The profits from the Stockholm option exercise shall be subject to global income tax as Class B earned income.

It is reasonable to view that benefits earned by a Korean employee by exercising Stockholm options are wages paid as compensation for non-independent labor of a domestic employee provided on the basis of an employment contract with a foreign corporation or any other similar cause with a domestic employee.

Article 3 [Scope of Taxable Income)

Article 20 [Earned Income] of the Income Tax Act

1. The plaintiff's appeal is dismissed.

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

The judgment of the first instance shall be revoked. The defendant shall revoke the disposition of imposition of global income tax of 610,825,610 on July 8, 2004 against the plaintiff on July 8, 2004.

1. Details of the disposition;

A. From January 6, 1996 to December 28, 1999, the Plaintiff was granted a Sock options (stock option; hereinafter “Sock options”) five times between ○○ Bank’s parent company and ○○ Bank’s parent company, from January 6, 1996 to December 28, 199. Meanwhile, ○○○ Bank holds 100% of the shares of ○ Bank, and ○○ Bank’s ○○○ branch has independent legal personality from ○ Bank.

B. Thereafter, as seen in the table below from April 18, 201 to May 16, 2001, the Plaintiff acquired 41,935 shares of ○○○○○ by exercising Stockholm options as an amount of Stockholm options, thereby acquiring each benefit indicated in the same description, which is the difference between the market price of shares at the time of exercising Stockholm options, after deducting the amount of the Stockholm option from the amount of the Stockholm option exercise (hereinafter referred to as “the profit of the Stockholm option exercise”) as indicated in the same description, “the profit of the Stockholm option exercise” (hereinafter referred to as “the profit of this case”) total 1,607,438,838 won (the total profit of the Stockholm option exercise calculated as seen in the table below), but such benefit of exercise is deemed as KRW 1,607,438,838 won as claimed by the parties.

Date of Grant

Date of event

Number of event shares

Profit from the Stockholm option Exercising

January 6, 1996

April 18, 2001

12,500 Shares

624,030,078 won

January 21, 1997

May 10, 2001

13,751 Shares

492,960,495 won

January 20, 1998

May 16, 2001

8,750 Shares

302,321,072 won

November 2, 1998

May 16, 2001

4,400 Shares

155,610,023 won

December 28, 1999

May 16, 2001

2,534 Shares

32,514,171 won

Total

41,935 Shares

1,607,435,839 won

C. On May 31, 2002, when the Plaintiff reported the tax base and tax amount of global income tax for the year 2001 to the Defendant, the Plaintiff reported the total amount of KRW 1,092,577,635, including the regular salary and allowances received from the ○○ branch of ○○ Bank and the former ○○ Bank Co., Ltd. (hereinafter “○○ Bank”), which was the Plaintiff’s work place in 2001, as Class A, as Class B’s earned income, and reported the total amount of KRW 1,607,435,838,00 in total, as Class B’s earned income.

Then, on May 31, 2003, the Plaintiff filed a request for reduction or correction to the effect that the Plaintiff would refund an amount equivalent to KRW 610,825,610, which is the tax amount imposed on the profits from the exercise of Stockholm options, out of the total global income tax amount reported as above. However, on July 8, 2004, the Defendant rendered the instant refusal disposition rejecting the Plaintiff’s request for reduction or correction on the ground that the former tax base and tax amount were reasonable.

D. On October 6, 2004, the plaintiff appealed to the National Tax Tribunal for a national tax trial, but the National Tax Tribunal dismissed the plaintiff's request on May 2, 2005.

[Reasons for Recognition] Facts that there is no dispute between the parties, Gap evidence 1 through Gap evidence 5, Eul evidence 1 to Eul evidence 4, the purport of the whole pleadings

2. Whether the rejection disposition of this case is legitimate

A. The plaintiff's assertion

In the following respects, the rejection disposition of this case is illegal and should be revoked.

(1) Class B earned income under Article 20(1)2(b) of the Income Tax Act refers only to the amount that an employee provided to a company that is the subject of employment and received as a consideration therefor. Since there is no employment relationship between the Plaintiff and ○○○○○○, the benefits accrued by exercising Stockholm options granted by the Plaintiff does not constitute benefits under the said Income Tax Act.

(2) Article 3 of the Income Tax Act provides that only the income listed in the Income Tax Act may be taxed. Article 38(1)17 of the Enforcement Decree of the Income Tax Act, which is the basis for taxation on the profits accruing from the exercise of Stockholm options, shall be newly established on December 30, 2002, after the occurrence of the above Stockholm options, and shall take effect on January 1, 2003, since there is no basis for imposing tax on the profits accruing from the exercise of Stockholm options prior to the establishment of the above provision, the instant rejection disposition violates the no taxation without law.

(b) Related statutes;

○ Scope of taxable income under Article 3 of the Income Tax Act

The income tax shall be levied on all incomes as prescribed by this Act for a resident, and the income tax shall be levied only on the domestic source income as prescribed in Article 119 for a nonresident.

○ Article 20 of the Income Tax Act

The relevant provision was amended by Act No. 5580 on December 28, 1998 but has not been amended by either of the following subparagraphs:

(1) Earned income shall be the following incomes generated in the corresponding year:

1. Class A:

(a) salaries, salaries, remuneration, annual allowance, wage, bonus, bonus, allowance and other similar salaries received due to the offer of labor;

2. Class B:

(b) Pay (shortage omitted) received from a foreigner or foreign corporation located abroad (excluding a domestic branch or domestic business office);

○ Calculation of gross income amount of Article 24 of the Income Tax Act

(1) The total amount of income of a resident shall be calculated based on the total amount received or received in the relevant year.

(2) In cases under paragraph (1), if any income other than money is imported, such income shall be calculated according to the value at the time of transaction.

○ Article 39 of the Income Tax Act and the year to which the necessary expenses are reverted.

(1) The year to which the total income and necessary expenses of a resident are reverted shall be the year in which the total income and necessary expenses are determined.

Article 38 of the Enforcement Decree of the Income Tax Act

(1) The scope of employment income under Article 20 of the Act shall include the following incomes:

17. Profits (referring to the difference between the market price and the actual purchase price at the time of exercising the stock option, and the stock includes the preemptive right) (Newly Inserted by Presidential Decree No. 17825, Dec. 30, 2002; Presidential Decree No. 17825, Dec. 30, 2002) earned by exercising the stock option granted to an officer or employee of the relevant corporation or a corporation having a special relationship under Article 87 of the Enforcement Decree of the Corporate Tax Act with the relevant

Article 49 of the Enforcement Decree of the Income Tax Act

(1) The receipt date of the total amount of the earned income shall be as follows:

1. Salaries;

The Labor Day;

(2) Notwithstanding the provisions of paragraph (1) 1, if the relevant benefits are not determined before the beginning of the period for final return on the tax base of the relevant taxable period, it shall be deemed to have been imported on the fixed date: Provided, That the amount actually received before the date of final return on the tax base of the relevant

[Supplementary Rule] (Presidential Decree No. 17825 delivered on December 30, 2002)

Article 1 Enforcement Date

This Decree shall enter into force on January 1, 2003: Provided, That the amended provisions of Articles 38(1), 62(2)2, 63, 64 (excluding paragraph (1)5), 14(3)1, 146-2, and 208-2(4) shall enter into force on the date of its promulgation.

Article 5 Scope of Earned Income

The amended provisions of Article 38 (1) shall apply to the portion of income generated in the taxable period to which the date of promulgation of this Decree belongs.

Article 15 of the Restriction of Special Taxation Act (amended by Act No. 6480 of May 24, 2001) (Special Taxation for Stock Option)

(1) Of the profits (referring to the difference between the market price at the time of exercising a stock option and the actual purchase price, and the stock shall be deemed to include a preemptive right) which an employee of a domestic corporation as prescribed by the Presidential Decree, and a stock-listed corporation or an Association-registered corporation under the Securities and Exchange Act which meets the requirements as prescribed by the Presidential Decree (hereafter in this Article, referred to as the "employee, etc.") obtains by exercising a stock option until December 31, 2003, the stock option shall not be considered as earned income, business income, or other income.

C. Determination

(1) Definitions of earned income and Stockholm options

(가) 통상 근로소득이란 고용계약 또는 위임계약 등 고용계약과 유사한 원인에 기초하여 사용자의 지휘명령에 따라 근로를 제공하고 그 대가로서 사용자로부터 지급받는 급여를 말한다. 그런데 소득세법 제20조 제1항 제1호 가목이 소득세의 과세대상이 되는 근로소득의 범위에 관하여 ＂근로의 제공으로 인하여 받는 봉급 · 급료 · 보수 · 세비 · 임금 · 상여 · 수당과 이와 유사한 성질의 급여〝라고 포괄적으로 규정함으로써, 퇴직소득을 제외하고 원칙적으로 근로관계 내지 고용관계에서 유래하는 모든 금전적 급부 또는 경제적 가치의 급부를 근로소득에 포함시키고 있으며, 반드시 위 법률조항에 열거된 소득만을 근로소득으로 보는 것은 아니다.

Furthermore, "in the course of providing labor" under the above legal provision means that the provision of labor and the payment of wages are dealt with a quid pro quo relationship or a pair of benefits relationship. The above earned income includes not only all economic benefits which are related to the provision of labor and payment of wages in the nature of regardless of the cycle of payment, means of payment, etc. (see Constitutional Court Order 2001HunBa74, Sept. 19, 2002) but also benefits which are closely related to the provision of labor and are regularly paid on the premise of labor in addition to the direct payment of labor (see Supreme Court Decision 2003Du4089, Apr. 15, 2005).

(B) The Stockholm option is a right to provide a company’s own stocks to its executives and employees as compensation for its future services, which is a right to purchase a certain amount of its own stocks at a certain exercise price within a certain period of time as agreed in advance, and is adopted as a method of strengthening the competitiveness of the company and payment of remuneration to its executives and employees. In other words, if the market price of the stocks exceeds the exercise price of the Stockholm option, the officers and employees granted the Stockholm option will obtain economic benefits equivalent to the difference between the market price of the stocks in question and the Stockholm option’s exercise price.

Article 340-2 (1) of the Commercial Act provides that "The company may, as determined by the articles of incorporation, grant the right to subscribe to new shares or purchase its own shares at a predetermined price to directors, auditors or employees of the company who will, or will be able to contribute to the establishment, management, technological innovation, etc. of the company, by a resolution of the general meeting of shareholders in accordance with Article 434 of the Commercial Act."

(2) Whether the profits from the Stockholm options constitute earned income

(A) In order to recognize that an employee has a quid pro quo relationship with an employee’s work provided by the employee, any economic profit that the employee received from the employee is not required to have a close proportion between the employee’s work quality and quantity, but to have a quid pro quo relationship based on a specific correlation or an economic rationality with the work provided by the employee.

(B) The purpose of granting Stockholm options is to fundamentally make contributions to the company of officers and employees, and to seek a motive for continuing to work in the future. In other words, to achieve this objective, a certain limitation is placed on the exercise of Stockholm options prior to the grant of such options. In other words, for a certain period of time, work must be performed by the company in order to exercise Stockholm options, and when the employment contract is terminated, the continued work is subject to the exercise of Stockholm options, such as the termination of Stockholm options or the limitation on the exercise period. However, the fundamental reason behind the Stockholm options system is maintaining is that the market price of the company’s shares is formed by various factors, but the company’s performance is one of the important factors forming the share price, and such company’s performance is related to the work provided by its officers and employees, and thus, it is believed that the continuous work performance of officers and employees with capacity is related to the improvement of performance results and the increase in the share price.

In light of the above purpose of the Stockholm option system, the method of its exercise, etc., the Stockholm is naturally planned to ensure and maintain human resources necessary for the Stockholm option granting company by lowering the economic benefits of its officers and employees with the market value. On the other hand, the executive officers and employees granted the Stockholm options make efforts to increase the share price through improving the performance of the company granting the Stockholm options, and the executive officers and employees are able to acquire the benefits of its exercise by exercising the Stockholm options when the share price increases with their efforts. In addition, in granting the Stockholm options to the executive officers and employees, the fact that the executive officers and employees are able to acquire the benefits of the Stockholm options using the Stockholm options in such a way as well as the essential elements inherent in the Stockholm options system. As such, from the standpoint of the executive officers and employees, it can be deemed that the executive officers and employees are granted the options options and provide labor to the Stockholm options granting company with the options options by expectationing such benefits of exercising the Stockholm options.

(C) On the other hand, the existence and amount of profit from the Stockholm option exercise is affected by the determination of the price change after the Stockholm option was granted and the time when the person to be given the Stockholm option was exercised, and it is difficult to view that there was a correlation between the quality and quantity of the work provided by the employee and the quality of the work provided by the employee.

However, in a case where a worker uses Stockholm option once, the company has a duty to deliver the shares as the price determined in advance, and thus, an employee grants an employee economic benefit equivalent to the difference between the market price determined at the time of the exercise and the exercise price, and an employee gains the benefit of acquiring shares at a price lower than the market price as a result thereof. This can be said to be the result of a prior agreement between the company and the employee to the effect that the company transfers the employee the economic benefit equivalent to the difference between the market price and the exercise price at the time of the exercise of the right. In other words, an employee acquires the economic benefit equivalent to the Stockholm option’s exercise price at the time of the exercise of the right, while an employee acquires the economic sacrifice equivalent to the Stockholm option’s exercise price, the company granting the Stockholm option can be deemed to have paid the economic sacrifice equivalent to the Stockholm option’s exercise profit. However, such an employee’s economic benefit and the economic sacrifice of the company granting the Stockholm option can be deemed to have a quid

(D) Ultimately, in light of the following circumstances, i.e., the objective of the Stockholm option system to secure and maintain able executives and employees, and to promote the future provision of high-quality labor, an indivisible relationship with the Stockholm option that can exercise Stockholm options only on the premise of the provision of labor for a certain period, the occurrence of profits from the exercise of Stockholm options is an essential element of the Stockholm option system, and the relationship between the provision of labor and the stock price of the executives and employees cannot be denied, etc., the benefits from the exercise of Stockholm options can be deemed as having a quid pro quo relationship based on the economic rationality between the labor provided by the executives and employees, and the quality of labor provided by the executives and employees and the economic benefits that are paid for a certain period of time (see Supreme Court Decision 2005Du1203, Oct. 13, 2006).

(3) Subject matter of taxation of the instant taxation disposition

(A) There may be controversy over the taxable object and the time of taxation when the Stockholm option was granted. In other words, the defendant, although the defendant viewed the taxable object of the instant taxation as the profits from the exercise of the Stockholm option, as the Stockholm option itself has already become final and conclusive, although it is possible to evaluate the specific contents of the assessment, so the subject of taxation is the Stockholm option itself, and the time of taxation should be deemed as the time of granting the Stockholm option, and the benefits from the exercise of the Stockholm option should be deemed as the profits from the operation of the Stockholm option, we examine this issue.

(B) First, there is room to view that the Stockholm option itself has a certain economic value as the future right to expect or form a contract. However, in order for an economic benefit to constitute an earned income under Article 20(1) of the Income Tax Act, the said economic benefit should be recognized as an income under the Income Tax Act, i.e., an increase of the tax-bearing capacity. However, Stockholm option itself is not the right to demand delivery of stocks, but is merely the right to establish a stock transfer contract, and it is merely the right to only establish a stock transfer contract, and as such, it is difficult to regard such Stockholm option itself as an economic profit to increase the tax-bearing capacity.

On the other hand, the Stockholm option exercise profit is an economic benefit equivalent to the difference between the share price and the exercise price at the time of the exercise, and is, as seen earlier, transferred from the company to the recipient at the time of the exercise of the Stockholm option pursuant to the Stockholm option agreement, and is distinguishable from the Stockholm option itself. In addition, the granting of the Stockholm option itself does not include the transfer of the Stockholm option exercise profit, or is merely an increase in the price of the Stockholm option, nor can it be deemed that the Stockholm exercise profit constitutes an economic benefit that increases the taxable capacity, unlike the Stockholm option.

(C) Meanwhile, Article 39(1) of the Income Tax Act provides that "the year in which the income amount and necessary expenses accrue shall be the year to which the date when the total income amount and necessary expenses are determined are determined," and in order to be deemed to have been determined in the year to which the income accrued pursuant to the above provision, it is not necessary to realize the income in a specific case by considering the management of income, the degree of objectiveization of income accrued from the control and income, and the timing when the taxpayer is secured, and it is sufficient to realize the income at a very high level in feasibility (see Supreme Court Decision 91Nu8180, Jun. 22, 1993). Accordingly, the profit acquired at the time of the Stockholm option using the stocks at a lower price than the market price and the profit has not yet been cashed, and as long as it is possible to dispose of the stocks acquired at the time of the exercise of the Stockholm option, the profit at least has been determined at the time when the Stockholm option was exercised or realized.

(D) Thus, the Stockholm option exercise profit is deemed to constitute earned income in the taxable period to which the time of its exercise belongs (see, e.g., Supreme Court Decision 2005Du11203, Oct. 13, 2006). Accordingly, the instant taxation disposition that regards the taxable object as the Stockholm option exercise profit is lawful.

(4) The employer under the employment contract and the Stockholm options are different.

(A) As seen earlier, Article 20 (1) 1 (a) of the Income Tax Act only provides that "the salary, salary, etc., and other similar salaries received from the provision of labor" as to the wage and salary income, and does not require the employer and the payer to coincide as a premise for constituting the wage and salary income. Moreover, the Income Tax Act classifys the wage into interest income, dividend income, real estate rental income, business income, wage and salary income, temporary property income, pension income, other income, retirement income, capital gains, and forest income. It can be seen that each of them is intended to consider the difference of each taxable capacity in calculating the amount of income and applying the tax rate by classifying each income according to its source or nature. In light of the fact that the person who is the payer of the wage and salary income cannot be deemed to have any difference in the nature of the income or the taxable capacity, it is difficult to deem that there is a reasonable reason to demand that the employer and the payer of the wage be the same. Therefore, the circumstance that the employer does not coincide with the wage does not constitute one of the grounds for determining whether the wage is paid due to provide labor or labor.

Ultimately, as seen earlier, by prescribing the income tax in the form of an exemplary legislation, rather than a specific way with regard to the scope of wage and salary income, in light of the fact that the wage for providing labor and receiving remuneration for labor is included in the wage and salary income if the substance of the wage falls under either the name or title thereof (see the above decision of the Constitutional Court), if economic benefits received by the employee or a person corresponding thereto are deemed as remuneration for labor provided by the employer by obeying the employer’s direction or order based on employment contracts or similar causes

(B) ○○○○○ is a parent company with 100% of the shares of ○○○○○○○ in the instant case, which was a parent company with ○○○○○○○ branch, and engaged in ○○○○○○○○○○○○○○ branch. As seen earlier, ○○○○○ grants an Stockholm option to the Plaintiff, a parent company, who is an employee of ○○○○○○ Bank. The reason why ○○○○ branch grants part of the shares of ○○○○○○ bank, a parent company, is that the shares of ○○○○○ bank, a parent company, may increase the company’s interest by increasing ○○’s value of assets when improving ○○○○’s performance through efforts by employees of ○○○ bank. This is consistent with the original intent of the ○○○○○ branch system, taking into account the fact that ○○○○ branch has an excellent human resources and is in a position equivalent to ○○○○ bank’s shares.

Therefore, considering these circumstances, it is reasonable to view that the Stockholm options given by ○○○○○ to the Plaintiff, who is an employee of ○○ bank, are wages paid as consideration for the Plaintiff’s non-independent labor provided on the basis of “employment contract or any other similar cause.” In the instant case, the difference between the employer and the Stockholm options grantr does not affect the conclusion that the instant Stockholm options constitute earned income.

(5) Whether legal grounds for the instant taxation disposition exist

(A) Article 38(1) of the Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17825, Dec. 30, 2002; hereinafter “Enforcement Decree of the Income Tax Act”) which was enforced in 2001 by the Plaintiff at the time of exercising the Stockholm option, did not stipulate the Stockholm option. As such, it may be problematic whether there exists a legal basis for the instant taxation disposition.

(B) In full view of the provisions of Articles 20 and 38(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17825, Dec. 30, 2002; hereinafter referred to as the “former Enforcement Decree”), the scope of earned income subject to income tax, as seen earlier, is determined in principle by Article 20 of the Income Tax Act, and the scope of earned income under Article 38(1) of the former Enforcement Decree of the Income Tax Act is defined as “the scope of earned income subject to income under Article 20 of the Income Tax Act shall include the following income” as it is interpreted as being generally listed in the principle that it should include the earned income. Thus, the provisions of Article 38(1) of the former Enforcement Decree of the Income Tax Act before the amendment cannot be deemed as a restrictive listing of the types of earned

Therefore, income not included in Article 38 (1) of the former Enforcement Decree of the Income Tax Act is subject to taxation as earned income if it is income under Article 20 (1) of the Income Tax Act, and the exercising profit of Stockholm constitutes earned income [In addition, before the enactment of Article 38 (1) 17 of the Enforcement Decree of the Income Tax Act of December 30, 2002, Article 15 (1) of the former Tax Special Lesure Restriction Act (amended by Act No. 6480 of May 24, 2001) which was enforced before the enactment of Article 38 (1) 17 of the Enforcement Decree of the Income Tax Act of December 30, 201) has already been granted stock options to employees of domestic corporations, business start-up corporations, etc., and exercises them under the premise that the profit earned by such employees is included in earned income, each of the instant Stockholm exercising profit constitutes legitimate disposition based on Article 20 (1) of the Income Tax Act.

(6) Sub-committee

Ultimately, since the parent company's benefits derived from the employee's exercise of the Stockholm option granted to the employee of the subsidiary company are included in the earned income under the Income Tax Act, the taxation of this case imposed on the plaintiff to this purport is legitimate, and all of the plaintiff's arguments against this are without merit.

3. Conclusion

Therefore, the plaintiff's claim seeking the revocation of the disposition of this case shall be dismissed as it is without merit, and the judgment of the court of first instance with the same conclusion shall be dismissed as it is without merit. It is so decided as per Disposition by the assent of all participating Justices.