Suwon District Court-2017-Gu Partnership-67651 ( October 19, 2018)

Performance rates, etc. paid by the Plaintiff shall be included in the Plaintiff’s deductible expenses.

(As in the judgment of the first instance, it is difficult to deem that the Plaintiff paid performance rates, etc. paid to executives, employees and service enterprises on behalf of major shareholders or paid them without connection with the Plaintiff’s work.

Article 52 of the Corporate Tax Act

2018Nu4485 Revocation of Disposition of Imposing Corporate Tax, etc.

AAAAA Company

FF Head of FF Tax Office

Suwon District Court Decision 2017Guhap67651 Decided April 19, 2018

September 20, 2018

October 18, 2018

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

1. Purport of claim

The Defendant’s imposition of corporate tax of KRW 0,00,000,000 against the Plaintiff on March 9, 2015 and the imposition of KRW 00,00,000 for the first year of 2012 (including additional taxes) shall be revoked, respectively.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Details of the disposition;

The reasoning for this part of this Court is that the reasoning for this Court is the same as the entry of the reasons for the judgment in the first instance except for the following specifications. Thus, this part is cited in accordance with Article 8(2) of the Administrative Litigation Act and Article 420 of the Civil Procedure Act.

○ 2 5 to 6 lines are as follows.

A. The Plaintiff is a domestic corporation that has been established on July 20, 1995 and operated food, beverage, and agricultural and fishery products sales business, etc. with 000CC as its principal office atCC (CCdong).

○ The 2nd 13rd 13rd m (hereinafter "the instant sales contract") is called "the first sales contract of the instant shares" (hereinafter "the instant sales contract").

The contents of the text box consisting of the two to three pages shall be replaced by the following:

- The first sale contract of the instant case -

Article 3 (Stock Purchase Price) (1) Each party agrees to the effect that the share value of the Plaintiff’s total number of issued and outstanding shares is calculated as KRW 000,000,000,000,000. Accordingly, the sales price for this transaction calculated in accordance with this agreement shall be KRW 00,000,000, which shall be adjusted in accordance with Article 5 of this Agreement. The details to be reverted to each seller of outstanding shares before adjustment are as follows:

In this regard, the parties recognize that the purchase price of shares before adjustment, which belongs to the seller's DD, is the amount calculated by subtracting the amount equivalent to the performance rate of KRW 0 billion that the plaintiff would pay to the plaintiff's workers after the date of termination of transaction pursuant to Article 11 (7).

Article 6 (Closing of Trade) (1) Date of the closing of Trade: The closing of Trade shall be effected on the three business days from the date on which the conditions prior to the termination provided for in Article VII of this Agreement are met (defluence omitted), or on the date on which the buyer and the seller agree otherwise, on the date on which the conditions prior to the termination provided for in Article VII, paragraph 1, 4, of this Agreement are met.

(2) Where a transaction is completed, the buyer's act of performing the obligation to complete the transaction: The buyer shall fulfill the obligation of the seller to complete the transaction pursuant to paragraph (3) of this Article on the date of the transaction and shall fulfill the following obligations:

1. Deposit of escalators and the payment of any balance: Not more than omitted;

2. Delivery of documentary evidence related to reporting on the combination of enterprises: Not more than omitted.

(3) Where a transaction is completed, a seller's obligation to complete the transaction: The seller shall fulfill the duty of the buyer to complete the transaction in accordance with paragraph (2) of this Article on the date on which the transaction is completed and shall fulfill the following duties:

5. The issuance of a receipt for the receipt of any balance: omitted.

7. Delivery of the statement of payment of piece rates: The seller shall deliver to the buyer the statement that contains the beneficiary of piece rates, the amount of payment by eligible recipient, and the total amount of payment (hereinafter referred to as "performance-based statement") that the plaintiff shall pay to workers after the closing date of transaction pursuant to Article 11(7).

Article 8 (Statement and Guarantee of Sellers) (2) Sellers shall jointly and severally state and guarantee the following matters to a purchaser based on the date on which this contract is concluded and the date on which transaction is terminated:

13. Labor relations: The Plaintiff is not obligated to pay special compensation, retirement compensation, or other money to the executives and employees of the company in relation to the conclusion and performance of this contract, except for piece rates equivalent to 0 billion won that the Plaintiff is scheduled to pay to the employees pursuant to Article 11(7) of this Agreement.

Article 10 (Matters to be Promised before Closing Transactions) ① Sellers shall comply with the law from the date of this contract to the date of the termination of transaction, conduct operations in accordance with the ordinary business process, and maintain the existing business organization, employment relationship, customer relationship, and contractual relationship properly.

(7) At the time when the buyer agrees with the seller after the completion of this transaction, the buyer shall have the Plaintiff pay the performance-based bonus equivalent to KRW 0 billion in total to the person eligible for the performance-based bonus as stated in the statement of performance-based rates, as agreed with the seller.

○○ 2-3 The following shall be added to the letter boxes consisting of eight to nine:

"The second revised contract of this case" (hereinafter referred to as "the second revised contract of this case"), and "the first revised contract of this case and the first and second revised contract of this case" are "the sales contract of this case".

○ 7 lines below the 3rd bottom of the "in accordance with the instant stock sales contract" added "after closing transactions".

○ 4 lines below the 3rd bottom shall add " October 4, 201 and January 31, 2012" to the following:

○ 4 Up to 3 lines "Ap. 1 and 2" shall be raised "Ap. 1 through 4".

2. Whether each of the dispositions of this case is legitimate

A. The parties' assertion

1) The defendant's assertion

Under the stock sales contract of this case, BB is clearly liable for the payment of the instant piece rate and service costs. Of the stock sales contract between DD and BB, the amount equivalent to performance-based rates shall be deducted from the sales price for the instant stocks. However, the part that BB requires the Plaintiff to pay performance-based rates to its officers and employees constitutes a contract for a third party, including DD, BB as a summary, BB as a person who is weak, and the Plaintiff as a third party. The Plaintiff’s actual payment of performance-based rates and service costs of this case by a resolution of the board of directors, etc. constitutes an expression of intent of profit in the contract for the third party.

Therefore, the Plaintiff’s bonus, which is a new major shareholder, paid by BB for the purpose of BBB without connection with the Plaintiff’s business. As such, the instant bonus and service payment fall under the expenses unrelated to the Plaintiff’s business under Article 27 of the Corporate Tax Act or the rejection of wrongful calculation under Article 52(1) of the same Act, and thus, the instant bonus and service payment should be excluded from deductible expenses, and the input tax amount related to the instant service payment is not the cost for legitimate service. Accordingly, each of the instant dispositions is lawful.

ii)the plaintiff's assertion

For the following reasons, each of the dispositions of this case is unlawful.

A) The instant piece rate falls under personnel expenses under the Corporate Tax Act as the performance rate paid by the Plaintiff in return for work performed by its executives and employees, and should be included in deductible expenses. Since the Plaintiff’s existing major shareholder, DD, or BB, a new major shareholder, cannot be deemed as bearing the duty of piece rate payment for executives and employees belonging to the Plaintiff, the Plaintiff cannot be deemed as bearing the duty of piece rate payment on behalf of the Plaintiff, and thus, it cannot be deemed that the Plaintiff paid the instant piece rate payment to its executives and employees on behalf of the Plaintiff cannot be deemed as having made payment on behalf of

B) The instant disposition imposing the value-added tax is unlawful on the grounds that there is no legal basis for not deducting the input tax amount, even though the Plaintiff’s price for the instant service related to the lawful provision of services related to the delivery service, etc.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

In principle, Article 19(2) of the Corporate Tax Act provides that "losss are generally accepted as ordinary losses or expenses incurred in connection with the business of the corporation or directly related to profit." The term "generally recognized expenses" refers to expenses that are deemed to have been disbursed under the same situation with other corporations engaged in the same kind of business as taxpayers. Whether they constitute such expenses shall be determined by comprehensively taking into account the process and purpose of disbursement, its form, amount, effect, etc. (see, e.g., Supreme Court Decisions 2007Du12422, Nov. 12, 2009; 2012Du7608, Jan. 15, 2015). Meanwhile, in order to apply Article 52(1) of the Corporate Tax Act to deny the calculation of unfair acts under Article 52(1) of the Corporate Tax Act, a transaction between a corporation and a specially related person should be deemed to have reduced tax burden on the corporation's income.

In full view of the following circumstances that can be seen by comprehensively taking account of the aforementioned evidence and the purport of the entire statement and arguments as to the instant case, the subject liable for the payment of the instant piece-rate and service payment pursuant to the Stock Sales Contract is not BB but BB. Therefore, even if the Plaintiff paid the instant piece-rate and service payment to its officers and employees, it does not constitute a case where a corporation’s profit is unfairly distributed as it cannot be deemed to have been attributed to BB. Furthermore, the instant piece-rate and service payment is a “ordinary cost that is generally recognized as being disbursed in connection with the Plaintiff’s business,” and shall be included in the deductible expenses pursuant to Article 19(2) of the Corporate Tax Act, and the input tax amount related to the instant service payment may be deducted. On a different premise, each of the instant dispositions made on the other premise is unlawful.

① The first purchase and sale contract of this case, the first alteration contract of this case, and the second alteration contract of this case, up to the date of the second alteration contract of this case, the total share value of the Plaintiff’s issued and outstanding stocks, the sales price attributed to DD, etc., and the amount of performance-based payment including service fees. However, all of the instant purchase and sale contract of this case had BB to be a major shareholder “Plaintiff”, Article 11(7) of the first purchase and sale contract of this case, Article 5(7) of the first alteration contract of this case, Article 3(7) of the second alteration contract of this case, and Article 3(7) of the second alteration contract of this case or “Plaintiff” (the latter part of Article 3(1), Article 6(3)7, Article 8(2)13 of the second alteration contract of this case, Article 2 of the second alteration contract of this case, Article 1 of the second alteration contract of this case, Article 2 of the second alteration contract of this case, etc.).

On the other hand, the Defendant asserts that the entity liable for the payment of the performance-based bonus and service in this case is BBB, and that the share sales contract in this case constitutes a contract between DD and BB for a third party to have the Plaintiff as a third party. However, the contract for the third party is a contract entered into in the name of the party to the contract for the third party and for the purpose of having the third party acquire the right directly to one of the parties to the contract, and there is no provision that DD and BB shall directly obtain the claim equivalent to the performance-based bonus from BB. This part of the Defendant’s assertion cannot be accepted.

As long as BB is the subject of the obligation to pay the instant piece rates, the Defendant asserts that the Plaintiff has a claim equivalent to piece rates against BB, and that the above claim should be included in the gross income for the business year 2012. However, as seen earlier, the Plaintiff bears the obligation to pay the instant piece rates, etc., so the above assertion is without merit without further review.

② The bonus rate of 0,000,000 won, which was to be reduced from the stock value of D pursuant to the first modified contract, was 0,000,000 won. However, as a result of the combination of enterprises approved by the Fair Trade Commission, the Plaintiff’s issue of paying dividends to the existing shareholders after the change of management rights arose, in order to prevent the Plaintiff’s change of management rights, the second modified contract of this case was concluded to use the amount not exceeding KRW 0,00,000 as dividends to the shareholders (existing shareholders) as at December 31, 201, and to use only the remainder 0,000,000,00 as bonus rate. After that, the Plaintiff paid 0,000,000 won as dividends to the existing shareholders and employees, and it should be interpreted that the Plaintiff did not have the duty to pay dividends as at the same time as the bonus rate of 31, 200,000,000 won.

③ The Defendant asserts that, inasmuch as the sales price of DD was reduced, part of the sales price to be borne by BB, the buyer, would have been paid as piece payments and service payments.

However, the total amount of the purchase price to be borne by BBB under the share purchase agreement of this case is merely the remainder of the purchase price deducted from piece rates and service charges. This is sufficient to deem that the Plaintiff’s net assets are expected to be reduced as a result of the increase of the Plaintiff’s liabilities by bearing the obligation to pay performance rates of this case and service charges, thereby reflecting the decline in corporate value.

④ The Defendant asserts to the effect that, inasmuch as the amount of the instant piece rate and the service price deducted as the sales price of the instant shares reflects the Plaintiff’s corporate value decline, the sales price should have been deducted in proportion to the Plaintiff’s shareholding ratio, such as DD, and that the instant share sales contract only deducts the sales price of DD individual, and thus, it cannot be deemed that the Plaintiff’s corporate value decline was reflected.

First, the agreement between the parties to reduce the price of the Plaintiff’s asset by deeming the Plaintiff’s asset value to decline compared to the value calculated at the time of the actual inspection to conclude a contract for the purchase and sale of shares is acceptable as seen earlier. Furthermore, it is unreasonable to view the amount of the asset so reduced as the amount equivalent to the instant piece rate and the service price as the degree equivalent to the instant amount is determined by the free will between the parties to the contract for the purchase and sale of shares, barring any special circumstance

Furthermore, considering the following circumstances, it is also acceptable to fully agree with the BB to reduce the total amount of the piece rates and service charges of this case among the stock value of the Plaintiff’s stock most highly assessed among the shareholders.

There is no ground to view that the sales price should be deducted in proportion to the shareholding ratio of all stock sellers by reflecting the decline in corporate value due to the instant piece rate and service cost. Rather, reflecting such decline in corporate value in full as to the Plaintiff’s issued and outstanding shares, not only is it very widespread in the process, but also it can be difficult to conclude and conclude a sales contract.

(2) The amount of the purchase and sale of the Plaintiff’s shares held by four major shareholders, including DD, is not equal to that of other minority shareholders. Rather, the purchase and sale price of the Plaintiff’s shares held by four major shareholders, including DD, was calculated as KRW 00,000 [finally, the purchase and sale price of the Plaintiff’s shares held by four major shareholders, such as DD, was calculated as KRW 00,000,000,000, the total number of issued and outstanding shares was calculated as approximately KRW 71.9% of the value calculated as of the total number of issued and outstanding shares ( KRW 00,000,000; KRW 53.6% of the total number of issued and outstanding shares). In particular, DD, which was the largest shareholder, was assessed as KRW 28,00,000, KRW 0000, KRW 0000, KRW 00000, KRW 0000, KRW 0000, KRW 300000.

2. Conclusion

If so, the plaintiff's claim shall be accepted as reasonable. The judgment of the court of first instance is just with this conclusion, and the defendant's appeal is dismissed as it is without merit.