The meaning of “import dividends received from another domestic corporation invested by the domestic corporation” subject to exclusion from gross income pursuant to Article 18-3(1) of the former Corporate Tax Act / Whether the amount received from another domestic corporation whose business operator is an undisclosed association agreement constitutes “amount subject to exclusion from gross income” (negative)

In full view of the language and structure of Articles 18-2(1) and 18-3(1)1 and 18-3(1)2 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same), the term “revenue dividends received from another domestic corporation invested by a domestic corporation subject to non-taxation pursuant to Article 18-3(1) of the former Corporate Tax Act refers to “the dividend received from an invested domestic corporation by investing its stocks in another domestic corporation and acquiring the corporation’s stocks, etc. by acquiring the corporation’s stocks, etc. and the legal fiction of dividend or distribution under Article 16 in proportion to the equity shares, etc. of another domestic corporation.”

Therefore, where a domestic corporation has concluded an undisclosed association agreement and agreed to divide profits from its business to another domestic corporation, and accordingly, where another domestic corporation invests in a business entity who is in the position of undisclosed partner, the domestic corporation does not acquire stocks, etc. of the other domestic corporation through investments or have the status of shareholder, etc., and thus, the amount received from the other domestic corporation that is in the position of an undisclosed partner is merely paid by a shareholder, etc. under an undisclosed association agreement as at the time of investment in the position of an undisclosed partner, and there is no room for constituting dividend received by the shareholder, etc. or constructive dividend under Article 16 of the former Corporate Tax Act. Therefore, any amount received from the other domestic corporation that is in the position of an undisclosed association agreement is not subject to exclusion from taxation under Article 18-3(1) of the former Corporate Tax Act.

Articles 18-2(1) and 18-3(1) of the former Corporate Tax Act (Amended by Act No. 8831, Dec. 31, 2007); Articles 18-2(1) and 18-3(1) of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008); Articles 16, 18-2(1), and 18-3(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Articles 16, 18-2(1), and 18-3(1) of the former Corporate Tax Act

Aftermasung Co., Ltd. (Attorneys Lee Chang-hoon et al., Counsel for the defendant-appellant)

Head of the tax office

Seoul High Court Decision 2015Nu31994 decided July 8, 2015

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined.

1. Article 18-3(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that the amount of dividend received from another domestic corporation invested by the relevant domestic corporation shall not be included in gross income in calculating the amount of income for each business year, and that the amount of dividend shall be calculated differently depending on whether the relevant domestic corporation invested in excess of the specified ratio of “total number of outstanding stocks or total amount of investment” of another domestic corporation (Articles 1 and 2), and Article 18-2(1) of the former Corporate Tax Act provides that “amount of dividend” under Article 18-3 of the former Corporate Tax Act shall be deemed as “amount of dividend or surplus distribution and deemed amount of dividend or dividend distribution under Article 16” (amended by Act No. 9267, Dec. 26, 2008; Article 18-2(1) and (1)18-3(1) of the former Corporate Tax Act; Article 318-1 of the former Corporate Tax Act.

Comprehensively taking account of the language and structure of these regulations, “import dividends received from another domestic corporation invested by a domestic corporation” subject to exclusion from taxable income pursuant to Article 18-3(1) of the former Corporate Tax Act shall be deemed to mean “the amount of profit dividend or surplus distribution and the constructive amount of dividend or distribution pursuant to Article 16, which a domestic corporation receives in proportion to the equity shares, etc. of another domestic corporation as a shareholder, etc. in the position of the shareholder, etc. of the domestic corporation.”

Therefore, where a domestic corporation made an investment in the business of another domestic corporation by concluding an undisclosed association agreement and agreed to distribute profits from such business to another domestic corporation, and accordingly, the domestic corporation does not acquire stocks, etc. of another domestic corporation through its investment or have the status of its stockholders, etc., and thus, the amount received from another domestic corporation that is in the status of an undisclosed partner is merely paid by a shareholder, etc. according to an agreement on distribution of profits and losses as determined at the time of investment as an undisclosed partner, and there is no room for constituting a dividend received by a shareholder, etc. or a constructive dividend payment under Article 16 of the former Corporate Tax Act. Therefore, any amount received from another domestic corporation that is in the status of an undisclosed partner pursuant to an undisclosed association agreement shall not be deemed as subject to exclusion from taxation under Article 18-3 (1) of the former Corporate Tax Act.

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

A. A. Around December 2003, 2003, the Company entered into an anonymous association agreement with the IFJ Korea Co., Ltd. (hereinafter “IFJ Korea”) as a business operator and as a member of IFJ Korea Co., Ltd. (hereinafter “IFJ Korea”) (hereinafter “instant undisclosed association agreement”), and “The profits and losses accrued from NFT shall be apportioned by the business operator to investors and business operators in accordance with the investment share ratio. The investor share ratio of investment in NFTex is 40%.”

B. Pursuant to the instant undisclosed association agreement, the Company invested KRW 1,240,000,000 in the IFJ Korea. Meanwhile, the Plaintiff succeeded to the rights and obligations of the Company under the instant undisclosed association agreement as a legal entity established by dividing the Company on November 2006.

C. The Plaintiff received 36,684,780,780 won in total, including 11,536,874,737 won in 2009, and 16,536,737 won in 2009, and 1,969,691,204 won in accordance with the distribution of profits and losses agreement under the undisclosed association agreement as stipulated in the instant undisclosed association agreement (hereinafter “instant issues income”).

D. The Plaintiff deemed that the instant key income falls under the dividend income as stipulated in Article 18-3(1) of the former Corporate Tax Act, and not partially included in gross income, and reported and paid each corporate tax for the business year from 2007 to 2010.

E. On March 9, 2012, the Defendant issued the instant disposition to increase and correct each corporate tax for the pertinent business year from 2007 to 2010 on the ground that the instant key income does not fall under the import dividends under Article 18-3(1) of the former Corporate Tax Act, and that the entire amount should be included in gross income.

3. Examining these facts in light of the legal principles as seen earlier, the key issue amount in this case is the money received by the Plaintiff, who is in the position of an undisclosed partner, pursuant to the distribution of profits and losses agreement under the undisclosed association agreement, and does not constitute “amount of dividend income” as provided for in Article 18-3(1) of the former Corporate Tax Act.

Although the lower court’s explanation of its reasoning is somewhat insufficient, the conclusion that the instant disposition is lawful is justifiable, and contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the principle of strict interpretation or the legal doctrine on the interpretation of “amount of dividend income” under Article 18-3(1) of the former Corporate Tax

4. Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Sang-ok (Presiding Justice)