Cho High Court Decision 2009Hu3874 (2010.02.01)

In case where excessive bonuses are paid to the controlling shareholders without any justifiable reasons, non-deductible expenses;

Even if an officer bonus is paid in accordance with the criteria for the payment of benefits, if the bonus is paid in reality more than that of an officer in the same position without justifiable reasons, it shall be deemed that the surplus is disposed of and excluded from

○○ Club Co., Ltd.

Head of Chungcheong Tax Office

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of imposition of corporate tax amounting to KRW 445,403,860 for the business year of 2006 against the Plaintiff on August 1, 2009, exceeding KRW 81,991,543, shall be revoked.

1. Details of the disposition;

A. The Plaintiff is a company that was established on March 1, 1992 and operated a golf course.

B. Article 34 (Remuneration and Retirement Allowance) of the Plaintiff’s articles of incorporation provides that “The remuneration and retirement allowance of a director and an auditor shall be determined at a general meeting of shareholders.” On March 23, 2006, the Plaintiff opened a general meeting of shareholders and set the following limits: On December 22, 2006, the Plaintiff decided that the payment of performance-based bonus was made: The amount of compensation payment for performance-based employee including the board of directors: the amount determined by the representative director.

C. On December 28, 2006, the Plaintiff paid bonuses to executive officers and employees, and the details of the payment for executive officers are as follows.

D. On December 28, 2006, the Plaintiff included the bonus paid as above in deductible expenses, and reported and paid corporate tax for the business year 2006.

E. After conducting a tax investigation, the Defendant considered the nature of bonus of one billion won paid to the Gangwon-do (hereinafter “instant bonus”) as a disposition of profits and imposed corporate tax of 445,403,860 (including additional tax) on August 1, 2009 on the Plaintiff on August 1, 2009 (hereinafter “instant disposition”).

F. The Plaintiff filed an objection with the Tax Tribunal on October 18, 2009, but was dismissed on February 1, 2010.

[Ground of recognition] Facts without dispute, Gap's 1, Gap's 3 through 8, 10, 12, Eul's 1 to 3, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

(1) The amount to be paid by the shareholders’ general meeting or the board of directors’ resolution pursuant to Article 43(2) of the Enforcement Decree of the Corporate Tax Act shall be included in deductible expenses. The instant bonus is naturally included in deductible expenses, as it was paid by the shareholders’ general meeting as of March 23, 2006 and the legitimate resolution of the board of directors as of December 22, 2006.

(2) On March 23, 2006, the Plaintiff’s general meeting of shareholders set the limit of executive officers’ remuneration, and there is no framework for the Plaintiff’s resolution to pay “the amount set by the representative director” as bonus for executive officers and employees without setting the specific payment criteria at the board of directors on December 22, 2006. However, there is no framework for implementing the Corporate Tax Act.

Article 43(2) of the Decree does not require a specific standard for the payment of benefits when a resolution is passed by the general meeting of shareholders or the board of directors. If the defendant requires the addition of these requirements, this constitutes an extended interpretation or analogical interpretation of the tax law and thus violates the principle of no taxation without law.

(3) On December 13, 2001, when it is extremely difficult for the Plaintiff to take the position of the representative director and make unconstitutional efforts to increase the company’s sales and operating income every year by continuously making efforts without receiving any remuneration. Therefore, since the instant bonus is characterized as remuneration for labor particularly contributed, there are reasonable grounds even if it was received a large amount of difference compared to other executives. Therefore, deeming the instant bonus to fall under the disposition of profits rather than a normal bonus with the size of the amount to be reasonable.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination

(1) According to the provisions of Article 19(1) and (3) of the Corporate Tax Act and Article 43(2) of the Enforcement Decree of the same Act, where a corporation disposes of surplus funds, the amount shall not be included in deductible expenses in principle, as it is not deductible expenses. However, among bonuses paid to executives, the amount paid in advance according to the standards for payment of wages determined by articles of incorporation, general meeting of shareholders, general meeting of shareholders or resolution of the board of directors, can be deemed as having been included in deductible expenses. However, regardless of the name or form of transaction, the imposition of taxes must be based on the substance of transaction, so it is the key issue of the instant case

(2) Circumstances recognized based on the above facts and evidence are as follows. ① At the time of the instant bonus payment, the Plaintiff opened a general meeting of shareholders and set the limit of compensation for executives and employees, and the Plaintiff did not have any other standards with regard to whom much amount of bonus would be paid. However, the purport of the representative director’s determination is to wholly delegate to the representative director the amount of money to whom would be paid. Thus, the representative director’s payment standard is not specific, but does not have any way to determine the amount of bonus. Therefore, if the amount of bonus exceeds the limit of the amount of remuneration for the executives and employees, it would be difficult to determine the amount of bonus payment and the amount of bonus payment to which it would be reasonably determined based on its own ability to pay the amount of bonus to the executives and employees. ② Although the amount of bonus payment to which it would be paid to the executives and employees would have been reasonably made, it would be difficult to determine the amount of bonus payment and the amount of bonus payment to which it would have been sufficiently different from the ordinary amount of bonus payment to all other executives and employees.

(3) Article 43(3) of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20619, Feb. 22, 2008) provides that, where a corporation pays remunerations to an officer or employee who is a controlling shareholder under Article 87(3) (including a person in a special relationship under paragraph (4) of the same Article; hereinafter referred to as "controlling shareholder, etc."), in excess of the amount paid to an officer or employee other than a controlling shareholder, etc. in the same position without justifiable grounds, such excess amount shall not be included in the calculation of losses. The plaintiff paid a large amount of money which can be extremely exceptional to Gangwon, who is a controlling shareholder, as the bonus of this case, to Gangwon who was in the same position as the joint representative director, and did not pay the same percentage of profit. Considering all the circumstances asserted by the plaintiff, it is difficult to view that there is justifiable reason to obtain such discrimination, and thus, the bonus of this case does not constitute the subject of inclusion in the calculation of losses.

(4) The instant disposition is lawful, and the Plaintiff’s assertion disputing this is without merit.

3. Conclusion

rejection of a claim.