1. The term “the term” means “the term” means “the term “the term” means “the term.

Head of the Gu Tax Office

December 18, 2015

Daegu District Court Decision 2014Guhap22870 Decided April 22, 2015

1. Revocation of a judgment of the first instance;

2. The Defendant’s disposition of imposing corporate tax of KRW 206,817,180 (including additional tax) against the Plaintiff on November 5, 2013 shall be revoked.

3. All costs of the lawsuit shall be borne by the defendant.

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a plastic manufacturer established on May 15, 2003 and settled accounts each year on December 31, 2003, and was not a small or medium enterprise for the first time in 2010 business year, but was subject to the application of the grace period for small or medium enterprises pursuant to Article 2(2) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 22583, Dec. 30, 201; hereinafter “former Enforcement Decree of the Restriction of Special Taxation Act”).

B. Article 3 Subparag. 2 of the Enforcement Decree of the Restriction of Special Taxation Act applies mutatis mutandis to the requirements for small and medium enterprises under the Framework Act on Small and Medium Enterprises. The Enforcement Decree of the Framework Act on Small and Medium Enterprises amended by Presidential Decree No. 21368 on March 25, 2009, and Article 3 Subparag. 2 of the Framework Act on Small and Medium Enterprises provides that companies belonging to “related companies” shall meet the requirements for the size of small and medium enterprises, adding subparagraph

C. Since then, the former Enforcement Decree of the Restriction of Special Taxation Act was amended by Presidential Decree No. 22583 on December 30, 2010, Article 2(1)3 and the proviso of Article 2(2) of the Enforcement Decree of the Framework Act on Small and Medium Enterprises (amended by Presidential Decree No. 22583, Dec. 30, 2010) provide that the provision on the grace period of small and medium enterprises that had been applied for the year in which the exclusion criteria are met and the subsequent three years shall not apply in cases where the total sales, etc. of relevant companies meet the exclusion criteria.

D. The Plaintiff’s dominant holding 70% of the Plaintiff’s total stocks as a company subject to external audit (hereinafter “KWP Investment”) and holding 76.8% of the Plaintiff’s total stocks, together with KWP Investment, constitutes a related company under the Enforcement Decree of the Framework Act on Small and Medium Enterprises. The Plaintiff and each of the above companies exceeds KRW 100 billion in total sales for the business year 2012.

E. On April 1, 2013, when filing a corporate tax return with the Defendant for the business year 2012, the Plaintiff reported the amount of tax subject to the special tax reduction and exemption and the tax credit for research and human resources development expenses pursuant to Articles 7 and 10 of the former Restriction of Special Taxation Act (amended by Act No. 11614, Jan. 1, 2013; hereinafter the same) on the ground that the period of the grace is in force

F. In accordance with Article 2(1)3 of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 24271, Dec. 28, 2012; Presidential Decree No. 24271, Jan. 1, 2013; hereinafter “Enforcement Decree of the Restriction of Special Taxation”), the Defendant determined that the Plaintiff cannot be subject to the grace period since it does not fall under the small and medium enterprises in accordance with the standards for related enterprises and cannot be subject to the application of the grace period. On November 5, 2013, the Defendant corrected and notified the Plaintiff of corporate tax of KRW 206,817,180 (including additional tax) (hereinafter “instant disposition”).

G. The Plaintiff served a written notice on November 19, 2013, and filed a request for review with the Board of Audit and Inspection on February 13, 2014, but the Board of Audit and Inspection dismissed the decision on August 14, 2014.

[Ground of recognition] Facts without dispute, Gap evidence No. 1, Eul evidence No. 1, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The Plaintiff is not a small or medium enterprise for the business year of 2010 more than KRW 100 billion and not a small or medium enterprise. However, the Plaintiff is subject to the grace period for the small or medium enterprise, and it does not constitute a small or medium enterprise only due to the introduction of the relevant business standards under the Enforcement Decree of the Framework Act on Small and Medium Enterprises and the Enforcement Decree of the Restriction of Special Taxation Act. Thus, the Plaintiff does not constitute “cases where a small or medium enterprise becomes no longer a small or medium enterprise due to any of the following reasons” under the proviso to Article 2(2) of the Enforcement Decree of the Restriction of Special Taxation Act. Nevertheless, the Defendant’

2) The proviso of Article 2(2) of the Enforcement Decree of the Restriction of Special Taxation Act is a provision that limits the commencement of the grace period in cases falling under any of the following subparagraphs, not a provision that limits the commencement of the grace period already commenced, and the Plaintiff was granted a reduction or exemption and tax credit pursuant to the former Enforcement Decree of the Restriction of Special Taxation Act that provides for the grace period for a limited period in the future. Thus, it cannot be deemed that the amendment of the Enforcement Decree of the Restriction of Special Taxation Act applied to the Plaintiff

(b) Related statutes;

Attached Table 1 is as stated in the relevant Acts and subordinate statutes.

C. Determination

1) Whether the Plaintiff constitutes “small and medium enterprise” under Article 2(1) of the Enforcement Decree of the Restriction of Special Taxation Act

Articles 7 and 10 of the former Restriction of Special Taxation Act provide for special tax reduction and exemption and tax credit for research and human resources development expenses as special cases for "small and medium enterprises", and Article 2 of the Enforcement Decree of the Restriction of Special Taxation Act provides for the scope of small and medium enterprises as "an enterprise engaged in manufacturing business, etc. as its main business, which satisfies all the following requirements" under Article 5 (1) of the same Act by specifying the scope of small and medium enterprises and subparagraph 3 of Article 3 (1) of the Enforcement Decree of the Framework Act on Small and Medium Enterprises. In addition, according to the proviso to Article 2 (1) 3 of the Enforcement Decree of the Restriction of Special Taxation Act, Article 3 (1) 2 (c) of the Enforcement Decree of the Restriction of Special Taxation Act, the proviso to Article 2 (1) of the Enforcement Decree of the Framework Act on Special Taxation, and Article 2 (1) of the amended Enforcement Decree of the Restriction of Special Taxation Act provides that "the total annual sales of related enterprises shall not exceed 10

However, as seen earlier, the Plaintiff is a legal entity settling accounts on December 31, 2012 annually; the Plaintiff’s obligation to pay corporate tax for the business year 2012 constituted on December 31, 2012; and the Plaintiff, pencing Holdings, and K&B Investment as of December 31, 2012 constituted a related company prescribed by the Enforcement Decree of the Framework Act on Small and Medium Enterprises; and the Plaintiff, the instant business year’s sales amount of the Plaintiff, the C&P Holdings, and the K&P Investment exceed KRW 100 billion. In addition, even before the business year 2010, the Plaintiff was the entity that had already been sales amount to exceed KRW 10 billion.

Therefore, at the time when the corporate tax liability for the business year 2012 was established, the Plaintiff does not constitute “small and Medium Enterprise” under Article 2(1) of the Enforcement Decree of the Restriction of Special Taxation Act.

2) Whether the Plaintiff is subject to exemption from the grace period under the proviso to Article 2(2) of the Enforcement Decree of the Restriction of Special Taxation Act

Meanwhile, Article 2(2) of the amended Enforcement Decree of the Restriction of Special Taxation Act provides that where a small or medium enterprise falls under the requirements for exclusion from small or medium enterprise under the proviso of paragraph (1) due to its expansion, etc. or does not meet the requirements for the size of small or medium enterprise under subparagraph 1, the first taxable year to which the date on which such cause occurred belongs belongs and the next three taxable years shall be deemed small or medium enterprise, and a grace period shall not apply to cases where it does not fall under a small or medium enterprise due to a cause not meeting the requirements for substantial independence under Article 2(2) proviso of the amended Enforcement Decree of the Restriction of Special Taxation Act.

In light of the following circumstances recognized by the above facts and the contents and form of the relevant statutes, even if the enforcement decree of the Framework Act on Small and Medium Enterprises and the amended Enforcement Decree of the Restriction of Special Taxation introduced the standards for related companies as the requirements of small and medium enterprises, the Plaintiff is not a small and medium enterprise under Article 2(1) of the amended Enforcement Decree of the Restriction of Special Taxation Act. However, it is reasonable to view that the existing grace period granted to the Plaintiff is not invalid, since the annual sales in 2010 exceed KRW 100 billion.

A) Article 2(2) of the former Enforcement Decree of the Restriction of Special Taxation Act provides that “When a small or medium enterprise comes not to fall under a small or medium enterprise due to the expansion of its size, etc. or the excess of the standards under subparagraph 1 of the same paragraph, if it falls under the proviso of paragraph (1), the small or medium enterprise shall be deemed a small or medium enterprise only once for the taxable year to which the date on which such cause occurred belongs and the following three taxable years thereafter, and shall be determined by each taxable year after the expiration of the said period.” Therefore, according to the language and text of the above provision, if a small or medium enterprise does not fall under a small or medium enterprise due to the expansion of its size, etc., it shall be interpreted that it is deemed a small or medium enterprise without undergoing a separate process of determining whether it falls under a small

B) In addition, the language and text of the above relevant statutes and the Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 26070, Feb. 3, 2015) excludes the grounds for the restriction of the grace period in cases where a small or medium enterprise is not a small or medium enterprise beyond the standards of related companies. It appears that the issue of whether to grant the grace period is the legislative policy. The Enforcement Decree of the Framework Act on Small and Medium Enterprises (amended by Presidential Decree No. 21368, Mar. 25, 2009) introduced the relevant standards as a requirement for substantial independence of a small or medium enterprise and Article 2 of the Addenda (amended by Presidential Decree No. 21368) of the Enforcement Decree of the Restriction of Special Taxation (amended by Presidential Decree No. 26070) does not apply to a small or medium enterprise which is not a small or medium enterprise subject to the grace period under the main sentence of Article 100 of the Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 2000 million won).

C) Furthermore, the latter part of Article 2(2) proviso of the Enforcement Decree of the Restriction of Special Taxation Act explicitly states that “where a company during a grace period fails to meet the requirements for a small or medium enterprise due to its merger with another company during a grace period, the provisions of the former part of Article 2(2) proviso of the Enforcement Decree of the Restriction of Special Taxation Act cannot be deemed as a provision to invalidate the grace period already given to the company during the grace period, such as the Plaintiff (Article 2(2) proviso of the Enforcement Decree of the Restriction of Special Taxation Act, even if interpreted otherwise, the former part of Article 2(2) proviso of the Enforcement Decree of the Restriction of Special Taxation Act does not stipulate any provision concerning the invalidation of the grace period from the time of the grace period. Therefore, it is unreasonable to interpret that the effect of the grace period immediately after the occurrence of the cause is excluded from the effect of the grace period without any express provision concerning the exclusion from the effect of the grace period from time. In this regard, it is difficult to interpret the former part of Article 2(2) proviso of the Enforcement Decree of the Restriction of Special Taxation Act as a grace period.

3) Sub-decisions

Therefore, the Plaintiff constitutes a “enterprise under the grace period to be deemed a small and medium enterprise” under the application of the grace period for small and medium enterprises in 2012, and thus, the instant disposition is unlawful on the premise that the provision of the grace period applied to the Plaintiff under the Enforcement Decree of the Restriction of Special Taxation

3. Conclusion

Therefore, the plaintiff's claim is justified, and the judgment of the court of first instance is unfair with different conclusions, so the plaintiff's appeal is accepted, and the judgment of the court of first instance is revoked, and the defendant decided to revoke the disposition of this case against the plaintiff on November 5, 2013 and it is so decided as per Disposition.

[Attachment Omission of Related Acts]

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