E. S. S.C. (Bae & Yang LLC, Attorneys Choi Full-soo et al., Counsel for the plaintiff-appellant-appellant)

Head of Central Tax Office

December 21, 2016

Seoul Administrative Court Decision 2012Guhap42687 decided May 20, 2016

1. All appeals filed by the plaintiff and the defendant are dismissed.

2. The costs of appeal shall be borne by each party.

1. Purport of claim

The Defendant’s rejection of correction of KRW 1,091,079,249 of corporate tax for the business year 2007 against the Plaintiff on September 26, 201 shall be revoked.

2. Purport of appeal

Plaintiff: Revocation of the part against the Plaintiff seeking revocation under the judgment of the first instance court. On September 26, 201, the Defendant revoked the part of KRW 732,934,044 out of the disposition rejecting correction of KRW 1,091,079,249 for the business year 2007 against the Plaintiff.

Defendant: The part against the Defendant among the judgment of the first instance court is revoked, and the Plaintiff’s claim corresponding to the revoked part is dismissed.

1. Quotation of judgment of the first instance;

The reasoning for this Court’s explanation concerning this case is as stated in the reasoning of the judgment of the first instance, except for the addition of the judgment of the plaintiff and the defendant to the new or new argument in the trial under Paragraph 2 of this Article, and therefore, it is acceptable to accept it as it is in accordance with Article 8(2) of the Administrative Litigation Act and the main text of Article 4

2. Additional determination

A. Judgment on the plaintiff's assertion

1) The plaintiff's assertion

In the case of long-term payable expenses equivalent to the transferred amount of this case, it is recognized as expenses under corporate accounting, but it is not recognized as losses until stock option is exercised, the plaintiff made a tax adjustment in which the above debt is excluded from deductible expenses under the Corporate Tax Act. However, on October 1, 2007, the plaintiff transferred the above debt in the course of transferring his/her business to El Card Co., Ltd., and if the plaintiff did not include the above amount of the transfer of the debt in gross income or make tax adjustment in deductible expenses for the initial inclusion in deductible expenses, there is a problem that the gains on transfer of the business calculated under corporate accounting is excessive compared to legitimate gains on transfer under the Corporate Tax Act. Therefore, in order to adjust this, the transferred amount of this case should be included as deductible expenses for the business year 2007 under the Corporate Tax

2) Determination

A) Each of the following facts is acknowledged as either a dispute between the parties or in full view of the purport of the entire pleadings in Gap evidence Nos. 2, 5, and 11 (including additional numbers):

① From 2002 to 2006, the Plaintiff recognized the stock option costs of this case to be paid to a new financial holding company in the future as stock compensation costs (long-term payable costs). However, in calculating the tax base for corporate tax, the Plaintiff did not include the stock option costs in deductible expenses.

② Some of the stock options in the instant case were exercised during 2007, and the Plaintiff paid KRW 1,432,580,821 to the executives and employees who exercised the stock options in 2007, which correspond to the difference between the exercising price and the market price of the shares of the new financial holding company at the time.

③ On October 1, 2007, the Plaintiff transferred its business to El Card Co., Ltd. the remaining 2,931,736,175 won of long-term unpaid costs (the instant transfer amount) as well as the remaining 2,931,736,175 won (the instant transfer amount). During the instant process, the Plaintiff confirmed the reservation included in the stock option costs, and simultaneously opposed to non-deductible losses (other)

④ The details of the Plaintiff’s accounting and tax adjustment on the instant stock option costs are summarized as follows (one million won).

(j) When granting the tax adjustment of the tax accounts classified in the table contained in the main text, (j) 4,364 non-deductible expenses (Reserve), 4,364 (202 to 2006) (202 to 2006) long-term unpaid expenses (j) 4,364 (207), 4,364 (207), cash 1,432 at the time of the transfer of the business, 2,932 non-deductible expenses (other) 4,364 (207), cash 2,932 (7) cash 2,932

B) Although the amount of tax adjustment due to the inclusion in the calculation of earnings, inclusion in the calculation of losses (or inclusion in the calculation of losses, and exclusion in the calculation of losses) remains inside the corporation, it shall be disposed of in other cases where there is no difference between assets and liabilities under corporate accounting and assets and liabilities under tax law. As seen above, as seen in the above, the amount equivalent to the transfer amount of this case accumulated as a reservation at the time of the return and payment of corporate tax in the business year 2007 shall be included in the calculation of losses (precept of the reservation) and other losses, it shall not be deemed that gains from transfer under corporate accounting are excessively calculated compared to gains from transfer under tax law or that the transfer amount of this case is necessary to

B. Judgment on the defendant's argument

1) The defendant's assertion

Since a new financial holding company is liable to pay the preservation amount of this case and the Plaintiff bears it by entering into the preservation agreement in this case even though there is no reason to pay the expenses, the preservation amount of this case shall be excluded from deductible expenses subject to the denial of wrongful calculation.

2) Determination

The Defendant’s assertion unfairly reduced the Plaintiff’s tax burden on the Plaintiff’s income by entering into the instant preservation agreement. However, around May 22, 2005, when three years have passed since the Plaintiff first granted the Plaintiff’s stock option to its executives and employees, it is insufficient to recognize that the Plaintiff unfairly reduced the Plaintiff’s tax burden solely on the ground that the Plaintiff entered into the instant preservation agreement around May 22, 2005, and there is no other evidence to acknowledge this otherwise. Rather, as seen earlier, the Plaintiff intended to grant the stock option on his own stocks as consideration for the provision of labor to its executives and employees, but the new financial holding company, which was the parent company, granted the stock option on behalf of the Plaintiff for the new financial holding company due to the difficulty in trading and the difficulties in market price assessment. Such stock option is for the Plaintiff’s business profit-making and thus, it is deemed that the Plaintiff should bear the Plaintiff’s tax burden. Thus, it cannot be deemed that the Plaintiff ultimately reduced the tax burden by entering into the preservation agreement of this case at the expiration of three years after granting the stock option.

3. Conclusion

Therefore, the judgment of the first instance court is legitimate, and all appeals by the plaintiff and the defendant are dismissed as it is so decided as per Disposition.

Judges Cho Jong-tae (Presiding Judge)