[1] Criteria for determining leased real estate under Article 18 (2) 8 of the former Enforcement Rule of the Corporate Tax Act

[2] Whether the disposal loss of the machinery and apparatus acquired by adding only for the purpose of using land and building is capital expenditure (affirmative)

[1] According to the provisions of Article 18-3 (2) 3 of the former Corporate Tax Act (amended by Act No. 4804 of Dec. 22, 1994), Article 43-2 (5) and (11) of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 14468 of Dec. 31, 1994), Article 18 (2) 8 of the Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Prime Minister No. 492 of Mar. 30, 1995) (amended by Ordinance of the Prime Minister No. 1968 of Mar. 12, 1994), where a corporation owns leased real estate more than two times its equity capital, the amount calculated pursuant to Article 43-2 (6) of the Enforcement Decree of the Corporate Tax Act among interest paid on the loan shall not be included in deductible expenses for each business year, and where each corporation actually uses leased real estate or constructed the entire building within one percent of its total floor area.

[2] In light of Article 57 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 14468 of Dec. 31, 1994), Article 33 subparagraph 2 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Prime Minister No. 492 of Mar. 30, 1995), and subparagraph 12 of the General Rule of the Corporate Tax Act (amended by Ordinance of the Prime Minister No. 2-15-1 of Apr. 21, 1997) of the former Corporate Tax Act, it is reasonable to view the losses incurred by disposing of the machinery added for the purpose of using only the land and building at a price below its acquisition value as capital expenditure for fixed assets rather than as revenue expenditure.

[1] Article 18-3 (2) 3 of the former Corporate Tax Act (amended by Act No. 4804 of Dec. 22, 1994); Article 43-2 (5) and (11) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 14468 of Dec. 31, 1994); Article 18 (2) 8 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Prime Minister of Finance No. 1968 of Mar. 12, 1994); Article 18 (2) 8 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Prime Minister No. 492 of Mar. 30, 1995); Article 57 of the former Enforcement Rule of the Corporate Tax Act (amended by Presidential Decree No. 1468 of Dec. 31, 194); Article 43 (2) 3 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Prime Minister of Mar. 239, 4953)

Sejong Industrial Co., Ltd. (Attorney Jeon Byung-hoon, Counsel for the defendant-appellant)

Head of the Gu Tax Office

Daegu High Court Decision 97Gu1915 delivered on December 29, 1997

The judgment below is reversed. The case is remanded to the Daegu High Court.

The grounds of appeal are examined.

1. On the first ground for appeal

According to each provision of Article 18-3 (2) 3 of the former Corporate Tax Act (amended by Act No. 4804 of Dec. 22, 1994; hereinafter the same shall apply), Article 43-2 (5) and (11) of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 14468 of Dec. 31, 1994; hereinafter the same shall apply), Article 18 (21) 8 (amended by Ordinance of the Prime Minister No. 492 of Mar. 30, 1995) of the Enforcement Decree of the Act (amended by Ordinance of the Prime Minister No. 1968 of Mar. 12, 1994; hereinafter the same shall apply), where a corporation whose loans exceed two times its equity capital owns real estate leased, it shall be exceptionally included in the total area of each building leased or constructed on the same basis, and where each corporation does not directly use the whole leased real estate within 0 percent of its total area.

However, according to the reasoning of the judgment below, the court below determined that the Plaintiff, a juristic person whose loans exceed twice its equity capital, was engaged in textile manufacturing business on the aggregate of 3,941.94 square meters in total of 204-1, 2, 3, 4, 6,707-5 square meters above the 204-1, 6,707-5 square meters in Daegu-gu, Seo-gu, Daegu-dong, and the building area of factories and dormitories (hereinafter “instant real estate”) around March 18, 1991 while moving a factory and head office into another place, and added a rental business to its business registration. The court below rejected the Plaintiff’s assertion that the Plaintiff’s real estate leased the real estate as a whole after the lapse of 431.5 square meters in the instant real estate from the following day to June 30, 1994, on the ground that it is difficult for the Plaintiff to use the entire real estate as a warehouse for rent exceeding 10-1,604 square meters in total.

However, even according to the court below's findings, the real estate in this case consists of several buildings such as factories, warehouses, and dormitories, and the building of factories and warehouses among the real estate in this case is replaced on the connected land. However, although the building of factories and warehouses among the real estate in this case is constructed alternatively on the connected land, although the connected land is constructed separately on the land where different lots of land is located, the remaining parts of the building have been crossed off by brupt (Records 135, 142, 147, 239). Further, although the building of factories and warehouses was all offered for lease after the plaintiff moved the factory or left a temporary empty space, it can be seen that the building of a dormitory was not leased at all.

If facts are different, the dormitory building among the real estate in this case can be seen as a separate building from the other factory and warehouse building. Therefore, whether a dormitory building constitutes an exclusive real estate for rent of a dormitory should be determined only on the dormitory building itself. Unless the previous dormitory building was provided for lease, it cannot be seen as an exclusive real estate for rent, and therefore, the part of the real estate in this case, which constitutes an exclusive real estate for rent, is ultimately limited to a factory and warehouse building actually provided for lease.

Nevertheless, the court below, after deciding whether the whole real estate of this case constitutes an exclusive real estate for lease, deemed that a dormitory building that was not provided for lease as an exclusive real estate for lease is an exclusive real estate for lease. Ultimately, the court below erred by misapprehending the legal principles on exclusive real estate for lease, which is a ground for non-deductible of loan interest in the calculation of losses, or by violating the rules of evidence, thereby affecting the conclusion

2. On the second ground for appeal

According to the reasoning of the judgment below, the court below, based on the evidence adopted in its judgment, found that the plaintiff purchased the above 2,465 Won for factory site 2,57,60 on September 10, 1994, and the above 426,80,00 won for above ground buildings, 329,142,40 won for direct repair (2,00 won for 60 studio, non-party 1's non-party 1's non-party 2's non-party 2's non-party 1's non-party 2's non-party 1's non-party 2's non-party 1's non-party 1's non-party 2's non-party 1's non-party 2's non-party 1's non-party 1's non-party 2's non-party 1's non-party 1's non-party 1's non-party 2's non-party 1's non-party 2's non-party 1'.

In light of the records, the above fact-finding by the court below is just, and there is no violation of the rules of evidence or incomplete trial.

In addition, Article 57 of the Enforcement Decree of the Act provides that " repair costs incurred to restore the original state of fixed assets owned by a corporation or to maintain the efficiency thereof shall be deemed as beneficial expenditures, and repair costs incurred to extend the service life of the fixed assets concerned or to increase the value of the fixed assets shall be deemed as capital expenditures. In this case, if distinction between profit expenditures and capital expenditures is unclear, it shall be governed by the Ordinance of the Ministry of Finance and Economy." The Enforcement Rule of the Act (amended by Ordinance of the Prime Minister No. 492 of Mar. 30, 1995) provides detailed examples of capital expenditures under Article 33 subparagraph 2 of the Enforcement Rule of the Act (amended by Ordinance of the Prime Minister No. 492 of Mar. 30, 1995), but there is no clear provision as to this case. However, in light of the above legal principles as to the disposal of new machinery and equipment acquired for the purpose of using only land and building, it shall not be deemed as capital expenditures for the assets in question, and it shall not be deemed as 94.

3. Therefore, the lower judgment is reversed by accepting the first ground of appeal, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices.

Justices Park Jong-chul (Presiding Justice)