corporate Tax Act, Article 88(1) of the Enforcement Decree of the Corporate Tax Act / [2] Articles 24(2)1 and 52 of the Corporate Tax Act, Article 88(1) of the Enforcement Decree of the Corporate Tax Act, Article 5(2) of the Act on the Collection and Use of Donations, Article 14 of the Enforcement Decree of the Act on the Collection and Use of Donations

[1] Supreme Court Decision 2005Du14257 Decided December 13, 2007 (Gong2008Sang, 67), Supreme Court Decision 2008Du15541 Decided October 28, 2010 (Gong2010Ha, 2188), Supreme Court Decision 2010Du19294 Decided November 29, 2012 (Gong2013Sang, 89)

Gangwon Islands (Law Firm LLC, Attorneys Kang Han-hun et al., Counsel for the defendant-appellant)

The superintendent of the tax office

Seoul High Court (Chuncheon) Decision 2017Nu300 decided September 20, 2017

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

The grounds of appeal are examined.

1. The wrongful calculation panel under Article 52 of the Corporate Tax Act is a system under which the taxation authority denies or reduces the tax burden by abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act without using a reasonable method of a person having a special relationship with the corporation, and it is deemed that the person having the authority to impose tax has the income which appears to be objective and reasonable by the method stipulated in the laws and regulations. In light of the economic person’s position, the determination of whether the economic rationality exists shall be made based on whether the transaction lacks economic rationality in light of the sound social norms and commercial practices (see, e.g., Supreme Court Decision 2010Du19294, Nov. 29, 2012).

2. The reasoning of the lower judgment reveals the following facts.

A. The Plaintiff is a corporation established on June 29, 1998 for the purpose of casino business, tourist hotel business, etc. based on a special Act on the Assistance to the Development of Abandoned Mine Areas. It is a corporation established on June 29, 199 for the purpose of the business of tourist hotel business in collaboration with a private company to conduct cooking business around December 2001.

B. On July 26, 2012, the Plaintiff submitted a letter of deposit stating the reason for the designation deposit as the “contribution to revitalize the regional economy through the inducement of normalization of the Taecheon Tourism Development Project,” and stating the purpose of use and purpose of use as “contribution to revitalize the regional economy through the inducement of normalization through the support of funds for emergency operation of the Taecheon Tourism Development Project,” and submitted a letter of deposit stating that it will deposit KRW 15 billion at the Tae Taecheon City. At that time, Tae Seo si decided to open the Deliberative Committee on Contribution and receive designated donations deposited by the Plaintiff

C. Accordingly, the Plaintiff paid the instant contribution amounting to KRW 4 billion on August 14, 2012, KRW 4 billion on November 16, 2012, KRW 4 billion on January 2, 2013, and KRW 3 billion on August 29, 2013 (hereinafter referred to as “instant contribution amount”) at the time of Thai City (hereinafter referred to as “instant contribution act”). At the time of Thai City, the Plaintiff received the instant contribution from the Plaintiff, and then granted the instant contribution amount to Thai Tourism Development Corporation, and the Thai City used it as operating funds.

D. The Plaintiff deemed that the instant donation constitutes money and valuables donated free of charge to a local government under Article 24(2)1 of the Corporate Tax Act, and included it in deductible expenses for each pertinent business year, and reported and paid corporate tax for the business year 2012 and 2013 to the Defendant.

E. On June 18, 2015, the Defendant rendered a bypassing support through the third party, who is in the position of a related party, to the Taecheon Tourism Development Corporation. As such, applying Article 52 of the Corporate Tax Act’s wrongful calculation protocol, the entire amount of the instant donations should be excluded from deductible expenses, and the Plaintiff issued the instant disposition imposing corporate tax for the business year 2012 and 2013.

3. Examining the following circumstances revealed through these facts and records in light of the legal principles as seen earlier, it is difficult to readily conclude that the act of donation in this case lacks economic rationality in light of sound social norms and commercial practices, and thus constitutes an object of wrongful calculation.

A. The donation received by a corporation without any direct connection with its business may be included in deductible expenses according to the degree of its public nature. The donation received by the State or a local government without compensation under Article 5(2) of the Act on the Collection and Use of Donations (hereinafter “donation Act”) shall be deemed a statutory donation and shall be included in deductible expenses within a given scope (Article 24(2)1 of the Corporate Tax Act).

B. After the establishment of the Thai Tourist Development Corporation, it was running a business to build and operate a large-scale golf course, skiing ground, and accommodation facilities in the Yellow-si in Thailand. Since the contribution of this case was made, it had experienced serious financial difficulties in relation to the construction and operation of the said Austria, and Thai-si had paid the payment guarantee amounting to KRW 146 billion to the National Agricultural Federation in relation to the obligations of the Tae Taecheon Tourist Development Corporation as the largest shareholder of the Tae Tae Seo-si Tourism Development Corporation. Therefore, the Taecheon Tourist Development Corporation could also face a serious financial crisis if it is insolvent.

C. The Plaintiff is a juristic person established under the Special Act on the Assistance to the Development of Abandoned Mine Areas, the purpose of which is to promote the economy of underdeveloped mine areas, promote balanced regional development, and enhance the living standard of residents, and has refused to continue to provide a continuous request for the support of funds directly to the Masan Development Corporation. Accordingly, the Plaintiff proposed a plan to contribute a total of 15 billion won to the Masan Tourism Development Corporation at the time of Thai-si, and to provide funds to the Masan Tourism Development Corporation with the above donations at the time of Thai-si. In the process, the chairperson of the Thai-si City and Thai-si City Council prepared a letter of commitment and delivered it to the Plaintiff. Accordingly, the Plaintiff was caused by the contribution act in this case for the public interest to revitalize the regional economy through the normalization of the Taesan Tourism Development Corporation.

D. Meanwhile, a local government is in principle unable to receive money and valuables even if the donator voluntarily donated. However, where a corporation or organization established by an investment or contribution by a local government directly needs to achieve administrative purposes or undergo deliberation by the Deliberative Committee on Donations, the receipt of voluntary donations designated for the purpose and purpose is allowed, and a certain notification and reporting obligation are granted (Article 5(2) of the Donations Act and Article 14 of the Enforcement Decree of the Donations Act).

E. Ultimately, the Plaintiff’s contribution act of this case was made by using the other party and beneficiary as a protruding City in order to achieve the public interest purpose under the provisions of the Donations Act, and it is difficult to deem that there was a specific purpose of tax avoidance. As such, the contribution of this case constitutes a statutory donation that is allowed to be included in the calculation of losses, and on the sole basis of the final result, it shall not be deemed as a taxable object by readily concluding that the act of donation of this case and the act of funding in the Taebag is one act

4. Nevertheless, solely on the grounds stated in its reasoning, the lower court determined that the instant disposition was lawful on the erroneous premise that the instant act of donation constitutes an abnormal abusive act that disregards economic rationality, and thus subject to the provision regarding the wrongful act of wrongful calculation. In so determining, the lower court erred by misapprehending the legal doctrine on the scope of statutory donations and the economic rationality in relation to the wrongful act of wrongful calculation, thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds of

5. Therefore, without examining the remaining grounds of appeal, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Sang-ok (Presiding Justice)