The purpose of the tax credit system for research and human resources development expenses under the Restriction of Special Taxation Act and whether allowances for retirement benefits fall under personnel expenses subject to tax credit (negative)

Article 10(1) of the former Restriction of Special Taxation Act (Amended by Act No. 9272, Dec. 26, 2008); Article 10(1) of the former Restriction of Special Taxation Act (Amended by Act No. 9921, Jan. 1, 2010); Article 9(2) [Attachment Table 6] of the former Enforcement Decree of the Restriction of Special Taxation Act (Amended by Presidential Decree No. 21307, Feb. 4, 2009); Article 8(1) [Attachment Table 6] of the former Enforcement Decree of the Restriction of Special Taxation Act (Amended by Presidential Decree No. 23590, Feb. 2, 2012)

Supreme Court Decision 99Du8718 delivered on January 19, 2001

Hyundai Automobile Co., Ltd. (Bae, Kim & Lee LLC, Attorneys Kim Jong-ho et al., Counsel for the defendant-appellant)

Head of Seocho Tax Office

Seoul High Court Decision 2013Nu13534 decided October 23, 2013

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

The grounds of appeal are examined.

1. Article 10(1) of the former Restriction of Special Taxation Act (amended by Act No. 9272 of Dec. 26, 2008 and Article 10(1) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Act No. 9921 of Jan. 1, 2010; hereinafter “former Restriction of Special Taxation Act”) provides that where a national has expenses for research and human resources development for each taxable year prescribed by Presidential Decree (hereinafter “research and human resources development expenses”), an amount prescribed in each of the following subparagraphs shall be deducted from income tax or corporate tax for the pertinent taxable year. Accordingly, Article 9(2)6 of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21307 of Feb. 4, 2009) and Article 8(1)6 of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 23590 of Feb. 2, 2012) shall be listed as one of the research and human resources development expenses prescribed by Ordinance of the Ministry of the Ministry of the Ministry of Strategy and Finance.

2. The lower court, citing the reasoning of the first instance judgment, acknowledged that the Plaintiff filed a claim for the reduction of corporate tax with the purport that the total amount of KRW 11,123,390,525 of the allowances for severance benefits for employees working in the department exclusively in charge of research and development at the time of filing a corporate tax return for the business year 2008 through 2010 was not included in the amount subject to the tax credit for research and human resources development expenses under Article 10(1) of the former Restriction of Special Taxation Act; on March 31, 2012, the Defendant issued the instant disposition rejecting the claim by deeming that the allowances for severance benefits did not constitute personnel expenses subject to the tax credit for research and human resources development expenses; and on the ground that the accumulation of allowances for severance benefits for the pertinent business year constituted personnel expenses subject to the tax credit for research and human resources development expenses under Article 10(1

3. However, we cannot agree with the judgment of the court below for the following reasons.

The purpose of the tax credit system of research and human resources development expenses under the Restriction of Special Taxation Act is to deduct a certain amount of money from the income tax or corporate tax for the pertinent taxable year in cases where there are personnel expenses, etc. within a certain scope required by the department exclusively in charge of research and human resources development (see Supreme Court Decision 9Du8718, Jan. 19, 2001). Thus, only the expenses directly corresponding to the research and human resources development in the pertinent taxable year should be subject to the tax credit (see Supreme Court Decision 9Du8718, Jan. 19, 2001). However, the expenses paid in a lump sum considering the long-term continuous service period such as retirement allowances cannot be deemed as the expenses directly corresponding to the research and human resources development in the pertinent taxable year only when the labor contract is terminated. Furthermore, even if the allowances for retirement benefits can be included in the expenses in calculating the income amount for the pertinent taxable year under the Corporate Tax Act, this is merely a reasonable estimate of the expenses for the purpose of calculating

Therefore, the allowance for severance benefits does not constitute personnel expenses subject to tax credit for research and human resources development expenses under Article 10 (1) of the former Restriction of Special Taxation Act.

Therefore, the lower court’s judgment on a different premise is erroneous in misapprehending the legal doctrine on the scope of personnel expenses eligible for the tax credit for research and human resources development expenses under Article 10(1) of the former Restriction of Special Taxation Act, thereby adversely affecting the conclusion of the judgment. The ground of appeal

4. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Chang-suk (Presiding Justice)