[1] Whether a crime of tax evasion is established where a tax liability has not been established because it failed to meet the taxation requirements under tax-related Acts (negative)

[2] The method of calculating the income amount of a domestic corporation for each business year under the Corporate Tax Act, and the business year of accrual of earnings and losses / The requirements for recognizing that the corporation’s income is evaded the corporate tax imposed on the corporation

[3] The case holding that the judgment below convicting the Defendant Company A as to the charge of tax evasion under the presumption of the establishment of corporate tax liability is erroneous on the erroneous premise that the Defendant Company A may include the difference in earnings for the business year in which the difference can be deducted from the subcontractor, in case where: (a) the subcontractor Company A was selected as the subcontractor at the lowest price for the purpose of raising funds; and (b) the subcontractor and the actual construction price were bid price; and (c) the subcontractor entered into a subcontract with the subcontractor and paid the difference in cash; and (b) the difference was refunded in cash; and (c) the corporate tax base was not included in the corporate tax base; and (d) there was a problem as to whether there was a crime of evading taxes on the premise of the establishment of corporate

[1] In order for a crime of tax evasion under Article 3 of the Punishment of Tax Evaders Act and Article 8 of the Act on the Aggravated Punishment, etc. of Specific Crimes to be established, tax claims shall be established upon meeting the taxation requirements under the tax law. Therefore, there is no room for establishing the crime of tax evasion unless the tax liability is established due to failing to meet the taxation requirements.

[2] Income of a domestic corporation for each business year shall be the amount obtained by deducting the total amount of losses which falls or comes to fall under the business year from the total amount of gross income which falls or comes to fall under the business year, and the business year in which gross income and deductible expenses accrue shall be the business year which includes the date on which the relevant gross income and deductible expenses are determined (Articles 14(1) and 40(1) of the Corporate Tax Act). In order to avoid corporate tax imposed on the corporation’s income which is calculated as a unit of business year, the taxable income for the pertinent business year shall be reduced through the inclusion of gross income

[3] In a case where: (a) Defendant Company A was selected as a subcontractor for the pertinent business year for the purpose of creating non-capital invested funds for the pertinent business year; (b) and the actual construction price was paid by bidding; (c) the difference was not paid in cash after the subcontract agreement was concluded; and (d) there was a problem as to whether there was an offense of evading corporate tax for several business years by passing the deadline for payment without including the difference in the corporate tax base; (b) the subcontract agreement unrefising the construction price can be deemed as the most unfair act of the subcontractor; (c) the difference between the construction price and the price paid for the pertinent business year is determined based on the subcontract agreement that the difference was calculated based on the premise that the difference between the construction price and the price actually paid for the pertinent business year is excessive and the corporate tax revenue of Company A was reduced; and (d) the difference cannot be deemed as having been paid for the pertinent business year, even if the difference was paid in excess of the construction price paid by the subcontractor A for the pertinent business year.

[1] Article 3 of the Punishment of Tax Evaders Act, Article 8 of the Act on the Aggravated Punishment, etc. of Specific Crimes / [2] Article 3 of the Punishment of Tax Evaders Act, Article 8 of the Act on the Aggravated Punishment, etc. of Specific Crimes, Articles 14(1) and 40(1) of the Corporate Tax Act / [3] Article 3(1) of the Punishment of Tax Evaders Act, Article 18 of the former Punishment of Tax Evaders Act (Amended by Act No. 16108, Dec. 31, 2018); Articles 14(1), 18 subparag. 2, 19(2), and 40(1) of the Corporate Tax Act

[1] Supreme Court Decision 89Do1356 delivered on September 29, 1989 (Gong1989, 1627) Supreme Court Decision 2003Do5631 Delivered on June 10, 2005 (Gong2005Ha, 1197) / [2] Supreme Court Decision 2004Do817 Delivered on June 29, 2006 (Gong2006Ha, 1458)

Defendant 1 and four others

Defendant 1, Defendant 2, Defendant 3, Defendant 5 and Prosecutor

Law Firm, Kim & Lee LLC et al.

Seoul High Court Decision 2017No2465 decided October 12, 2018

Of the judgment below, the guilty part against Defendant 1 and Defendant 3 and the part against Defendant 5 are reversed, and that part of the case is remanded to the Seoul High Court. Defendant 2’s appeal and prosecutor’s appeal against Defendant 1, Defendant 2, Defendant 3, and Defendant 4 are all dismissed.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Judgment on the grounds of appeal by the prosecutor

A. Whether Defendant 1, Defendant 2, Defendant 3, and Defendant 4 violated the Act on the Aggravated Punishment, etc. of Specific Economic Crimes (Embezzlement) (hereinafter “Specific Economic Crimes Act”)

For the following reasons, the lower court determined that Defendants 1, 2, 3, and 4’s violation of the Specific Economic Crimes Act (Embezzlement) was acquitted or acquitted.

As to the part of the facts charged after October 19, 2006, it is insufficient to recognize that Defendant 1, Defendant 2, Defendant 3, and Defendant 4 obtained unlawful acquisition intent and used the funds for personal purposes of Defendant 5 Co., Ltd. (hereinafter “Defendant 5”) from January 2002 to October 18, 2006. In addition, as to the part from October 19, 2002 to October 18, 2006, the statute of limitations expired following the ten-year statute of limitations.

Examining the reasoning of the lower judgment in light of the relevant legal principles and records, the lower court did not err by exceeding the bounds of the principle of free evaluation of evidence in violation of logical and empirical rules, or by misapprehending the legal doctrine

B. Whether Defendant 2’s violation of the Act on the Aggravated Punishment, etc. of Specific Crimes (hereinafter “Special Crimes Aggravated Punishment Act”) (tax) and violation of the Punishment of Tax Evaders Act

The lower court determined that Defendant 2 was not guilty of Defendant 2’s violation of the Specific Crimes Aggravated Punishment Act (tax) and the Punishment of Tax Evaders Act on the grounds that it cannot be readily concluded that Defendant 2 had functional control over the crime of evading Defendant 5’s corporate tax with intent to jointly process the crime. Examining the reasoning of the lower judgment in light of the relevant legal principles and records, the lower court did not err by misapprehending the

C. Whether Defendant 5’s employees violated the Punishment of Tax Offenses Act relating to “Defendant 2”

The prosecutor found Defendant 1 and Defendant 2 guilty on the facts charged that “Defendant 5’s employees and Defendant 2 evaded corporate tax by fraud or other improper means in connection with Defendant 5’s business affairs.” Defendant 5 argued that Defendant 2 should be held liable for criminal liability under joint penal provisions and filed a final appeal.

However, inasmuch as the lower court recognized Defendant 1’s act of tax evasion in the same criminal charges as the date and period of crime, and the amount of tax evaded, etc., to be convicted of all the charges of Defendant 5, it is not permissible for the lower court to lodge an appeal to request the addition of Defendant 2 among the employees to the effect that it does not relate to the text of the judgment, but rather to the reasoning of the judgment (see, e.g., Supreme Court Decisions 2003Do8249, Mar. 26, 2004; 2017Do20575, Jul. 11, 2018).

Therefore, the Prosecutor’s ground of appeal on this part cannot be accepted.

2. Judgment on Defendant 2’s grounds of appeal

The lower court found Defendant 2 guilty on Defendant 2’s receipt of property in breach of trust on the ground that the money and valuables and entertainment received by Defendant 2 from the Nonindicted Party was the consideration for illegal solicitation.

Examining the reasoning of the lower judgment in light of the relevant legal doctrine and the evidence duly admitted, the lower court did not err by exceeding the bounds of the principle of free evaluation of evidence in violation of logical and empirical rules, or by misapprehending the legal doctrine on “illegal solicitation”, “price”, and calculation of the amount of funds in breach of trust, or by violating the principle of court-oriented trial and direct deliberation.

3. Determination on the grounds of appeal by Defendants 1, 3, and 5

A. Whether the permission of the court below for Amendments to Bill of Indictment is unlawful

(1) A prosecutor may add, delete, or change facts charged or applicable provisions of Acts stated in the indictment with permission of the court. In this case, the court shall grant permission to the extent that it does not impair the identity of the facts charged (Article 298(1) of the Criminal Procedure Act). Corporate tax is a taxable period. As corporate tax is a taxable period, one crime is established in each business year (see Supreme Court Decision 87Do84, Dec. 22, 1987). The effect of indictment and accusation against part of the facts charged in the relationship of a single crime extends to the whole crime (see Supreme Court Decisions 2002Do5411, Jan. 14, 2005; 2009Do3282, Jul. 23, 2009, etc.).

(2) According to the record, the following facts are revealed.

On October 19, 2016, Defendant 1, Defendant 2, Defendant 3-207, 2008, and each business year of 2009, violation of the Specific Crimes Aggravated Punishment Act (tax) due to the evasion of corporate tax (tax), 201, 2012, and each business year of 2013, and violation of the Punishment of Tax Evaders Act due to the evasion of corporate tax under the joint penal provisions on the evasion of corporate tax in 2009, 201, 2011, 2012, and 2013, each of the crimes was prosecuted by stating that “the method of reporting the difference to the tax base by including the said difference and passing the payment period of corporate tax at around the time of signing a subcontract with the collaborative company” as follows: (a) the form of each crime was described as “the method of making a false contract with the collaborative company to cover the construction amount at the time of signing a subcontract, and even if the difference was returned, as if

On April 11, 2018, when the court below continued, the prosecutor applied for amendments to Bill of Indictment with the purport of changing the form of the crime to "a method of withdrawing the amount of construction at the time of a subcontract with a subcontractor and receiving a refund of the difference under the pretext of rebates, etc., even though the difference was not included in the corporate tax base as profits and the corporate tax payment deadline expires at that time," without changing the list of crimes committed in the facts charged.

On April 20, 2018, the lower court permitted the amendment of the indictment as above during the 9th trial.

(3) In comparison with the facts charged before and after the amendment in light of the aforementioned legal principles, the prosecutor specified the form of the crime as a corporate tax evasion due to the excessive appropriation of losses as a result of the difference in the construction cost from the collaborative company based on the same factual basis, based on the same facts, and changed the form of the crime by simply changing the legal evaluation as a result of the omission in the calculation of earnings for the same business year. Therefore, there is no difference in the business year before and after the amendment, the amount of evaded tax, etc.

In the same purport, the lower court was justifiable to have determined that the modification of indictment was permitted and that the permission was lawful. In so doing, the lower court did not err by misapprehending the identity of the facts charged or the legal doctrine on the modification

B. Whether Defendant 5’s liability to pay corporate tax was established according to the changed facts charged

(1) In order for a crime of tax evasion under Article 3 of the Punishment of Tax Evaders Act and Article 8 of the Specific Crimes Aggravated Punishment Act to be established, tax claims shall be established upon meeting the taxation requirements stipulated in the tax law. Thus, there is no room for establishing the crime of tax evasion unless the tax liability is established due to failing to meet the taxation requirements (see, e.g., Supreme Court Decisions 89Do1356, Sept. 29, 1989; 2003Do5631, Jun. 10, 2005).

The income of a domestic corporation for each business year shall be the amount calculated by subtracting the total amount of losses belonging or to be attributed to the relevant business year from the total amount of earnings which are or will be attributed to the relevant business year, and the business year to which the relevant gross income and deductible expenses accrue shall be the business year which includes the date on which the relevant gross income and deductible expenses are determined (Articles 14(1) and 40(1) of the Corporate Tax Act). In order to avoid corporate tax imposed on the corporation’s income which is calculated on a business year basis, the taxable income shall be reduced through the inclusion of the gross income or processed deductible expenses belonging to the relevant business year (see Supreme Court Decision 2004Do817, Jun. 29, 200

(2) Examining the part of the revised facts charged which the court below found guilty in light of the above legal principles and the records, even if the defendant 5 company excluded the excess of the actual construction price in the business year in which the subcontractor paid the unfluored construction price, as shown in the judgment of the court below, the difference cannot be included in the gross income for the business year in which the difference was refunded from the subcontractor. Thus, the defendant 5 company's corporate tax liability under the premise that the taxable income was reduced through omission of the gross income cannot be established as follows.

(A) In addition, according to the facts duly established by the lower court and the record, the Defendant Company: (a) designated a subcontractor who has tendered at the lowest price for the purpose of creating a non-financing as a subcontractor, and entered into a subcontract with the subcontractor in return for the difference thereof; and (b) concluded a subcontract with the subcontractor in accordance with the subcontract rate, which is compared to the subcontract price ratio, which is compared to the subcontract price, as the criteria for the examination of subcontracting as determined by the Framework Act on the Construction Industry while the actual construction price is bidding price; and (c) made a subcontract with the subcontractor in return for the difference in cash after the actual payment of the discounted construction price in order to make it difficult to understand it from the outside.

As such, it can be deemed that a subcontract for construction work is an act of pretending to a subcontractor with Defendant 5 company, and thus, it should be imposed according to the subcontract transactional relationship in which the bid price is the actual construction cost depending on the substance of hidden transaction.

Therefore, as the difference in the business year in which the construction cost is less than the actual construction cost is paid is excessive and the corporate tax income of Defendant 5 is reduced, it is necessary to calculate the evaded tax amount on the income omitted in deductible expenses in the corresponding business year.

(B) In addition, the difference among the construction amount excessively paid by a subcontract, which is the requirement for inclusion in deductible expenses, cannot be deemed as “the ordinary accepted loss or expenses incurred or spent in connection with the business of the corporation” (Article 19(2) of the Corporate Tax Act), and thus, it cannot be included in deductible expenses for the business year in which the construction amount was paid.

(C) Article 18 Subparag. 2 of the Corporate Tax Act provides that the income already taxed shall not be included in gross income even if it was returned for the business year following the return. As such, the difference in the amount of construction paid by additional payments shall be included in the tax base for the relevant business year, and even if the difference is subsequently refunded, it shall not be included in gross income for the

(D) Meanwhile, in order to recognize that a company evaded corporate tax for the business year in which the difference paid in excess of the changed facts charged was evaded, the subcontract is based on the premise that the difference was determined and reverted to the gross income for the business year in which the difference was refunded. However, the validity of the subcontract for the business year in which the difference was refunded. Defendant 5 agreed to receive a refund of the difference at the time of concluding the subcontract with the subcontractor and received a refund of the difference in accordance with the above agreement. As such, Defendant 5’s bonds equivalent to the difference should be attributed to the gross income for the business year in which the right to receive a refund of the difference in the business year in which Defendant 5 paid the subcontractor to the partner. Since the above difference was confirmed and confirmed to the higher degree, even if Defendant 5 received the refund of the difference, it was the realization of the right already determined as the gross income for the pertinent business year and the claim was extinguished and the corresponding cash was made accordingly,

(3) Nevertheless, the lower court convicted Defendant 5 of this part of the facts charged on the erroneous premise that Defendant 5 may include the difference in earnings in the business year during which the difference was refunded from the subcontractor. The lower court erred by misapprehending the legal doctrine on the crime of tax evasion, which is premised on the establishment of corporate tax liability, thereby adversely affecting the conclusion of the judgment.

4. Scope of reversal

For the foregoing reasons, without examining the remaining grounds of appeal by Defendants 1, 3, and 5, the part of the lower judgment against Defendants 1 and 3’s violation of the Specific Crimes Aggravated Punishment Act (tax) and the Punishment of Tax Evaders Act (hereinafter “Defendant 1”) and the part concerning Defendant 5’s employee’s violation of the Punishment of Tax Evaders Act should be reversed. The prosecutor’s appeal against the acquittal portion (including acquittal in the grounds of appeal) cannot be accepted. The part concerning Defendant 5’s violation of the Punishment of Tax Evaders related to “Defendant 2” should also be reversed. As such, the lower court’s conviction part against Defendants 1 and 3 and the part concerning Defendant 5 should be reversed.

5. Conclusion

Without examining the remaining grounds of appeal by Defendant 1, Defendant 3, and Defendant 5, of the lower judgment, the guilty part against Defendant 1 and Defendant 3 and the part of the lower judgment against Defendant 5 are reversed, and this part of the case is remanded to the lower court for further proceedings consistent with this Opinion. Defendant 2’s appeal and the Prosecutor’s appeal against Defendant 1, Defendant 2, Defendant 3, and Defendant 4 are dismissed in its entirety as it is without merit. It is so decided as per Disposition by the assent of all participating

Justices Lee Dong-won (Presiding Justice)