2015Guhap50195 Revocation of Disposition of Imposition of Corporate Tax, etc.

○ Development Co., Ltd.

For the Representative Director:

Law Firm LLC, Attorney Park Hong-chul, Counsel for the plaintiff-appellant-appellant

The director of the Southern Incheon District Office

A proposal for the use of litigation performers

July 16, 2015

August 27, 2015

1. The Defendant’s imposition of KRW 532,364,730 of corporate tax for the business year 2009 against the Plaintiff on December 14, 201, and KRW 338,70 of corporate tax for the business year 2010 (including each additional tax), and the imposition of KRW 311,719,210 of corporate tax for the business year 201 as of June 12, 2013, and each imposition of KRW 304,428,190 of corporate tax for the business year 2012 (including each additional tax) shall be revoked.

2. The costs of the lawsuit shall be borne by the defendant.

The order is as set forth in the text.

1. Details of the disposition;

A. On February 2, 1996, the Plaintiff was established by 100% investment of ○○ Construction Co., Ltd. (hereinafter “○○ Construction”) for the purpose of constructing, managing, and operating the literature and industry tunnels, etc. located in the Nam-gu Incheon Metropolitan City, and the Military Mutual Aid Association is a corporation established under the Military Mutual Aid Association Act, which acquired all the Plaintiff’s shares and business rights from ○○ Construction on November 30, 199, and became a shareholder.

B. The Plaintiff’s private investment inducement facility project (hereinafter “private investment inducement facility project”)

On December 3, 199, the Military Mutual Aid Association concluded a contract with the maximum amount of 50 billion won (hereinafter referred to as the "loan of this case") at the interest rate of 13.06% per annum (hereinafter referred to as the "interest rate of this case") and the overdue interest rate of 25% per annum to raise funds for the project funds.

C. After conducting a tax investigation with respect to the Plaintiff on July 201, the Defendant: (a) borrowed money from the Military Mutual Aid Association, a person with a special relationship, at a higher interest rate than the market price; and (b) deemed that the difference between the interest paid as the interest rate in the instant case and the interest paid at the interest rate at the interest rate at the rate of wrongful calculation under Article 52 of the Corporate Tax Act (from 2009 to 8.5%, June 9, 201), was excluded from deductible expenses; and (c) imposed the Plaintiff each disposition imposing the said disposition upon the Plaintiff at the expense of KRW 532,364,730, corporate tax for the business year 209 to 338,709,300, corporate tax for the business year 2010 to 311,719,210, corporate tax for the business year 201, corporate tax for the business year 2010 to 304,2012.

D. The Plaintiff was dissatisfied with the instant disposition and filed a request for review with the Board of Audit and Inspection, but was dismissed on October 27, 2014.

[Ground of recognition] Facts without dispute, Gap evidence 1 to 5, Eul evidence 2, 3-1 to 4, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The loan of this case is to raise funds for the project cost of the literature tunnel project, which is a method for raising the minimum operating guarantee (MG), but if the minimum operating revenue is less than, the risk of nonperformance is high, and the maturity is the first long-term period that reaches 18 years as of the date of the loan agreement. Since the application for the IMF relief loan at the time of the loan agreement of this case and the situation where it is difficult to raise funds due to the restructuring of financial institutions, the market interest rate was higher, and the loan interest rate of the operator of other build-transfer projects was set at the level similar to the interest rate of this case. The interest rate of 13.06% of the interest rate of this case is appropriate, taking into account such risks, and the interest rate of the loan of this case claimed by the Defendant is not reflected in the above risks, and thus, it cannot be deemed the appropriate interest rate of the loan of this case. Accordingly, the disposition of this case was unlawful on the premise that the market price of the loan

(b) Related statutes;

It is as shown in the attached Table related Acts and subordinate statutes.

(c) Fact of recognition;

1) On December 9, 1995, the conclusion of the concession agreement and the approved ○○ Construction concluded a concession agreement with the Incheon Metropolitan City on the project of the literature tunnels.

After February 2, 1996, ○ Construction established the Plaintiff by investing 100% for the purpose of the construction, management, and operation of the literature and industry tunnel, etc., and submitted to Incheon Metropolitan City an implementation plan containing a total financial model of non-public-private partnership funds that reflects the interest rate of other capital in 13.06%. The Incheon Metropolitan City approved the said implementation plan as Incheon Metropolitan City Notice No. 1999-78 on May 16, 1996. (2) The Plaintiff’s application for change of the concession agreement of the literature and industry tunnel and the notification of Incheon Metropolitan City.

On October 15, 1999, the Plaintiff submitted to Incheon Metropolitan City Mayor a revised implementation plan to change investors from ○ Construction to the Military Mutual-Aid Association, and filed an application for amendment to the concession agreement, and November 3, 1999.

After the provisional contract between ○○ Construction and Military Mutual-Aid Association was concluded, the transfer agreement was submitted on November 19, 199, and Incheon Metropolitan City notified that the change of investors should be completed as soon as possible and that the result should be submitted immediately.

3) On November 30, 1999, ○○ Construction entered into a contract between ○○ Construction and Military Mutual Aid Association to transfer all the Plaintiff’s issued stocks and sales rights. On December 3, 1999, the Plaintiff entered into a contract to borrow 50 billion won of the instant loan from the Military Mutual Aid Association at the rate of 06% per annum 13.06% per annum. 4) On January 9, 2002, the Plaintiff entered into an agreement to alter the literature and industry tunnel, including the following, with the Incheon Metropolitan City on January 9, 2002, and Incheon Metropolitan City approved the implementation plan formulated pursuant to the above agreement.

Article 1(Purpose)The purpose of this Convention is to enter into an agreement on necessary matters between Incheon Metropolitan City and a project implementer in the implementation of literature and industry tunnel projects in accordance with the Private Investment Act, the Enforcement Decree of the same Act, the basic plan for literature and industry tunnel projects. The Incheon Metropolitan City (Designation of a project implementer) shall designate the Plaintiff as the project implementer for the project in accordance with the Private Investment Act, the Enforcement Decree of the same Act, and this Convention. The free use period granted to the project implementer under Article 5 (Free Use Period) shall be 20 years from the date of commencement of operation and shall remain in existence for the same period unless extended or reduced in accordance with this Convention.The ownership of the project facility shall be reverted to Incheon Metropolitan City at the time of the establishment of the management and operation rights.Article 8 (Calculation of General Project Costs) ① The total project cost shall be 64.7 billion won for the project of the project implementer at the time of the conclusion of this Convention shall be 64.7 billion won as the interest rate for the project in question and the rate for profit of the project implementer at the same time of the project in question.

[Attachment 1] The domestic market interest rate at the time of the loan agreement of this case

[Attachment 2] The interest rate for the member loans of the Military Mutual Aid Association [Attachment 3] The interest rate for the PF loans to non-specially related persons of the Military Mutual Aid Association

[Attachment 4] The facts that there is no dispute over the interest rate borrowed by the other project implementer for a build-transfer-lease project (based on recognition), each of the evidences mentioned above, Gap evidence Nos. 9-1, 2, 10, 11-1 through 4, 13-1, 2, 14-17, 19, 22-2 through 24, and the purport of the whole pleadings.

D. Determination

Article 52 (1) of the Corporate Tax Act recognizes that the act or calculation of income amount of a domestic corporation has unjustly reduced the tax burden on the corporation's income through transactions with a specially related person.

The calculation of the income amount of the corporation for each business year of the corporation, regardless of the calculation of the act or income amount of the corporation (Calculation by wrongful calculation). Paragraph (2) of the same Article provides that "the calculation by wrongful calculation shall be based on the market price, which is the price applied or deemed to be applied to the sound social norms and commercial practice and the normal transaction between persons not specially related." In addition, Article 88 (1) 7 of the Enforcement Decree of the same Act provides that "where money and other assets or services are borrowed or received at a rate, rate, or rent higher than the market price," and Article 89 (3) provides that "the interest rate by wrongful calculation or the interest rate by equal loan as prescribed by Ordinance of the Ministry of Strategy and Finance shall be the market price at the time of lending or borrowing money."

In a case where a corporation’s wrongful calculation division under Article 52(1) of the Corporate Tax Act does not follow a reasonable method of a person with a special relationship and instead evades or reduces tax burden by abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act without using a reasonable method of a person with a special relationship, the institution which is deemed to deny it by the person with a right to taxation and to have the income objectively and reasonably deemed to exist

As such, it is limited to cases where, from the standpoint of an economic person, it is deemed that the economic rationality was neglected due to the calculous and unreasonable calculation. Determination as to the economic rationality is based on whether the transaction is abnormal when the transaction lacks economic rationality in light of sound social norms or commercial practices, and the transaction price between non-specially related persons, special circumstances at the time of the transaction, etc. should also be considered (see Supreme Court Decision 2007Du14978, May 13, 2010). Furthermore, the burden of proving the “market price”, which serves as the basis of application for the avoidance of wrongful calculation, is the tax authority (see Supreme Court Decision 2007Du14978, Sept. 9, 2013).

27. Supreme Court Decision 2013Du10335 Decided 27.

Here, the time to determine the wrongful calculation should be based on "the time of the act." Therefore, it is unreasonable to make a change as an object of the wrongful calculation solely on the circumstance that the interest rate of the overdraft loan or the cash loan that was not subject to the avoidance of wrongful calculation was changed after the lending of money above the interest rate of the overdraft loan at the time of the lending of money, and thereafter the interest rate of the overdraft loan was changed (see Supreme Court Decision 2006Du1647, Sept. 20, 2007).

In light of the aforementioned relevant provisions and the legal principles as seen earlier, the interest rate of the instant case in full view of the following circumstances revealed by the Health Board and the facts acknowledged earlier.

13. 06% cannot be deemed to be an abnormal lack of economic rationality in light of sound social norms and commercial practices. The evidence submitted by the Defendant alone alone is insufficient to recognize that the current loan interest rate is the market price of the instant loan interest rate, and there is no other evidence to acknowledge it. Accordingly, the instant disposition of imposition based on the premise that the market price of the loan interest rate is the current loan interest rate is illegal.

① After ○○ Construction entered into a concession agreement with Incheon Metropolitan City, it was already submitted to Incheon Metropolitan City for the first time and was already planned to calculate and plan estimated private investment cost (hereinafter referred to as “raising plan”) based on the interest rate of 13.06% on the implementation plan approved by Incheon Metropolitan City. However, at this time, the Plaintiff did not have to borrow money from the Military Mutual-Aid Association.

② Since then, ○○ Construction and Military Mutual Aid Association concluded a provisional contract for acquisition of the instant loan between the Plaintiff and the Military Mutual Aid Association, and the Plaintiff discussed to borrow the instant loan from the Military Mutual Aid Association on October 199 to November 13.06% per annum as stated in the instant financing plan. At that time, there was no special relationship between the Plaintiff and Military Mutual Aid Association.

③ In addition, as at the time of the instant loan agreement, it was difficult to raise funds due to the application for IMF relief financing and the restructuring of financial institutions, there was a considerable increase in the domestic market interest rate, and thereafter, it was difficult to predict the market interest rate as at the time when the market interest rate lowers. Therefore, even if the instant loan agreement was concluded at a fixed interest rate other than the fluctuation rate, it cannot be deemed that there was an unreasonable loan agreement.

④ The interest rate when the Military Mutual Aid Association extended a loan to a member is generally lower than that of a loan to a non-member. However, when comparing the interest rate between 198 and 2000, the interest rate was set at a lower or lower than 06% than that of the instant case 13.06%.

⑤ The interest rate in cases where the Military Personnel Mutual Aid Association extended a PF loan to a non-specially related person was set at a higher or similar level than the instant interest rate, and thus, the case of granting a PF loan to the Plaintiff who is a specially related person did not differ differently from the interest rate.

6. In addition, even in the case of other private investment projects, the interest rate is nearly similar to the interest rate in this case, and the interest rate in this case cannot be deemed inappropriate compared with that in other private investment projects.

7. On March 21, 2002, Incheon Metropolitan City made the Military Mutual-Aid Association as an investor, and finally approved an implementation plan calculated based on the interest rate of 13.06%.

8) The Defendant’s interest rate at the market price of the instant interest rate is from 2009 to 2012, and the interest rate at the market price at the instant interest rate is not at the time of the agreement, but at the time of the agreement, the difference at that point is ten years. Therefore, the Defendant’s position contradicts the basic law that determines whether the act constitutes wrongful calculation at the time of agreement.

9) Furthermore, while the Defendant’s interest rate at the market price is generally applicable to short-term loans, the instant loan is a long-term loan with a maturity of 18 years, and the interest rate at the current loan was not fully reflected in the maturity premium of the instant loan transaction. Moreover, the instant loan was designed to raise the project cost of the literature and industry tunnel project, and even though it was difficult to completely eliminate the possibility that the operating revenue of the literature and industry tunnel would not occur as anticipated, the current loan interest rate did not reflect the risk premium.

3. Conclusion

Therefore, the plaintiff's claim of this case is reasonable, and it is decided as per Disposition by admitting it.

Judgment of the presiding judge;

Judge Detailed-type

Judges Hong-gion

A person shall be appointed.

A person shall be appointed.

A person shall be appointed.