In a case where the articles of incorporation or a provision on payment of retirement benefits delegated by the articles of incorporation that provides for the amount of retirement benefits to be paid to an officer or the standard for calculating the amount of retirement benefits or a provision on payment of retirement benefits delegated to an officer’s articles of incorporation provides for a specific corporation’s funds to be distributed to a specific officer, whether the provision on retirement benefits under Article 44(4)1 or (5) of the former Enforcement Decree of the Corporate Tax Act constitutes the provision on retirement benefits for officers under Article 44(4)2 of the former Enforcement Decree (negative)

In light of the language and text of Article 26 subparag. 1 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010); Article 44(4) and relevant provisions of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22812, Mar. 31, 201; hereinafter the same) and legislative intent to prevent unfair reduction of corporate income, etc., the total amount of retirement benefits paid to an executive pursuant to the articles of incorporation or the rules on payment of retirement benefits delegated to an executive under the articles of incorporation or the rules on payment of retirement benefits delegated by the articles of incorporation (hereinafter collectively referred to as “the provisions on retirement benefits”) should be included in the calculation of deductible expenses. However, if retirement benefits were established temporarily as a means of allocating the corporation’s funds to a specific executive by lending the type of retirement benefits to his/her officer, such provision does not constitute a temporary retirement benefits under Article 44(4)1 or (5) of the former Enforcement Decree of the Corporate Tax Act, which would substantially affect the retirement benefits payment or its existing provision.

In addition, if a corporation that made the provisions of the retirement benefits of officers which are merely a temporary reason increases the monthly salary which serves as the basis for the calculation of the retirement benefits immediately before the retirement of an officer without any reasonable reason in order to distribute the corporation's funds to a specific officer in the form of the retirement benefits, only the amount calculated based on the monthly salary before the increase shall be included in the calculation

Article 26 subparag. 1 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 44(4) and (5) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22812, Mar. 31, 201)

Limited Company Construction (Law Firm LLC, Attorneys So-young et al., Counsel for the defendant-appellant)

Head of Dong District Office

Daejeon High Court (Cheongju) Decision 2014Nu5591 decided July 22, 2015

The part of the judgment of the court below against the defendant is reversed, and that part of the case is remanded to the Daejeon High Court. The plaintiff's appeal is dismissed.

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

1. The plaintiff's ground of appeal Nos. 3 and 4 and the defendant's ground of appeal No. 1

A. Article 26 subparag. 1 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that personnel expenses shall not be included in deductible expenses in calculating the amount of income of a domestic corporation for each business year, as prescribed by Presidential Decree. Article 44(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22812, Mar. 31, 201; hereinafter the same shall apply) provides that “the amount exceeding any of the following amounts shall not be included in deductible expenses.” Article 26 subparag. 1 of the former Corporate Tax Act provides that “where the amount of retirement benefits (including retirement benefits, etc.) to be paid to an officer is prescribed in the articles of incorporation, the amount prescribed in the articles of incorporation shall be included in deductible expenses; where subparagraph 2 provides that “in cases other than those referred to in subparagraph 1, the amount of retirement benefits paid to the relevant officer shall be included in deductible expenses; and where subparagraph 4 of the same shall apply mutatis mutandis.”

In light of the language and text of the aforementioned provisions or the legislative intent to prevent an unfair reduction of corporate income, etc., an officer’s retirement benefits paid pursuant to the articles of incorporation or the rules on payment of retirement benefits delegated to an officer (hereinafter “the provisions on retirement benefits”) should be included in the calculation of losses. However, if the provisions on retirement benefits do not intend to pay retirement benefits for the continuous service period or for the employees’ work, but rather a temporary measure was taken to distribute the corporation’s funds to a specific officer, such provision does not constitute retirement benefits under Article 44(4)1 or (5) of the former Enforcement Decree of the Corporate Tax Act. Therefore, if an officer’s provision on retirement benefits was established or revised with a more rapid increase in the number of retirement benefits than the previous one, and if a person in a position or close relationship with such a person is in a position likely to affect the enactment or amendment thereof, the amount of retirement benefits paid pursuant to the provisions on retirement benefits cannot be seen as a temporary increase in the number of retirement benefits under Article 44(2) of the Enforcement Decree of the Corporate Tax Act.

In addition, if a corporation that made the provision on retirement benefits of officers, which is merely a temporary reason, increases the monthly salary, which serves as the basis for calculating the retirement benefits immediately before the retirement of the officer without any reasonable reason, to distribute the corporation's funds to a specific officer in the form of retirement benefits, only the amount calculated based on the monthly salary before the increase shall be deemed as being included in the calculation of the retirement benefits.

B. Review of the reasoning of the lower judgment and the record reveals the following facts.

(1) The Plaintiff (former Mutual Liability Company) was established on June 1, 2005 and engaged in a housing construction business, etc., and merged between a limited liability company and a Dominmins Co., Ltd. on April 29, 2010.

The above companies are all affiliated companies of the original Construction Co., Ltd. (hereinafter “original Construction”). The articles of incorporation of the Korea Development Bank prior to the merger and the Korea Development Bank prior to the merger provide that “the retirement allowance of the officers shall be governed by the rules of payment of the retirement allowance for officers determined by the resolution of a general meeting of members,” and the articles of incorporation of the Korea Development Bank prior to the merger provide that “the retirement allowance of the retired officers shall be determined by the resolution of the general

(2) The non-party 1 and the non-party 2 respectively were paid KRW 5,389,50 each month while serving as the director of the KIKO Construction before the merger, and the non-party 3 was paid KRW 5,389,50 each month while serving as the director of the mining mins before the merger. The non-party 1’s payment was increased by KRW 30 million from August 2009, and the non-party 2 and the non-party 3’s payment was increased by KRW 20 million from September 2009.

(3) On July 1, 2009, the minging license prior to the merger held a temporary general meeting of employees on October 30, 2009, respectively, and the provision on the payment of retirement allowances for executive officers of the same purport that retirement allowances calculated according to the formula of “average wage for the three months immediately preceding the retirement x the number of years of service x the payment rate (20 times)” was prepared by the resolution.

Accordingly, the company prior to the merger applied the provisions of the retirement allowance for officers newly prepared based on the increased monthly salary. On September 28, 2009, the company paid the retirement benefit of KRW 1,963,05,383 to the non-party 1 who retired from the merger to the non-party 1,963,05,383, the retirement benefit of KRW 1,795,711,60 to the non-party 2 who retired from the KIKO Construction before the merger, and the retirement benefit of KRW 1,812,193,286 to the non-party 3 who retired from the former Domination on December 23, 2009, respectively.

(4) The sum of net income during the five-year period from 2005 to 2009 is approximately KRW 5 billion in the case of the merger, and approximately KRW 2.5 billion in the case of the 2000 billion in the case of the Gabling Domins before the merger and the Domins before the merger.

C. The following circumstances revealed by the facts and records: ① Nonparty 1 et al. was a shareholder or director of Nonparty 4, who was the owner of the original construction that had been employed by the former company as an affiliated company; ② Nonparty 1 created the retirement allowance payment provision for officers before the merger only after the merger; and Nonparty 2 and Nonparty 3 created the retirement allowance provision for officers before the merger with the former two months or six months before the retirement; ③ Nonindicted 1 et al.’s monthly benefit payment for officers was increased to about four times or six times before the establishment of the provision on retirement allowance for officers; ④ Nonindicted 1 et al.’s monthly benefit payment for 0 to 00 times after the merger with the former 0-year retirement allowance provision; and ④ Nonparty 1’s new retirement allowance payment for 0 to 40 years after the merger with the former 0-year retirement allowance provision; and ④ Nonparty 1’s new retirement allowance payment for 00 to 95% after the merger with the former 0-year retirement allowance provision.

Nevertheless, on the premise that the instant provision of retirement allowance for officers is in accordance with Article 44(5) of the former Enforcement Decree of the Corporate Tax Act, the lower court, on the basis that the Defendant, on January 2, 2013, calculated again the retirement allowance payment limit according to the formula (one year salary 】 1/10 】 length of service 】 payment rate (five times)) stipulated in the Rules on Payment of Retirement Allowances for Officers of the original Construction based on the monthly salary as of January 2, 2013, and determined that each of the instant dispositions in which the Plaintiff, a corporation continuing to exist after the merger, issued a correction and notification of corporate tax for the business year 209 after the merger by non-deductible the excess amount as a bonus to Nonparty 1, etc., was unlawful. In so determining, the lower court erred by misapprehending the legal doctrine on the interpretation of Article 44(4)1 and (5) of the former Enforcement Decree of the Corporate Tax Act, which affected the conclusion of the judgment by failing to exhaust all necessary deliberation. The Defendant’s ground of appeal pointing this out

2. Plaintiff’s remaining grounds of appeal

A. As to grounds of appeal Nos. 1 and 2

The Plaintiff asserted that the lower court erred by applying Article 52 of the former Corporate Tax Act, which cannot be applied to the instant case, but the lower court rejected the Defendant’s assertion that the provision on the wrongful calculation basis should be applied on the ground that the adequate amount of retirement benefits to be paid to Nonparty 1, etc. was not proven. As such, the Plaintiff’s ground of appeal on this part is contrary to the different premise and cannot be accepted without need to further examine.

B. Ground of appeal No. 5

Since the company before the merger did not report the tax base by improper means, this part of the allegation that the illegal under-reported penalty in the instant disposition was unlawful is the first time in the final appeal, and it cannot be a legitimate ground of appeal.

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal by the Defendant, the part against the Defendant is reversed, and that part of the case is remanded to the court below for further proceedings consistent with this Opinion. The Plaintiff’s appeal is dismissed. It is so decided as per Disposition by the assent of all participating Justices

Justices Kim So-young (Presiding Justice)