Seoul Administrative Court-2016-Gu Partnership-57083 (2017.04.07)

Only penalty and compensation which result in the increase in net assets can be subject to taxation.

Simple compensation for damage itself, if there is no increase in net assets, it can not be subject to taxation, and only penalty and compensation which result in an increase in net assets can be subject to taxation.

Article 132 of the Enforcement Decree of the Corporate Tax Act

2017Nu46365 Revocation of disposition, etc. of corporate tax withholding

Plaintiff and Appellant

△ Bank Co., Ltd.

Defendant, Appellant

OO Head of the tax office

Seoul Administrative Court Decision 2016Guhap57083 decided April 7, 2017

November 22, 2017

January 17, 2018

1. Revocation of a judgment of the first instance;

2. On July 10, 2014, the Defendant’s imposition disposition of KRW 1,071,765,482 and imposition disposition of KRW 107,176,548 and penalty tax of KRW 3,134,845,905 and imposition disposition of KRW 313,484,591, and imposition disposition of KRW 1,091,336,180 for corporate tax and penalty tax of KRW 109,13,617 for the business year 2010 shall be revoked.

3. All costs of the lawsuit shall be borne by the defendant.

The decision is as follows: (a) the plaintiff stated the subject matter of cancellation in the complaint and the purport of the petition of appeal as the "each collection disposition (including imposition disposition of additional tax) of corporate tax of KRW 1,178,942,030 (including additional tax), KRW 3,448,30,50 (including additional tax), KRW 1,200,469,80 (including additional tax) for the business year 2010; (b) however, it appears that the amount of reduction and correction after the initial disposition is to be stated as the basis of the amount stated in the notice of national tax refund (4 through 6 of evidence A). Therefore, the amount of reduction and correction shall be made based on the amount stated in the correction resolution of the source tax (including evidence A 2-1 to 3) for the business year 2010.

1. Quotation of judgment of the first instance;

The reasons for this Court concerning this case are as follows, since the reasons for this Court are the same as the reasons for the judgment of the court of first instance except for the dismissal or addition of a part of the judgment of the court of first instance, the meaning of the language used in accordance with Article 8(2) of the Administrative Litigation Act and the main sentence of Article 420 of the Civil Procedure Act (hereinafter the same shall apply to the judgment of the first instance).

2. Parts used or added;

○, for the second reason, 8th (hereinafter referred to as “the 8th (the 8th)”) shall be used as “no domestic place of business of the mother, no other domestic place of business; hereinafter referred to as “the 8th (the 1st)”, and the last action shall be amended to “the shipbuilding agreement” (the 1st).

Part 8 of the 8th page "First, we will examine the plaintiff's primary argument, first, use the 5th chapter "(1)" as "A.", delete 19,20 and then put the 19,20th chapter "B" as "B."

○○ The first place of the first place of the 9th page "(A)" shall be deemed to be "(1)", and the third place of the table shall be "compactalty" with "compactalty".

Pursuant to the first table of the 10th page, the 10th page "(B)" shall be read as "(2)", and the 3rd column of the 10th page "compalty penalty" shall be applied as "compalty".

0000000000000000000000000000000000,0000

Between the 12th table and the 2nd table, ".... whether it falls under Article 93 subparagraph 11 (b) of the former Corporate Tax Act," and the 2nd table below the said table ".................................."

○ 14 Up to 21 pages 14 up to 21 pages 9 shall be dried as follows:

2) Whether the additional dues for each of the instant cases constitute money paid in excess of the damages to the payment itself under the original terms of the contract

A) As seen earlier, each additional refund of this case has the nature of compensation for damages, but Article 132(10) of the former Enforcement Decree of the Corporate Tax Act provides that in order to constitute a domestic source income of a foreign corporation provided for in Article 93 subparag. 11 (b) of the former Enforcement Decree of the Corporate Tax Act, compensation for damages paid due to breach or termination of a contract on property rights should be “money paid in excess of compensation for payment itself under the previous contract terms” regardless of the title thereof. This does not constitute a new income or income, and thus cannot be deemed as other income. However, the penalty or compensation paid in excess of the original payment or actual amount of damages cannot be deemed as having been subject to corporate tax because it generated new income or income beyond the compensation for damages. Accordingly, it cannot be subject to taxation if there is no increase in net assets as a mere compensation for the damages itself, and only a penalty and indemnity arising from the increase in net assets may be subject to taxation (see Constitutional Court Order 2005HunBa278, Feb. 29, 2010).

Therefore, in applying this, even if the recipient of the damage compensation received more amount than the amount paid through the initial contract, it cannot be deemed that the payment made to compensate the actual damage of the recipient constitutes “money compensating for the damage exceeding the actual damage to the payment itself under the original contract” (see Supreme Court Decisions 2002Du3942, Apr. 9, 2004; 2007Du1947, Apr. 29, 2010; 2007Du19454, Apr. 29, 2010).

B) However, the aforementioned facts and evidence Nos. 14 through 16, Gap’s evidence No. 17-1 and 2 were revealed by comprehensively taking account of the overall arguments, namely, ① the cost of shipbuilding is required, so shipbuilding is conducted by means of lending from ordinary financial institutions, etc. at the time of shipbuilding contracts (the form of vessel financing, such as Dandice, in which multiple financial institutions participate). In this case, it is likely that the Plaintiff would raise capital by adding a certain interest rate to the above general financing method in light of the scale of the shipbuilding price as seen earlier. Thus, it is difficult to view that each of the instant additional charges were paid as compensation for damages incurred to foreign vessel owners in the course of procuring the advance payments paid to the domestic shipbuilding company. Ultimately, in light of the fact that each of the instant shipbuilding contracts could not be seen as an increase in the amount of compensation for losses incurred to each of the instant vessel owners, not an increase in the amount of compensation for losses incurred by each of the instant vessel owners.

C) Therefore, each of the instant additional charges cannot be deemed as falling under the domestic source income of foreign corporations under Article 93 subparag. 11 (b) of the former Corporate Tax Act.

D) As to this, the Defendant asserted that all expenses, including financial expenses, which the above foreign vessel owners spent are only items included in deductible expenses in the return and payment of corporate tax to the country where the foreign vessel owners are located, and that they cannot be considered in calculating the amount of domestic source income. However, as seen earlier, since each additional refund of this case does not constitute new income or income which incurs an increase in net assets, it cannot be subject to withholding unless it constitutes other income. The circumstances asserted by the Defendant merely serve as materials concerning the calculation of gross income and deductible expenses when calculating the corporate tax of the foreign vessel owners in their own country, and the above argument by the Defendant cannot be accepted.

(d) Whether Article 93 subparagraph 11 (j) of the former Corporate Tax Act applies

In addition to items (a) through (i) of Article 93 of the former Corporate Tax Act, "income accrued from a business operated in the Republic of Korea, a personal service provided in the Republic of Korea, or an economic profit related to assets located in the Republic of Korea" is defined as one type of other income among the domestic source income of a foreign corporation.

However, foreign vessel owners are not carrying on any business in the Republic of Korea as seen earlier, and there is no evidence to deem that foreign vessel owners provided any human services in connection with the shipbuilding in the Republic of Korea. Moreover, a vessel under construction by domestic shipbuilding owners is owned by foreign vessel owners, and thus cannot be deemed as the assets of foreign vessel owners. Thus, each of the instant additional charges for refund cannot be deemed as income accrued from economic benefits provided in relation to assets in the Republic of Korea or similar income.

Therefore, each additional refund of this case does not constitute a foreign corporation’s domestic source income as provided in Article 93 subparag. 11 (j) of the former Corporate Tax Act.

E. Whether Article 93 subparagraph 1 (a) of the former Corporate Tax Act is applicable

Article 16(1) of the former Income Tax Act (amended by Act No. 11146, Jan. 1, 2012) citing subparagraph 1 (a) of Article 93 of the former Corporate Tax Act (amended by Act No. 11146, Jan. 1, 201) lists each type of interest income, and provides that “any income similar to the income referred to in subparagraphs 1 through 11 of Article 12, in the nature of consideration following the use of money, is also included in interest income.” In order to constitute such interest income, it must be similar to the income listed above, must be the nature of consideration following the use of money, and there must be transactions pursuing the occurrence of profit from operation of money, such as interest, between the parties. However, each of the instant advance payments is paid in advance by a foreign vessel owner, taking into account the expenses necessary for building a ship, and each of the instant additional charges of this case is merely damage compensation following the cancellation

Therefore, since each additional refund of this case is not premised on a transaction seeking the occurrence of pecuniary operating profits, such as a lending of money, it cannot be deemed that it constitutes a domestic source income of a foreign corporation under Article 93 subparagraph 1 (a) of the former Corporate Tax Act.

F. Sub-committee

Therefore, the instant disposition that the Plaintiff paid to foreign vessel owners in accordance with each refund guarantee contract of this case on the premise that the additional payment on refund constitutes a foreign corporation’s domestic source income subject to corporate tax withholding is unlawful without having to review the remainder of the Plaintiff’s remaining arguments.

3. Conclusion

Therefore, the plaintiff's claim of this case seeking the cancellation of the disposition of this case is justified, and the judgment of the court of first instance has different conclusions, so the court of first instance shall accept the plaintiff's appeal and shall cancel the judgment of the court of first instance and decide to cancel the disposition of this case as per Disposition.