[1] Purport of Article 2-2 of the former Securities and Exchange Act as securities transaction, and whether the price of stock price index futures is included in the sale price of securities under Article 40 of the former Enforcement Decree of the Corporate Tax Act, which serves as the basis for calculating the entertainment expense limit of a securities company (negative)

[2] In a case where the corporation did not allocate the share issued by capitalizing the excess amount to its own shares and allocated it to other shareholders on the grounds of the restriction on the acquisition of its own shares, whether it constitutes a constructive dividend (affirmative)

[3] Whether the sale price of securities under Article 40 of the former Enforcement Decree of the Corporate Tax Act, which is the basis for calculating the entertainment expense limit of a securities company, means only the sale price of securities for the purpose of sales profit (negative)

[4] The standard for determining whether a corporation's expenses incurred for its business constitute "entertainment expenses" or "sale incidental expenses" under the Corporate Tax Act

[5] The case holding that the nominal amount of investment advisory fees constitutes sales incidental expenses not entertainment expenses

[1] The term "securities" under Article 25 (1) 2 of the Corporate Tax Act and Article 40 (1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033, Dec. 29, 2000) refer to securities representing private rights with property value. On the other hand, the securities index, such as the stock price index under Article 2-2 of the former Securities and Exchange Act (amended by Act No. 5041, Dec. 29, 1995), which is subject to futures trading, is merely a value representing the price level of certain securities such as stocks, etc., and does not fall under the concept of securities itself. The method of receiving the price index futures trading shall only make daily settlement according to changes in the stock price index after payment of deposit money, and it shall not be deemed that the purpose of calculating the sale price of securities is to ensure fair and smooth trading of securities and to protect investors from the securities trading index under Article 2-2 of the former Securities and Exchange Act. Thus, the same purpose of the former Securities and Exchange Act is not to apply to the securities trading index.

[2] The purpose of each provision of Article 16 (1) 3 of the former Corporate Tax Act (amended by Act No. 6558 of Dec. 31, 2001) and Article 17 (2) 5 of the former Income Tax Act (amended by Act No. 6557 of Dec. 31, 2001) is to consider the value of shares issued free of charge as fictitious dividend in the case where a corporation issues new shares by capitalizing the amount of shares in possession of its own shares, the acquisition of its own shares is restricted under the Commercial Act in a case where the corporation issues new shares by capitalizing the amount of shares in excess of its own shares, etc., and thus, the other shareholders are allocated shares in excess of the amount of new shares that are to be issued free of charge for its own shares because the acquisition of its own shares is restricted under the Commercial Act.

[3] Article 25 (1) 2 of the Corporate Tax Act and Article 40 (1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033, Dec. 29, 2000); Article 40 (1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033, Dec. 29, 200) provides that, even if securities trading are not for the purpose of business management purpose, it is difficult to conclude that only securities trading for the purpose of profit-making can disburse entertainment expenses, and that there is a need to pay entertainment expenses; while securities trading conducted by a securities company is frequently in comparison with other goods or services trading, it seems that Article 40 (1) of the former Enforcement Decree of the Corporate Tax Act provides that the amount of income, which is the basis for calculating entertainment expenses, shall not be deemed to be the basis for calculating the sales price of securities, and Article 40 (1) of the former Enforcement Decree of the Corporate Tax Act provides that "10/1500 of the sales price of securities transaction shall not be included."

[4] Entertainment expenses are in proportion to the size of business of an enterprise, which are necessary to facilitate corporate activities and facilitate corporate growth. Therefore, a strict interpretation should be made. If the other party among the expenses paid by a corporation for business is a person related to a business and the purpose of spending is to promote friendship with business partners through entertainment activities, etc. to facilitate transactional relations, such expenses shall be deemed entertainment expenses under Article 25(4) of the former Corporate Tax Act (amended by Act No. 6293 of Dec. 29, 2000). However, if the expenditure circumstance, nature, amount, etc. are recognized as ordinary expenses directly related to the sale of goods or products in light of sound social norms or commercial practices, such expenses constitute sales incidental expenses recognized as losses from Article 19(1) of the Corporate Tax Act and Article 19 subparag. 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033 of Dec. 29, 200).

[5] The case holding that the amount under the name of the investment advisory commission constitutes sales incidental expenses not entertainment expenses, since it consists of real investment advisory fees and the investment advisory company's investment funds through securities account to increase the revenue of trading commission fees to securities companies, it constitutes sales incidental expenses not entertainment expenses

[1] Article 25 (1) 2 of the Corporate Tax Act, Article 40 (1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033 of Dec. 29, 2000), Article 2-2 (1) (current repeal) of the former Securities and Exchange Act (amended by Act No. 5041 of Dec. 29, 1995) / [2] Article 16 (1) 3 of the former Corporate Tax Act (amended by Act No. 6558 of Dec. 31, 2001), Article 17 (2) 5 of the former Income Tax Act (amended by Presidential Decree No. 6557 of Dec. 31, 200) / [3] Article 25 (1) 2 of the Corporate Tax Act, Article 20 (1) 9 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 2501 of Dec. 29, 2000) / [209)

[2] Supreme Court Decision 2003Du7217 Decided July 22, 2004, Supreme Court Decision 2003Du7231 Decided August 20, 2004 / [4] Supreme Court Decision 80Nu527 Decided April 26, 1983 (Gong1983, 890) Supreme Court Decision 2003Du6559 Decided December 12, 2003 (Gong204Sang, 183)

Korea Investment Securities Co., Ltd. (Attorneys Lee Im-soo et al., Counsel for the plaintiff-appellant)

Head of Yeongdeungpo Tax Office

Seoul High Court Decision 2004Nu14931 delivered on July 6, 2005

All appeals are dismissed. The costs of appeal are assessed against each party.

The grounds of appeal are examined.

1. Judgment on the Plaintiff’s grounds of appeal

A. Whether the proceeds from sale of the price index are included in the proceeds from sale of the securities

According to Article 25(1)2 of the Corporate Tax Act and Article 40(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17033, Dec. 29, 2000; hereinafter the same), in the case of a securities company under the Securities and Exchange Act, the amount equivalent to 15/100 of the proceeds from the sale of securities shall be included in the amount of income when calculating the limit of inclusion of entertainment expenses in deductible expenses. Meanwhile, Article 2-2(1) of the former Securities and Exchange Act (amended by Act No. 5041, Dec. 29, 1995; hereinafter the same) provides that in the case of stock certificates and other securities, the amount of money designated by the Korea Stock Exchange as securities price index or other securities index which comprehensively indicates the price level of multiple items according to the kinds of stock certificates and other securities shall be deemed to be the amount of securities traded in accordance with the criteria and method set by the Korea Stock Exchange for securities index.

However, the term "securities" as stipulated in the above corporate tax law refers to securities representing private rights of property value. However, securities index such as stock price index does not fall under the concept itself as securities because it merely indicates a certain price level of securities such as stocks. The method of receiving price from stock price index futures trading is to make daily settlement only according to changes in the stock price index after paying deposit money, and it does not receive the total amount of contract amount (securities index x 500,000 x contract amount). When comprehensively and comprehensively considering the contents and purport of each of the above laws and regulations, the purpose of Article 2-2 of the former Securities and Exchange Act, which considers securities index futures trading as securities trading, is to promote fair and smooth trading in the futures trading of securities index, and to prepare institutional measures to protect investors, the same purpose is to apply the Securities and Exchange Act in order to apply the same legal regulation as securities trading in relation to the taxation of corporate tax, so it cannot be deemed that the proceeds from sale of securities under Article 40 of the former Enforcement Decree of the Corporate Tax Act is irrelevant to the scope of the proceeds from sale.

In the same purport, the court below's decision that the price of the stock price index gift of this case is not included in the sale price of securities under Article 40 of the former Enforcement Decree of the Corporate Tax Act is just and it is not erroneous in the misapprehension of legal principles as to the sale price of securities, which is the basis for calculating the limit of entertainment expenses, as otherwise

(b) Whether deemed dividend exists where a corporation fails to allocate treasury stocks to the treasury stocks on the grounds of the restriction on the acquisition of treasury stocks, and distributes it to other shareholders;

Article 16 (1) 3 of the former Corporate Tax Act (amended by Act No. 6558 of Dec. 31, 2001) provides that in capital transfer under Article 16 (1) 2 of the same Act, where other stockholders, etc. are allocated as the corporation did not allocate the value of the stocks, etc. to the treasury stocks or shares of investment owned by the corporation, the value of the stocks, etc. shall be deemed deemed deemed the fictitious dividend, and in capital transfer under the proviso of Article 17 (2) 5 of the former Income Tax Act (amended by Act No. 6557 of Dec. 31, 2001; hereinafter the same shall apply), Article 17 (2) 2 of the former Income Tax Act provides that in case where other stockholders or investors have been allocated the value of the stocks or shares of the corporation's own stocks or shares of investment, the value of the stocks or shares of the corporation shall be deemed the fictitious dividend, and thus, the amount of the stocks or shares shall be

Each of the above provisions is, in principle, not subject to corporate tax or income tax, even though the value of new shares received free of charge due to capital transfer of capital surplus, such as the amount in excess of the issuance of shares, if a corporation issues new shares by capitalizing the amount in excess of its own shares, the acquisition of its own shares is restricted under the Commercial Act, and if other shareholders are allocated shares in excess of the amount corresponding to the new shares to be granted free of charge for the shares of its own shares because the acquisition of its own shares is not limited under the Commercial Act, and as such, it would result in the same as new dividends of the amount equivalent to the shares that the corporation delivered free of charge to other shareholders by the corporation. Thus, the value of the shares received free of charge should be deemed to be deemed to be deemed to be deemed to be fictitious dividends (see, e.g., Supreme Court Decisions 2003Du7217, Jul. 22, 2004; 2003Du72

In the same purport, the court below acknowledged the fact that the defendant made the withholding disposition of this case on February 1, 2002 on the ground that the provisions of Article 16 (1) 3 of the former Corporate Tax Act and Article 17 (2) 5 of the former Income Tax Act are applied not only to the case of a corporation's voluntary intent but also to the case of a case due to legal restriction on the prohibition of acquiring its own stocks, since it did not allocate 50% of the total stocks issued by the mobilization securities company in capitalizing 50% of the total stocks issued on May 26, 200 to the other shareholders as the restriction on the acquisition of its own stocks. Accordingly, the judgment of the court below that the withholding disposition of this case is legitimate on the ground that the provisions of Article 16 (1) 3 of the former Corporate Tax Act and Article 17 (2) 5 of the former Income Tax Act are not erroneous in the misapprehension of legal principles as to constructive dividend as otherwise

2. Judgment on the Defendant’s grounds of appeal

(a) Whether the price sold at the same price after purchasing the bonds falls under the proceeds from the sale of securities

Article 25(1)2 of the Corporate Tax Act, Article 40(1)2 of the former Enforcement Decree of the Corporate Tax Act, and Article 40(1)1 of the former Enforcement Decree of the Corporate Tax Act can not be readily concluded that there is a need to pay entertainment expenses even for securities transaction which is not for the purpose of business management. Securities transaction conducted by a securities company is frequent in the short term compared to other goods or services transaction. On the other hand, Article 40(1) of the former Enforcement Decree of the Corporate Tax Act is deemed to be based on the amount of income, which is the basis of entertainment expenses, not all of the securities sales proceeds, inasmuch as the necessity of payment for entertainment expenses is low. Since Article 40(1) of the former Enforcement Decree of the Corporate Tax Act, amended by Presidential Decree No. 17033, Dec. 29, 200, considering that the amount of income calculated for entertainment expenses is “15/100 of the price for securities sales entrusted by a securities company,” the amount of income calculated for the purpose of 10/100 of the former Enforcement Decree is not included in sales proceeds of securities transaction.

In the same purport, the court below is just in holding that the transaction in which mobilization securities sold at the same price on the date of the purchase of bonds constitutes the proceeds from the sale of securities under Article 40 (1) of the former Enforcement Decree of the Corporate Tax Act by deeming such proceeds from the sale of bonds as a transaction by its own sale, and there is no error in the misapprehension of legal principles as to the proceeds from the sale of securities, which is the basis for calculating the limit

B. Whether the nominal amount of investment advisory commission constitutes entertainment expenses

Since entertainment expenses are expenses necessary for facilitating corporate activities and promoting corporate growth in proportion to the business size of an enterprise, they should be strictly interpreted (see Supreme Court Decision 80Nu527, Apr. 26, 1983). If a corporation's expenses for business are expenses related to a business and the other party is a person related to a business and the purpose of expenditure is to promote friendship among business persons through entertainment and other acts, thereby promoting smooth transactional relations, they shall be deemed entertainment expenses under Article 25 (4) of the former Corporate Tax Act (amended by Act No. 6293, Dec. 29, 200). However, if it is recognized that expenses are expenses directly required in relation to the sale of goods or products in light of sound social norms and commercial practices, such expenses constitute sales units recognized as losses under Article 19 (1) of the Corporate Tax Act and Article 19 subparagraph 1 of the former Enforcement Decree of the Corporate Tax Act (see Supreme Court Decision 200Du5365, Dec. 29, 2003).

In light of the above legal principles and the records of this case, after compiling the adopted evidence, the court below recognized the facts as stated in its decision, and held that the investment advisory company, which is the price for substantial investment advisory and the investment advisory company, which is the "sale incidental expenses", operated its own funds through the mobilization securities account, should not be included in entertainment expenses because it was made in return for raising transaction fees to mobilization securities by managing the funds of its own customers' investment advisory fees through the mobilization securities account. There is no violation of the rules of evidence or misapprehension of the legal principles as to entertainment expenses as otherwise alleged in the ground of appeal by the defendant.

3. Conclusion

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

Justices Jeon Soo-ahn (Presiding Justice)