[1] The scope of and criteria for determining “provisional payments, etc. unrelated to business” under Article 18-3(1)3 of the former Corporate Tax Act and Article 43-2(2)2 of the former Enforcement Decree of Corporate Tax Act

[2] The case holding that the acquisition and holding of subordinated bonds by a specially related company constitutes "provisional payment without business office, etc." under Article 18-3 (1) 3 of the former Corporate Tax Act, since it is for the purpose of supporting funds necessary to improve the financial structure of the specially related company and actually lends funds

[3] The case holding that the acquisition and holding of subordinated bonds by the specially related company at an interest rate lower than the monthly interest rate in the notice of the Commissioner of the National Tax Service is abnormal which lacks economic rationality, and thus, it is subject to the avoidance of wrongful calculation under Article 20 of the former Corporate Tax Act

[1] Article 18-3(1)3 of the former Corporate Tax Act (wholly amended by Act No. 5581 of Dec. 28, 1998) [see Article 28(1)4(b) of the current Corporate Tax Act] Article 28(1)4(b) of the Corporate Tax Act, Article 43-2(2)2(2) of the former Enforcement Decree of Corporate Tax Act (wholly amended by Presidential Decree No. 15970 of Dec. 31, 1998] Article 53(1) and (2) of the Enforcement Decree of Corporate Tax Act / [2] Article 18-3(1)3(b) of the former Corporate Tax Act (wholly amended by Act No. 5581 of Dec. 28, 1998; Article 28(1)4(b) of the former Enforcement Decree of Corporate Tax Act (wholly amended by Act No. 5581 of Dec. 29, 198); Article 28(1)4(1)9(2)3) of the former Enforcement Decree of the Corporate Tax Act

[1] Supreme Court Decision 91Nu8302 delivered on November 10, 1992 (Gong1993Sang, 141) / [3] Supreme Court Decision 2004Du7993 delivered on May 11, 2006 (Gong2006Sang, 1059) Supreme Court Decision 2006Du1647 delivered on September 20, 2007

Plaintiff Co., Ltd. (Law Firm Namsan, Attorneys Jeong U.S. et al., Counsel for the plaintiff-appellant)

Sejong Tax Office et al. (Attorney Lee Jae-soo, Counsel for the plaintiff-appellant)

Seoul High Court Decision 2005Nu22946 delivered on September 15, 2006

The appeal is dismissed.

The costs of appeal are assessed against the Plaintiff.

The grounds of appeal are examined.

1. As to the non-Inclusion of interest paid in relation to the provisional payment in office (ground of appeal Nos. 1 through 5)

Article 18-3 (1) 3 of the former Corporate Tax Act (amended by Act No. 5581 of Dec. 28, 1998; hereinafter the "former Corporate Tax Act"), Article 43-2 (2) 2 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 15970 of Dec. 31, 1998; hereinafter the "former Enforcement Decree of Corporate Tax Act"), and Article 28 (1) 4 (b) of the Corporate Tax Act, and Article 53 (1) and (2) of the Enforcement Decree of the same Act, "provisional payment, etc. made without business relations" include not only pure meaning loans, but also those corresponding to loans in light of the nature of claims, and also those cases where provisional payment has been made with interest received at an appropriate interest rate, and the issue of whether provisional payment is related shall be determined objectively based on the purpose or business contents of the relevant corporation (see, e.g., Supreme Court Decision 200Du16678, Dec. 16, 2000).

The court below acknowledged the facts as stated in its reasoning after taking full account of the adopted evidence. The court below determined that the purpose business of the non-party 1 corporation, the financial status at the time of purchasing the subordinated bonds of this case, the rate of profit at the time of the non-party 1 corporation's purchase of the bonds of this case, the rate of profit at the time of the third-year maturity, the interest rate on the overdraft bonds of this case and the interest rate on the non-party 1 corporation, the difference between the interest rate on the subordinated bonds of this case as determined by the Commissioner of the National Tax Service, the purpose and circumstance of issuing the subordinated bonds of this case, the economic profit gained by the non-party 2 corporation due to the subordinated bonds of this case, the economic profit gained by the non-party 2 corporation due to the pertinent subordinated bonds of this case, the non-party 1 corporation acquired the subordinated bonds of this case by the contract with the non-party 2 corporation, the non-party 1 corporation did not have invested surplus funds in other financial products similar to the subordinated bonds of this case. The plaintiff merged the non-party 1 corporation also stated the financial structure of this case.

In light of the aforementioned legal principles and records, the lower court’s recognition and determination are justifiable, and there is no error in the misapprehension of legal principles as to provisional payment, omission of judgment, and incomplete hearing, as otherwise alleged in the grounds of appeal.

In addition, the court below rejected relevant evidence such as evidence No. 4, and it did not recognize the fact that the non-party 1 corporation entered into an occasional special agreement to redeem the subordinated bonds prior to maturity with the non-party 2 corporation, which was the issuing company at the time of the decision to continue to hold the subordinated bonds of this case, was erroneous in the misapprehension of legal principles as to the probative value of the disposal document. However, in light of the above circumstances, the issue of whether there was an occasional special agreement to redeem the subordinated bonds of this case as alleged in the above facts is no obstacle to recognizing that the acquisition and holding of the subordinated bonds of this case constitutes the "provisional payment, etc. which was paid without connection with the business" as financing for the non-party 2 corporation. Thus, this part of the argument cannot be accepted without further

2. As to the denial of wrongful calculation (Ground of appeal No. 6)

Article 20 of the former Corporate Tax Act provides that the tax burden was unjustly avoided or reduced by abusing all the forms of transaction listed in each subparagraph of Article 46 (2) of the former Enforcement Decree of the Corporate Tax Act without reasonable means of transaction with a person with a special relationship. It is deemed that the person with the authority to impose taxes denies it and has the income objectively and reasonably deemed objective and reasonable by the method stipulated in the laws and regulations. In light of the overall circumstances of transaction, the determination of whether the transaction lacks economic rationality in light of sound social norms and commercial practices (see, e.g., Supreme Court Decision 2004Du7993, May 11, 2006), and the time of such determination shall be at the time of the transaction (see, e.g., Supreme Court Decision 2006Du1647, Sept. 20, 2007).

According to the reasoning of the judgment below, the court below determined that it was legitimate to calculate the amount equivalent to the difference between the loan interest rate of the non-party 1 corporation and the interest rate of the non-party 1 corporation as the interest rate lower than the monthly interest rate publicly notified by the Commissioner of the National Tax Service, as it was abnormal in economic rationality, and thus, it is subject to the avoidance of wrongful calculation. Therefore, it is reasonable to calculate the amount equivalent to the difference between the loan interest rate of the non-party 1 corporation and the interest rate of the non-party 1 corporation as the recognized interest rate for the period from September 30, 198 before the time when the director of the tax office of the non-party 1 calculated the interest rate of the subordinated bonds of this case to September 30, 198.

In light of the above legal principles and records, the judgment of the court below is justified, and there is no error in the misapprehension of the legal principle of denial of wrongful calculation, which misleads the subject of the judgment and the period of wrongful calculation.

3. Conclusion

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

Justices Ahn Dai-hee (Presiding Justice)