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 or interim settlement of accounts constitutes personnel expenses subject to tax credit (negative)

The purpose of the tax credit system for research and human resources development expenses under the Restriction of Special Taxation Act is to deduct a certain range of amount from the income tax or corporate tax in the relevant taxable year in order to encourage the development of technology of an enterprise in case there are personnel expenses within a certain scope required by the research and human resources development department.

However, as retirement allowances, expenses paid in a lump sum taking into account the long-term continuous service period cannot be deemed as expenses directly corresponding to research and human resources development for the pertinent taxable year only when a labor contract is terminated. Moreover, even if allowances for retirement benefits can be included in deductible expenses in calculating income for the pertinent taxable year under the Corporate Tax Act, it is merely a reasonable calculation of expenses for calculating a reasonable period of profit and loss, and it does not necessarily constitute labor expenses subject to tax credit under the Restriction of Special Taxation Act. Accordingly, allowances for retirement benefits or interim settlement allowances paid with the aforementioned funds do not constitute labor expenses subject to tax credit under Article 10(1) of the former Restriction of Special Taxation Act (amended by Act No. 9272, Dec. 26, 2008; Act No. 9921, Jan. 1, 2010).

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

Otods Co., Ltd. (Attorney Lee Han-soo, Counsel for defendant-appellant)

Head of Suwon Tax Office

Busan High Court Decision 2013Nu1379 decided September 25, 2013

The judgment below is reversed, and the case is remanded to Busan 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) [Attachment Table 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) [Attachment 6] of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 23590 of Feb. 2, 2012).

2. The court below, citing the reasoning of the judgment of the court of first instance, acknowledged the following facts: (a) the Plaintiff reported the corporate tax for the business year 2006 through 2009 to the researchers working at the dedicated department, and received the tax credit by reporting the total of 924,33,504 won of interim retirement allowances paid within the limit of the amount set for allowance for severance benefits for each business year to the researchers who worked at the dedicated department as labor expenses subject to the tax credit for research and human resources development expenses under Article 10(1) of the former Restriction of Special Taxation Act; (b) the Defendant deemed that the said interim retirement allowances do not constitute labor expenses subject to the tax credit for research and human resources development expenses; and (c) notified the Plaintiff of the correction and notification of corporate tax for the business year 2006 through 2009 on December 1, 2010, on the ground that the interim retirement allowances paid by the Plaintiff within the limit set for allowance for severance benefits for each business year constituted labor expenses subject to research

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

The purpose of the tax credit system for 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 retirement allowances 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 the reasonable period

Therefore, an interim retirement allowance paid with the allowance for severance benefits or the financial resources therefor does not constitute personnel expenses subject to the 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)