Whether losses incurred in the Gesung Industrial District may be recognized as losses under the Corporate Tax Act;

Losses incurred by a domestic corporation in the course of operating a business approved as one of the inter-Korean economic cooperation projects in the GIC district shall be included in deductible expenses as the Corporate Tax Act applies.

20154Guhap6578 The revocation of revocation of revocation of rectification

KoreanAA

○ Head of tax office

oly 23, 2015

December 18, 2015

1. On July 8, 2014, the Defendant’s disposition rejecting to rectify the increase of ○○○○○○○○○ in the business year 2010 against the Plaintiff is 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. On December 31, 1981, the Plaintiff was a juristic person established for the purpose of developing 00 resources pursuant to the Korea0 Construction Corporation Act, which was established on February 18, 2005 by the ○○ Minister pursuant to Article 16(1) of the former Inter-Korean Exchange and Cooperation Act (amended by Act No. 9357 of Jan. 30, 2009). On March 31, 2005, the Plaintiff was approved as a cooperative project operator pursuant to Article 16(1) of the former Inter-Korean Exchange and Cooperation Act (amended by Act No. 9357 of Jan. 30, 2009), and supplied 00 industrial areas to the domestic enterprises located in the ○○ Industrial District.

B. In the year of 2010, the Plaintiff incurred losses at the Gsung branch (hereinafter “instant settlement”). At the time of filing a corporate tax return for the pertinent business year, the Plaintiff calculated the tax base and tax amount without deducting the instant losses from the income for the pertinent business year, and reported and paid them, but on March 31, 2014, filed a request for correction of the tax list and tax amount to include the instant losses in deductible expenses with the Defendant.

C. However, on July 8, 2014, the Defendant notified the Plaintiff of the purport to refuse the said request for correction.

(hereinafter referred to as "disposition of this case")

D. On July 29, 2014, the Plaintiff filed an appeal with the Tax Tribunal on July 29, 2014, but was dismissed on March 26, 2015.

[Ground of recognition] Facts without dispute, entry of Gap evidence 1 to 6, purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

Since there is no legal basis to deny inclusion of the instant losses in deductible expenses for the business year 2010, the instant disposition is unlawful.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

According to Article 26(3)6 and 7 of the Inter-Korean Exchange and Cooperation Act and Article 44(1) and (3) of the Enforcement Decree of the same Act, the Corporate Tax Act and the Small and Medium Business Act shall apply mutatis mutandis to the imposition, collection, exemption, refund, etc. of taxes on income generated from investment between South and North Korea, taking out or bringing in goods, etc., and other economic-related cooperative projects and transactions incidental thereto; however, when there is an agreement between the Government and the Korean authority with regard to taxation on income generated from inter-Korean exchange and cooperation, all or part of the income tax under paragraph (1) may not be applied mutatis mutandis.

As seen earlier, since the Plaintiff, a domestic corporation, has suffered losses in the course of running a business that was approved as one of the inter-Korean economic cooperation projects in the Gsung Industrial District, the Corporate Tax Act shall apply to the settlement of losses in this case (Article 44(1) and (3) of the Enforcement Decree of the Inter-Korean Exchange and Cooperation Act only where an agreement between South and North Korea is reached between South Korea in relation to the inter-Korean cooperation projects, it shall be interpreted that only the application of the Income Tax Act may be excluded, and the application of the Corporate Tax Act shall not be excluded, and it seems that there is no specific agreement between South and North Korea on the method

Therefore, with respect to the provisions of the Corporate Tax Act, Article 13 subparagraph 1 and Article 14 (2) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that the total amount of losses belonging to a domestic corporation for each business year exceeds the total amount of earnings belonging to that business year, and the tax base of corporate tax on income of a domestic corporation for each business year shall, within the scope of income for each business year, be deducted from the losses incurred during the business year that began within 10 years from the beginning date of the business year, which were not deducted in calculating the tax base for each business year thereafter.

Therefore, unless there is any other legal basis to exclude the application of the above provision of the Corporate Tax Act, the loss of this case shall be included in the loss in calculating the Plaintiff’s taxation table on the corporate tax for the business year 2010 pursuant to the above provision of the Corporate Tax Act.

In this regard, the defendant argues that the deduction of deficits from the amount of income constitutes tax reduction and exemption, and that Article 16 of the Act on the Support of the Gesung Industrial District provides that "the Government may reduce or exempt taxes from the amount of income if necessary for South Korean residents who invested in the Gesung Industrial District in order to encourage investment in the Gesung Industrial District, according to the provisions of the Restriction of Special Taxation Act, if there is a legal basis in the Restriction of Special Taxation Act for the residents of South Korea who invested in the Gesung Industrial District." Thus, unless there is a provision on the deduction of losses incurred while running a business in the Gesung Industrial District in the Restriction of Special Taxation Act, the deduction of losses shall not be allowed unless there is a legal basis in the Restriction of Special Taxation Act for the deduction of losses from the amount of income.

However, tax reduction or exemption refers to the application of special tax rate, tax reduction or exemption, tax credit, income deduction, inclusion in deductible expenses, etc. (Article 2(1)8 of the Restriction of Special Taxation Act), and since the inclusion of losses in deductible expenses under subparagraph 1 of Article 13 and Article 14(2) of the former Corporate Tax Act cannot be deemed to constitute tax reduction or exemption, the defendant's above assertion on a different premise is without merit.

Next, the defendant argues that the main text of Article 22 (1) of the Agreement on the Prevention of Double Taxation (hereinafter referred to as the "Agreement in this case") on Income between South and North Korea provides that "if a resident in his own region has paid or is to pay taxes on the income that he received from the other party, a tax on such income shall be imposed on such income." Thus, as long as the plaintiff does not impose tax on the income that he received at the Gisung branch, it is balanced that the plaintiff cannot deduct the loss that the plaintiff suffered at the Gisung branch in accordance with the principle of response to the income cost under the Corporate Tax Act, and it is more reasonable that the North Korean authority grants a carryover deduction for five years from the regulations on the tax of the Gisung Industrial District established by the North Korean authority (hereinafter referred to as the "the tax provisions in this case") so that it can obtain double benefits from the deduction of losses in both high-priced South and North Korea.

In order to promote economic exchanges and cooperation between South and North Korea on December 26, 200, and to prevent double burden of tax by coordinating that the right to impose tax on income accrued from one of the parties is concurrent, South Korea’s representative and ○○○ Minister as North Korea’s representative, and the part related to this case’s agreement is as follows. The part related to this case’s agreement does not have any provision to treat the other party’s loss in the other party’s region. On June 30, 2003, the National Assembly of Korea approved this case’s agreement at the National Assembly of Korea on December 240, 200. Article 18 of the tax provision of this case’s "the corporate acquisition tax should be paid with respect to income accrued from business activities in the Gsung Industrial Zone," Article 24 of the tax provision provides that an enterprise that has paid losses to the court for settlement of accounts may not be changed by "any losses incurred during the period of appropriation for management loss".

① However, if Article 22 of the Agreement does not allow the deduction of losses incurred in the permanent establishment of North Korea from income generated in the Republic of Korea on the ground that it adopted the method of income exemption, the taxpayers would rather incur the same result as increasing or newly occurring. This is the basic purpose of the Agreement concluded to reduce the tax burden by preventing double taxation.

that is obviously contrary to this chapter;

Agreement on Prevention of Double Taxation against Income between South and North Korea

South and North Korea agree to confirm that economic exchanges and cooperation conducted pursuant to the South and North Joint Declaration, which was published on June 15, 200, are transactions inside the nation, not between the country and the country, and to prevent double taxation on income as follows:

Article 3 Kinds of taxes

1. The kinds of taxes applied under this Agreement shall be as follows:

(a) Income tax, corporate tax and income-proportional resident tax on the south side;

(b) Local taxes on corporate income, personal income tax, and income on the north side;

2. The kinds of taxes include taxes, in essence, imposed in addition to or in substitution for the existing gold, after an agreement is concluded. Both parties shall notify each other of the different kinds of taxes if the different types of taxes are different.

Article VIICorporate Profits

1. A tax may be levied on profits earned by an enterprise of one of the other party from its business activities at a permanent establishment in which the other party is located. In this case, a tax shall be imposed only on the profits accruing to the permanent establishment in which the other party is located;

Article 22 Means of Double Taxation

1. One party shall be exempted from the amount of tax on any income that a resident in his/her region has paid or is obligated to pay with respect to the income earned from the other party: Provided, That with respect to the interest, dividend and rent, the amount of tax on one party may be deducted from the amount of tax paid or to be paid by

2. Where a resident of his/her own region has been exempted or abated from taxes on income earned from the other party or in accordance with any other measure, the former shall be deemed to have fully paid the taxes;

② The instant agreement is similar to a tax treaty. In general, the inclusion of losses is not logical and inevitable because it adopted the method of income exemption in the tax treaty in order to prevent double taxation (Article 23A(Exemptions) of the OECD Model Tax Convention; Article 234 of the OECD Model Tax Convention provides that no or may allow the deduction of losses according to the State in the application of Article 23A(Exemptions) of the same Convention; the solution is primarily attributable to the domestic law of the Contracting State; the domestic law of the OECD Member State is fundamentally different; thus, any solution in this Convention itself cannot be presented; and, if necessary, the Contracting State can clarify the issue related to losses under its own provisions or mutual agreement procedures;

③ The double taxation provision of Article 22 of the Agreement provides that "where a taxpayer has paid or is obligated to pay a tax on the income earned from the other party" under the premise that there is no tax to pay the loss, and thus, double taxation as provided for in the above provision does not exist. ④ The principle of profit-making cost response under the Corporate Tax Act refers to the expression of realizing profit and the cost, expenses, and losses related to the profit and its profit in the form of the period or the subject of the loss. When the profit is determined, it is difficult to view that it is directly related to the issue of this case, namely, whether the loss incurred in the course of carrying out the business exempt from taxation on the income can be included in deductible expenses. ⑤ The plaintiff supplied domestic enterprises located in Gsung Industrial District with low-level industrial power. The problem of double benefit from the carryover deduction of deductible expenses in North Korea should be resolved by enacting explicit provisions related to the Corporate Tax Act, and it is difficult to accept the above double benefit only in light of the concerns that dual benefit may arise from North Korea's domestic corporation's taxation and cooperation with the legislative purpose.

Ultimately, any legal basis can be found to deny inclusion of the instant loss in deductible expenses, and thus, the instant disposition rejecting the Plaintiff’s application for rectification of the loss is unlawful.

3. Conclusion

The plaintiff's claim is reasonable, and it is so decided as per Disposition.