early trial 2013west 1676 ( December 10, 2013)

Expenses incurred in exercising stock options granted by the parent company to its officers and employees constitute personnel expenses of the subsidiary company and must be included in deductible expenses.

The cost of exercising stock options granted by the parent company to its officers and employees falls under the personnel expenses of the subsidiary, and Article 19 subparagraph 19 of the Enforcement Decree of the Corporate Tax Act clearly provides for the expenses that could have been recognized as losses by including the cost of exercising stock options in personnel expenses as separate deductible expenses, so the rejection of the plaintiff's request for correction that the cost of exercising stock options

Article 19 (Scope of Deductible Expenses)

2014Guhap53889 Disposition of revocation of refusal to correct corporate tax

AA Bank, Inc.

The director of the tax office

April 22, 2016

May 27, 2016

1. The Defendant’s rejection of correction of KRW 000 of corporate tax for the business year 2007 and KRW 000 of corporate tax for the business year 2008 against the Plaintiff on December 18, 2012 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. From 2002 to 2005, executives and employees of the Plaintiff were granted stock options from the Plaintiff or the Plaintiff’s wholly owning parent company, AA financial holding company (hereinafter “AA financial branch owner”). The Plaintiff’s executives and employees did not include the amount of money that the Plaintiff paid by exercising part of the said stock options during the business year 2007 and 2008 (hereinafter “instant expenses”) in deductible expenses, but reported corporate tax for the business year 2007 and 2008.

B. On November 16, 2010 and December 2, 2011, the Plaintiff filed a request for correction to the effect that “the instant expenses constitute personnel expenses, and thus, the Defendant included them in the deductible expenses and subsequently changed corporate tax for the business year 2007 and 2008.” However, on December 18, 2012, the Defendant rejected the Plaintiff’s request for correction on the ground that “the instant expenses do not meet the requirements under Article 15(1) of the Restriction of Special Taxation Act, and Article 19 subparag. 19 of the Enforcement Decree of the Corporate Tax Act amended on February 4, 2009 does not apply retroactively to the business year 2007 and 2008” (hereinafter “instant disposition”).

C. The Plaintiff appealed and filed an appeal with the Tax Tribunal on March 22, 2013, but was dismissed on December 10, 2013.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 and 2 (including branch numbers; hereinafter the same shall apply), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

Since the cost of this case is an economic profit paid by the Plaintiff in return for the work of the executives and employees belonging to the Plaintiff, it constitutes "labor cost" or "amount attributed or to be attributed to the corporation" among the deductible expense items under the Enforcement Decree of the Corporate Tax Act. Therefore, the Defendant refused to rectify corporate tax by adding the expense of this case to deductible expenses. Thus, the disposition of this case is unlawful

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination

1) Facts of recognition

The following facts are not disputed between the parties, or recognized by the purport of Gap evidence Nos. 2 through 7, 9 through 23 and all pleadings.

① On September 10, 2001, the former AA Bank (referring to a corporation that was merged with the Plaintiff on April 1, 2006, as seen below; hereinafter referred to as the “former AA Bank”) which was a listed corporation established AAB on September 10, 201, and listed as its complete subsidiary was abolished.

② On June 22, 2004, the Plaintiff (former: BB bank) who was a listed corporation became a complete subsidiary of AAA financial branch through an all-inclusive share swap, and the listing was abolished on July 2, 2004.

③ On April 1, 2006, the Plaintiff merged the former AA bank and changed its current trade name (hereinafter referred to as “former AA bank,” and only the subsequent Plaintiff was referred to as “Plaintiff”).

④ Upon the resolution of the board of directors and the special resolution of the general meeting of shareholders, AAB granted stock options to the executives and employees of the former AAB, who are the non-subsidiary. The former AAB made an agreement to compensate for the expenses incurred by the executives and employees of the former AAB in exercising the stock options in the future.

Table 1

Gu Sector

1 1 1

Second granted shares

3 The amount granted in the third place

4 Ratio of loans granted

Method of Implementation

Cash Settlement Type

Cash Settlement Type

Cash Settlement Type

Cash Settlement Type

Exercise Price

18,910 won

1,800 won

21,595 won

28,006 won

Date of Grant of Rights

may 22, 2002

May 15, 2003

March 25, 2004

March 30, 2005

Exerciseable Period

4 years after the date of grant of rights;

4 years after the date of grant of rights;

2 years after the date of grant of rights;

4 years after the date of grant of rights;

Objects of Grant

Officers and Employees of the Gu AA Bank

Officers and Employees of the Gu AA Bank

Officers and Employees of the Gu AA Bank

Officers and Employees of the Gu AA Bank

⑤ Meanwhile, upon the resolution of the board of directors and the special resolution of the general meeting of shareholders, the former BB bank granted the stock options to its officers and employees as set forth in the table 2 as follows. After that date, when the former BB bank’s stocks are delisting on July 2, 2004, the Plaintiff, when its employees and employees exercise the stock options, was able to pay the difference between the value calculated by applying the share swap ratio between the AAB bank and the former BB bank at the time of the cancellation of the listing.

Table 2

Gu Sector

4 The fourth granted portion

5 Shares in grant

Method of Implementation

Cash Settlement Type

Cash Settlement Type

Exercise Price

5,000 Won/5,260

5,000 won

Date of Grant of Rights

March 28, 2003

March 25, 2004

Exerciseable Period

2 years after the date of grant of rights;

2 years after the date of grant of rights;

Objects of Grant

former BB Bank's officers and employees

former BB Bank's officers and employees

6. The former AA Bank, the former BB Bank, and the Plaintiff estimated the expenses to be incurred in exercising the stock options granted by the former AA Bank and each stock options granted by the former BB Bank (hereinafter referred to as the “stock options in this case”) to account as stock compensation costs and long-term unpaid expenses, but, in filing a return of corporate tax, the tax adjustment was made in

7) The executives and employees of the Plaintiff exercised part of the instant stock option during the business year 2007 and 2008. The Plaintiff paid the exercise difference on behalf of the AA financial branch owner or as their own debt (hereinafter referred to as “instant expense”). With respect to the instant expense, the Plaintiff, without compensation, was treated as deductible expenses at the same time as the instant expense out of the amount previously treated as non-deductible losses (Reserve △), while adding the same amount to deductible expenses.

Table 3

Gu Sector

207 event minutes for the business year

208 For the annual event

non-higher

AA Financial Branch Notes

00 won

00 won

Above 202 up to 2005

old BB Bank Assignments

00 won

00 won

Above 2003 up to 2004

Consolidateds

00 won

00 won

8 The Plaintiff withheld the labor income tax from its officers and employees on the difference in the event paid to its executives and employees.

2) Determination

A) According to Article 19 of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008; hereinafter “Corporate Tax Act”), deductible expenses are deductible expenses incurred from transactions which reduce the net assets of the corporation, except as otherwise provided for in this Act, such as refund of capital or financing, disposal of surplus funds, and losses or expenses incurred in connection with the corporation’s business, which are generally accepted as ordinary or directly related to profit, and necessary matters concerning the scope and classification are delegated to Presidential Decree. Article 19(3) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009; hereinafter “former Enforcement Decree”) provides that “in cases where an employee or employee exercises his/her overseas stock option from Article 19(3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 1, 2009; hereinafter referred to as “the same shall apply”) and Article 19(3) of the latter Enforcement Decree of the Corporate Tax Act is amended by Presidential Decree No. 219.

B) Examining the aforementioned facts and relevant laws and regulations comprehensively, the instant cost constitutes the Plaintiff’s labor cost and ought to be included in deductible expenses. The reasons are as follows.

(1) According to Article 19 of the former Corporate Tax Act, Article 19 (3) of the former Enforcement Decree before amendment, and Article 3 (3) of the Enforcement Decree after amendment, etc. of the former Corporate Tax Act, " personnel expenses" shall be included in deductible expenses in principle: Provided, That it shall not be included in deductible expenses, in cases where it is prescribed as non-deductible items in excess of the ordinary scope which is irrelevant to or generally acceptable to the business of the corporation (see Articles 26 and 27 of the Corporate

② “Labor cost” under Article 3(3) of the former Enforcement Decree before the amendment refers to the cost paid to an employee as a consideration for work (see, e.g., Supreme Court Decision 97Nu14194, Jun. 25, 199). The instant stock option was granted for the purpose of attracting long-term work motivation to the officers and employees granted such option. Accordingly, the said officers and employees have economic incentives to maximize profits arising from the exercise of the stock option, and are more advanced in their duties, and do not intend to retire as much as possible during the period of exercising the stock option. As such, the Plaintiff is able to achieve higher business performance by raising business efficiency and continuity. Accordingly, the instant cost constitutes labor cost under Article 3(3) of the former Enforcement Decree prior to the amendment, and there is no other material to deem that the instant cost exceeded the ordinary scope of the Plaintiff’s business-related or generally acceptable, or that the Plaintiff’s corporate tax was unfairly reduced.

③ Upon the exercise of the stock option granted by the Plaintiff to AA financial branch, the Plaintiff paid the instant expenses to its officers and employees instead of the AA financial branch (as seen earlier, the former AA financial branch agreed to compensate for the expenses incurred in exercising the stock option granted by the former AA financial branch owner to its employees and employees, and thereafter the former AA financial branch agreed to compensate for the expenses incurred in exercising the stock option granted to its employees and employees, and the former AA bank was merged with the Plaintiff and comprehensively succeeded to the rights and obligations of the Plaintiff as a result of the merger of the Plaintiff), which is identical to the method of paying ordinary wages under the Labor Standards Act (see Article 43(1) of the Labor Standards Act). In such sense, the said expenses should be deemed as personnel expenses included

④ Article 12(1)19 of the Enforcement Decree of the Act provides that “If stock options granted by the parent company to its executives and employees are exercised, the expenses incurred in exercising the stock options granted by the parent company to its executives and employees shall be included in deductible expenses.” The above provision assumes that, even if the parent company granted stock options to its executives and employees, it is right to dispose of the expenses incurred by the subsidiary as deductible expenses. As such, where expenses incurred in exercising the stock options are reverted to the deductible expenses of the subsidiary, it can be interpreted as “ personnel expenses” even before the provision is newly established. Therefore, since the above provision was newly established, the above provision, rather than deeming the expenses incurred in exercising the stock options paid by the subsidiary as deductible expenses, is clearly defined as separate deductible expenses (see subparagraph 8 of the same Article).

⑤ If the instant expenses could not be deemed as the Plaintiff’s loss, the Plaintiff would have not agreed to compensate for the expenses incurred in exercising the stock option against the Plaintiff’s executives and employees. Moreover, if the Plaintiff compensated for the expenses incurred in exercising the stock option that the Plaintiff paid to the Plaintiff’s executives and employees, it cannot be deemed that the Plaintiff paid the difference in exercising the Plaintiff’s exercise to its executives and employees by shortening the two-stage payment process as above.

C) Therefore, the instant disposition rejecting the Plaintiff’s request for correction that included the instant expense in deductible expenses is unlawful.

3. Conclusion

The plaintiff's claim is reasonable, and the costs of lawsuit are assessed against the losing defendant. It is so decided as per Disposition.