The case holding that a person working at a domestic branch of a foreign subsidiary's company's income from exercising stock options received from a foreign parent company constitutes earned income.

The case holding that a person who works at a domestic branch of a foreign subsidiary shall constitute Class B earned income provided for in Article 20 (1) 2 (b) of the Income Tax Act on the ground that he/she has a quid pro quo relationship based on a certain correlation or economic rationality with labor provided by a foreign parent company.

Article 20 (1) 2 (b) of the Income Tax Act

Plaintiff (Attorney Kim Jae-chul, Counsel for plaintiff-appellant)

Head of Sungnam Tax Office

Seoul High Court Decision 2004Nu17497 delivered on December 7, 2006

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

The grounds of appeal are examined.

Wage and salary income under Article 20 (1) of the Income Tax Act, regardless of the form or name of payment, shall include not only all economic benefits in the nature of the provision of labor and the relationship of compensation, but also benefits which form the contents of the working conditions closely related to the provision of labor on the premise of the work.

In full view of the relevant employment evidence, the lower court determined that the Plaintiff’s employment contract was automatically terminated upon termination of the employment contract between the Plaintiff and Nonparty 1 Co., Ltd. and Nonparty 1 Co., Ltd. on condition that the granted stock option cannot be transferred to another person, and that the Plaintiff’s employment contract would not have any economic difference between the Plaintiff and Nonparty 1 Co., Ltd.’s exercise of the stock option or its exercise of the stock option and the actual exercise of the stock option (hereinafter “the economic difference between the Plaintiff’s exercise of the stock option or the actual exercise of the stock option”) and the purchase price of the Plaintiff, which was the parent company (name of the corporation omitted) holding not less than 90% of the shares issued by Nonparty 1 Co., Ltd. on six occasions from June 9, 1995 to May 15, 200, and that there was no economic difference between the Plaintiff’s exercise of the stock option and Nonparty 1 Co., Ltd.’s exercise of the stock option or its exercise of the stock option.

In light of the above legal principles and records, the above judgment below is just and acceptable. The court below did not err by misapprehending the legal principles as to the scope of earned income under the Income Tax Act, as otherwise alleged in the ground of appeal.

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 Shin Hyun-chul (Presiding Justice)