Cho Jae-2012-west-526 (2013.06)

Where a parent company has paid stock option costs directly to its executives and employees, it constitutes deductible expenses and a withholding agent shall be the subsidiary.

Where the subsidiary has directly paid the expenses for exercising stock options to its executives and employees, the subsidiary constitutes the reduced benefits and the withholding agent shall be the subsidiary.

Article 19 of the Enforcement Decree of the Corporate Tax Act

2013Guhap61395 Disposition of revocation of refusal to correct corporate tax

○ Financial Investment Company

○○ Head of tax office

April 22, 2016

May 13, 2016

1. The Defendant’s rejection of correction of KRW 539,605,640 for the business year 2008 against the Plaintiff on August 24, 2012 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

Cheong-gu Office

As set forth in the text.

1. Details of the disposition;

A. The Plaintiff was a previous listed corporation that runs the investment trading business and the investment brokerage business. On December 23, 2004, the Plaintiff was incorporated into the complete subsidiary of the ○○ Financial Holding Company (hereinafter “○○ Financial Branch”) through an all-inclusive share swap on December 23, 2004, and the Plaintiff’s shares were delisted as ○ Financial Branch shares were newly listed on January 5, 2005.

B. The Plaintiff’s officers and employees granted the Plaintiff’s stock options based on the Plaintiff’s shares pursuant to Article 340-2(1) of the Commercial Act prior to delisting of the Plaintiff’s shares. The said stock options were replaced with the stock options based on the Plaintiff’s shares. After delisting the Plaintiff’s shares, stock options based on the Plaintiff’s shares were granted from the beginning (hereinafter “instant stock options”).

C. The instant stock option was operated in a way that the difference settlement method stipulated in the proviso of Article 340-2(1) of the Commercial Act, namely, when the Plaintiff’s executives and employees exercised the instant stock option, the difference between the exercising price of the stock option and the real price thereof was paid in cash from the ○ Financial Branch owner. The Plaintiff agreed with the ○○ Financial Branch owner to bear the Plaintiff’s cost of exercising the instant stock option (hereinafter “instant preservation agreement”).

D. The Plaintiff’s officers and employees exercised the instant stock option in 2008, and, in principle, they paid cash to them according to the difference settlement method, and the Plaintiff paid to the ○○ Bank Holdings in accordance with the instant preservation agreement, but the Plaintiff directly paid the Plaintiff’s executives and employees KRW 2,158,422,593 (hereinafter “the instant money”). The Plaintiff reported and paid corporate tax for the business year 2008 without including it in deductible expenses.

E. On June 28, 2012, the Plaintiff filed a claim for rectification to the effect that the instant monetary amount should be included in deductible expenses and the corporate tax of KRW 539,606,190 for the business year 2008 was refunded. However, Article 19 subparagraph 19 of the Enforcement Decree of the Corporate Tax Act (hereinafter “former Enforcement Decree”) newly incorporated by Presidential Decree No. 21302 on August 24, 2012, the Defendant rejected the claim on the ground that the said provision cannot be applied to the instant monetary amount that was previously paid since February 4, 2009, on the ground that Article 6 of the Enforcement Decree of the Corporate Tax Act (hereinafter “the instant disposition”).

F. The Plaintiff appealed and filed an appeal with the Tax Tribunal on November 15, 2012, but was dismissed on August 6, 2013.

[Reasons for Recognition] Facts without dispute, Gap's 1 to 8, 11 to 13 (including branch numbers; hereinafter the same shall apply) and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant money is a kind of labor cost required by the Plaintiff for the payment of bonus in kind to its officers and employees, which falls under subparagraphs 3 and 18 of Article 19 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009; hereinafter referred to as the “former Enforcement Decree”), and thus, should be included in deductible expenses under the Corporate Tax Act, but the instant disposition that different premise is unlawful.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

1) Article 19 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) provides that deductible expenses shall be the amount of losses incurred from transactions which reduce the net assets of the corporation, except as otherwise provided for in this Act and other Acts and subordinate statutes, such as refund of capital or financing, disposal of surplus funds, and the amount of losses incurred from transactions which reduce the net assets of the corporation, and the amount of losses or expenses incurred in connection with the business of the corporation shall be generally accepted as ordinary or directly related to profits. Paragraph (3) provides that matters necessary for the scope, classification, etc. of such losses shall be prescribed by Presidential Decree, and Article 19 of the former Enforcement Decree provides that deductible expenses shall be included in the following subparagraphs except as otherwise provided for in the Act and this Decree, and subparagraph 3 provides that "work expenses" and subparagraph 18 provides for other losses that accrue or will accrue to the corporation:

2) Comprehensively taking account of the following facts, the instant money borne by the Plaintiff’s officers and employees as a result of exercising the Plaintiff’s right to choose purchase of the instant shares can be deemed as personnel expenses incurred in relation to the Plaintiff’s business for the purpose of generating business profits, and even if not, it can be deemed as “other losses under Article 19 subparag. 18 of the former Enforcement Decree, which are accrued or will accrue to the corporation,” and thus, the instant disposition on a different premise is unlawful.

(1) A stock option is a right to acquire new shares at a predetermined price or to allow its executives and employees to purchase their own shares at a certain price to contribute to the management, technological innovation, etc. of the company, which is established to maximize their business performance by inducing future profits from the purchase of shares. In addition, Article 38(1)17 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301, Feb. 4, 2009) provides that "the profits from the exercise of the stock option granted to the executives or employees of the corporation or the corporation in a special relationship under Article 87 of the Enforcement Decree of the Corporate Tax Act with the corporation concerned during the period of their work, etc." as one of the earned income. The stock option, etc. is paid to its executives and employees as a part of

② Articles 19(1) and 20 subparag. 1 of the former Corporate Tax Act, and Article 43(1) of the former Enforcement Decree of the same Act provide that “the amount appropriated as losses for the disposal of surplus, excluding certain piece rates,” or “the bonus paid by a corporation to its executives or employees by the disposal of profits, in principle, shall not be included in the calculation of losses.” The term “profit disposal” refers to the amount paid by the disposal of profits with the approval of the general meeting of shareholders stated in the disposal of profits in the disposal of appropriation of profits. There is no evidence to deem that the instant

③ According to the result of the fact-finding on the ○○ Financial Branch Holdings, Article 8 of the ○○ Financial Branch Holdings’s Stock option Business (the procedure for exercising the stock option in compensation type) provides that “a person who intends to exercise the Stockholm option” shall submit to the affiliated company with the name and seal or signature and submit two copies of the shares to be exercised in the application form for stock option. The affiliated company shall send one copy of the application form to the holding company, and shall pay cash in accordance with the procedure for payment.” Thus, the Plaintiff’s payment without paying the instant amount to the ○○ Financial Branch Holdings is a party to the instant preservation agreement and immediately paid to the Plaintiff’s officers and employees without paying it to the ○○ Financial Branch Holdings. The Plaintiff’s payment without paying it to the ○○ Financial Branch Holdings constitutes “the so-called so-called” reduced benefits directly paid to the Plaintiff’s executives and employees, who are third parties having a different contractual relationship between the Plaintiff and the ○○ Financial Branch Holdings Co., Ltd., a party to the instant preservation agreement.

④ The purpose of Article 19 subparag. 3 of the former Enforcement Decree is to confirm that the cost of exercising a stock option to be compensated by a corporation to a parent company according to a prior agreement is that it is a "labor cost" under Article 19 subparag. 3 of the former Enforcement Decree, and that Article 19 of the former Enforcement Decree is "where an executive or employee exercises a stock option granted under Article 542-3 of the Commercial Act, the amount to be compensated, etc. as the cost of exercising the stock option to the corporation granting the stock option is a loss under Article 19(1) of the former Corporate Tax Act (see Supreme Court Decision 2012Du3491, Nov. 17, 2015).

⑤ As to this, the Defendant asserts that the instant money is not expenses unrelated to business, on the ground that the Plaintiff paid the Plaintiff’s expenses for exercising the right to choose purchase of stocks to the Plaintiff’s executives and employees without guaranteeing the Plaintiff’s right to choose purchase of stocks, and that the Plaintiff did not recognize the right to demand reimbursement against the Plaintiff’s financial branch owner as an accounting for the right to demand reimbursement. However, as the Plaintiff paid the instant money to its executives and employees, the Plaintiff offered benefits to the Plaintiff’s executives and employees pursuant to the instant preservation agreement at the same time, and there is no room for the Plaintiff’s right to demand reimbursement against the ○○ financial branch owner, and the Plaintiff’s repayment is different from the Plaintiff’s assertion. Accordingly, the Defendant’s assertion is without merit.

3. Conclusion

Thus, the plaintiff's claim of this case is reasonable, and it is so ordered as per Disposition.

shall be ruled.