In cases where a claim for the principal and interest of a loan already recovered and extinguished at the time of determination or correction of a final return on tax base or tax base and amount of tax among multiple loans, whether interest income is deemed to exist on a claim (affirmative in principle), and whether the same applies to cases where multiple loans are claims against the same debtor (affirmative)

Whether there exists interest income from non-business loans shall be determined by applying Article 51(7) of the former Enforcement Decree of the Income Tax Act by individual loans (amended by Presidential Decree No. 22034, Feb. 18, 2010). Thus, if there are claims for the principal and interest of loans already recovered at the time the final return on tax base or the tax base and the amount of tax are determined and corrected among multiple loans, the interest income shall be deemed to exist on the loans unless there are special circumstances. The same applies even if multiple loans are claims for the same debtor.

Article 51 (7) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010)

Plaintiff

The Head of the North Daegu Tax Office (Law Firm, Attorneys Gangnam-gu et al., Counsel for the plaintiff-appellant)

Daegu High Court Decision 2013Nu10107 decided December 6, 2013

The part of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the Daegu High Court. The Plaintiff’s appeal is dismissed.

The grounds of appeal are examined.

1. As to the Defendant’s third ground of appeal

Whether a lending of money constitutes a non-business profit, which is a kind of interest income, or a business income, depends on whether a lending of money constitutes a business under the Income Tax Act. Whether a lending of money constitutes a business under the Income Tax Act ought to be determined in light of social norms by taking into account all the circumstances, such as the nature of profit-making, continuity, repetition, existence of a certain period of transactions, the length of the period of transactions, the amount of the lending and the amount of interest, etc. (see, e.g., Supreme Court Decision 2003Du14505, Aug

After finding the facts as indicated in its reasoning based on the adopted evidence, the court below rejected the Defendant’s assertion that the income from the loan transaction of this case constitutes business income on the ground that it cannot be seen as continuous and repeated grounds to the extent that it can be seen as business activities, and that the income from the loan transaction of this case constituted non-business income, in light of the fact that the Plaintiff merely appears to have engaged in the loan transaction of this case upon receiving a request from the non-party who was the birth partner of this case for the lending of stock investment funds from the non-party who was the birth partner of this case.

In light of the above legal principles and records, the judgment of the court below is just, and there is no error in the misapprehension of legal principles as to the classification of interest income and business income as alleged in the defendant'

2. The plaintiff's grounds of appeal and the defendant's grounds of appeal Nos. 1 and 2

A. Details of relevant regulations and legal principles

Article 39(1) of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) provides that “the year to which the total amount of income and necessary expenses of a resident belong shall be the year in which the total amount of income and necessary expenses are determined.” Article 39(4) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same shall apply) delegated by Article 39(4) of the former Income Tax Act shall be the date of receipt of non-business profits according to the agreement, in principle, the date of payment of interest shall be the date of interest under the agreement, or where interest is paid before the date of payment of principal under the agreement, or where interest is excluded from the calculation of total amount of income under the provisions of Article 51(7) of the former Enforcement Decree of the Income Tax Act shall be the date of payment of interest. In addition, Article 51(7) of the former Enforcement Decree of the Income Tax Act provides that the amount collected from a final return on non-business profits shall be calculated.

Unlike the Corporate Tax Act, Article 51 (7) of the former Enforcement Decree of the Income Tax Act does not provide an institutional device to reflect the amount of interest income in the items of deduction even if the amount of loss was incurred due to the failure to recover the principal for non-business proceeds later, and therefore, it appears to be a provision to prevent unfair result in imposing interest income tax. The above provision provides that the entire amount recovered until a certain cause for recovery occurs prior to the final return on tax base or the determination or correction of tax base and tax amount is less than the principal amount, and there is no special exception. Whether interest income accrues under the Income Tax Act is difficult to discuss the possibility of recovering the principal claim which is the source of income. In full view of the above, if the amount recovered falls short of the principal amount by the taxable year prior to the final return on tax base of non-business proceeds or the determination or correction of tax base and tax amount, even if the amount recovered falls short of the principal amount prior to the occurrence of a certain cause not to recover the principal, it cannot be deemed as a taxable object of interest income tax (see, e.g., Supreme Court Decision 20032Du313138Du.

In addition, whether there is interest income from non-business loans shall be determined by applying Article 51(7) of the former Enforcement Decree of the Income Tax Act by individual loans. Thus, if there are bonds already recovered and extinguished at the time of the final return on tax base or the determination and correction of tax base and tax amount among multiple loans, such bonds shall be deemed to have interest income, barring any special circumstance. The same applies to the case where several loans are bonds for the same debtor.

B. The disposition imposing global income tax on the Plaintiff in 2007

The lower court determined that the disposition imposing global income tax for the year 2007, on the ground that the Plaintiff obtained the above interest income, was lawful, on the ground that: (a) the Plaintiff lent KRW 400 million to the Nonparty on three occasions from January 31, 2007 to March 2, 2007; (b) received reimbursement of KRW 570,000,000 from July 6, 2007 to August 2, 2007; and (c) collected all principal KRW 400,000,000 as interest income of KRW 170,00,000; and (d) the Plaintiff received such interest income.

In light of the above legal principles and records, such determination by the court below is just, and contrary to the Plaintiff’s grounds of appeal, there were no errors by misapprehending the legal principles on interpretation and application of Articles 45(9-2 and 51(7) of the former Enforcement Decree of the Income Tax Act or by failing to exhaust all necessary deliberations

C. Each disposition imposing global income tax for the tax year 2008 and 2009

(1) The lower court rejected the Plaintiff’s assertion that the Plaintiff’s total amount of interest income should be deemed unlawful on the ground that: (a) the Plaintiff’s loan of KRW 4,907,400 (hereinafter “loan 2”) was lent to the Nonparty from August 31, 2007 to November 25, 2009; and (b) the Plaintiff’s payment of KRW 4,235,680,000 in total from February 29, 2008 to November 17, 2009 should be deemed unlawful on the ground that the Plaintiff’s total amount of interest income should be deemed as falling short of KRW 671,720,000 among the principal amount of the loan, even if the Plaintiff was unable to recover the remainder of the loan due to the impossibility of collecting the principal and interest income and appropriated the total amount of the loan to the principal at the time of the final return on tax base or the determination and correction of tax base and tax amount; and (c) the Plaintiff did not have any other interest income accrued from the Plaintiff’s total amount.

(2) Examining the above legal principles in light of the premise that Article 51 (7) of the former Enforcement Decree of the Income Tax Act can be applied to a case where a cause for recovery occurs at the time of the final return on tax base or the determination or correction of tax base and tax amount, even though the cause for recovery was not occurred at the time of receipt of interest in the judgment of the court below, and there is no error in the misapprehension of legal principles as to the interpretation or application of Article 5

(3) However, we cannot agree with the court below's rejection of the defendant's assertion that the court below should consider the application of Article 51 (7) of the former Enforcement Decree of the Income Tax Act for each individual loan claim for the following reasons.

According to the reasoning of the judgment below and the evidence duly admitted by the court below, the plaintiff filed a lawsuit against the non-party seeking the payment of the above loan from January 31, 2007 to November 25, 2009, 5,307,400 won in total over 55 times from July 6, 2007 to November 17, 2009, and 4,805,680,000 won in total over 55 times from July 6, 2007 to November 25, 209; the plaintiff filed a lawsuit against the non-party for the payment of the principal of the loan from the Daegu District Court 2010 Ga22555, and the above court calculated the loan amount up to 209,000 won in total from July 2, 200 to 209 to 19,000 won in total as the result of appropriating the interest and principal of the loan from each loan to the non-party in the order of lending 209.

Examining these facts in light of the legal principles as seen earlier, there is room to view that Article 51(7) of the former Enforcement Decree of the Income Tax Act cannot be applied to the Plaintiff at least on the ground that the Defendant’s imposition of global income tax for the year 2008 and year 2009, was imposed on the Plaintiff on the principal and interest of the loans as of March 5, 2012, which had already been collected until May 29, 2009, and the principal and interest of the loans were entirely recovered, thereby terminating the principal

Nevertheless, the lower court did not examine and determine whether a loan was already extinguished in relation to a loan No. 2 at the time of imposition of global income tax for 2008 and 2009, and, solely on the grounds indicated in its reasoning, determined that the imposition of global income tax for the year 2008 and 2009 on the ground that the total amount of the loan No. 2 was not an interest income accrued to the Plaintiff and each disposition imposing global income tax for the year 2008 and 2009 was unlawful. In so doing, the lower court erred by misapprehending the legal doctrine on interpretation and application of Article 51(7) of the former Enforcement Decree of the Income Tax Act, thereby adversely affecting the conclusion of the judgment. The Defendant’

3. Conclusion

The part of the lower judgment against the Defendant is reversed, and that part of the case is remanded to the lower court for further proceedings consistent with this Opinion. The Plaintiff’s appeal is dismissed. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee Sang-hoon (Presiding Justice)