Cho-2015-China-1841 (Law No. 13, 2015)

A penalty and cancellation money can be imposed on other income only in cases of money, etc. exceeding the loss to the payment itself.

In the event that a seller receives money as a compensation for damages from a buyer in the course of cancelling an agreement on the sales contract due to the buyer's default, if it is paid for compensating for actual damages, it shall not be subject to other income under the Income Tax Act, but if it is paid in excess of it, it shall be subject to other income tax

Article 41 of the Enforcement Decree of the Income Tax Act

Article 50 (Receipt Date of Other Incomes)

2015Guhap5250 Revocation of Disposition of Imposing Additional Tax

AA

BB Director of the Tax Office

May 25, 2016

June 22, 2016

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

Of the disposition imposing global income tax on the Plaintiff on January 8, 2015, the Defendant revoked the imposition of KRW 00,000,000 and penalty tax of KRW 00,000 as well as penalty tax in good faith in payment.

1. Details of the disposition;

(a) Conclusion of a contract for acquisition of stocks and management rights and receipt of performance guarantee money;

1)CC Co., Ltd. (hereinafter “CC”) was a company established for the purpose of producing and selling MG-Si (MG-Si) around April 2008, and the Plaintiff is the representative director ofCC. Since around 2008,CC promoted the business of developing and selling the MG-Si (MG-Si) by using China’s Plue mine.

(2) On July 23, 2009,CC entered into an agreement with DDR Co., Ltd. (hereinafter referred to as “Non-Party Co., Ltd.”), stating that “CC shall appoint a person designated by Non-Party Co., Ltd. at a temporary general meeting of shareholders as a director, and Non-Party Co., Ltd shall invest ten billion won in the manner of participating in CC’s capital increase with capital increase.” (hereinafter referred to as “instant agreement”). (3) On July 23, 2009, the Plaintiff entered into an agreement with Non-Party Co., Ltd. on July 23, 2009 that “the Plaintiff shall transfer the shares and management rights of Non-Party Co., Ltd. to Non-Party Co., Ltd. (hereinafter referred to as “Non-Party Co., Ltd.’s director at the temporary general meeting of shareholders”) and an additional agreement on acquisition and transfer of shares and management rights of Non-Party Co., Ltd. (hereinafter referred to as “the instant agreement and additional agreement on acquisition and transfer of shares” (hereinafter referred to as follows).

○ The Agreement on Acquisition of the Shares and Management Right in the instant case (Partial exploitation)

Article 4 (Methods of Price Payment)

(1) "B" (hereinafter the same shall apply) shall pay to A. (the plaintiff; hereinafter the same shall apply) a sum of KRW 1,000,000 (1,00,000) as a performance bond of this contract on the date of conclusion of this contract.

(2) The performance bond under Section (1) above shall be converted to the down payment of the transfer price immediately after the transfer price is calculated in accordance with section 3.

③ “B” shall pay the remainder to “B” at the temporary general meeting of shareholders held for the implementation of this Agreement as well as the appointment of a photograph of “B”.

○ Additional Agreement (Partial Abstract)

Article 2 (Time of Temporary General Meeting of Shareholders)

The temporary general meeting of shareholders to transfer the management right of the target company to a person designated by the "B" shall be held within 30 days from the date of receipt of the down payment.

Article 3 (Price for Transfer)

(1) The price for acquisition by transfer of management rights under the "acquisition agreement" is agreed to be KRW 5,00,000 ( KRW 5,000,000).

(2) Therefore, the performance guarantee under the "acquisition contract" has the effect of substantial down payment.

Article 4 (Matters of Special Agreement)

3. 'B' shall deliver to a person designated by A his/her own check of KRW 4,00,000 ( KRW 4,000,000) issued by a bank not later than one hour prior to the opening time of the temporary general meeting of shareholders.

④ If “B” fails to comply with the above paragraph 3, “A” may rescind the contract, and no performance guarantee shall be refunded. In addition, the termination of the understanding between “B” and “B” subject company (CC) becomes void.

4) On July 23, 2009, the Plaintiff received 1 billion won of the performance bond from the non-party company in accordance with the terms and conditions of the contract (hereinafter referred to as the "performance bond of this case"), and upon cancellation of the contract due to the non-party company's non-performance of obligation, "the Plaintiff's performance bond forfeiture agreement of this case" refers to the contract of penalty of this case.

5) Upon the request of the non-party company, the remaining payment date was postponed from August 24, 2009 to September 4, 2009, but the non-party company could not pay any balance even until the postponed payment date. After that, the non-party company agreed on September 7, 2009 to pay management rights and stock acquisition amount and investment amount to the non-party company and the plaintiff by September 30, 2009, but the non-party company expressed its intention to waive investment priority to theCC on September 17, 2009, when the fund was not secured. Accordingly, on September 23, 2009, theCC sent to the non-party company a certificate of content that the contract would be rescinded unless the contract terms are fulfilled by September 30, 2009 (hereinafter referred to as the "instant notice").

6) The non-party company did not perform its contractual obligations under the instant contract until September 30, 2009, and published the decision to withdraw the acquisition to the KOSDAQ Headquarters on October 21, 2009 (hereinafter “instant publication”).

B. Disposition, etc. of this case

1) On May 24, 2012, the Plaintiff sent to the non-party company a certificate of content that the instant performance bond will be reverted to the Plaintiff as a penalty for breach of contract (hereinafter “instant content certification”). On May 2012, the Plaintiff reported the amount equivalent to the instant performance bond as income to the BB tax office, and paid KRW 375,608,574 as global income accrued in the year of 2011.

2) On January 8, 2015, the Defendant deemed that the management right and acquisition of shares of this case were the receipt date of the instant performance guarantee in 2009, which was the time when the contract was rescinded, and accordingly, the Defendant corrected and notified the Plaintiff of KRW 000,000 of the global income tax for the year 2009 (including the additional tax of KRW 00,000,000 and the additional tax of KRW 00,000 for the nonperformance of payment).

(c) Procedures of the previous trial;

The Plaintiff filed an appeal with the Tax Tribunal on April 7, 2015, on the imposition of the global income tax of KRW 000,000,000 in total (i.e., penalty tax of KRW 00,000,000 + penalty tax of KRW 00,000 in good faith in payment; hereinafter “instant disposition”). The Tax Tribunal dismissed the Plaintiff’s appeal on August 13, 2015.

[Reasons for Recognition] Unsatisfy, Gap evidence Nos. 1, 2, 3, 5 through 17 (including branch numbers, hereinafter the same shall apply), Eul evidence Nos. 1 and 2, and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The amount equivalent to the instant performance bond confiscated by the Plaintiff pursuant to the agreement of penalty of this case constitutes “other income,” which is the compensation amount for damages exceeding the above amount of damages, as it is for compensating for the Plaintiff’s actual damages suffered by Nonparty Company’s nonperformance of obligation, and thus does not constitute “other income,” which is the compensation amount for damages exceeding the above amount of damages. Nevertheless, deeming the performance bond confiscated by the Plaintiff as other income under the Income Tax Act is unlawful.

2) Even if the performance guarantee of this case can be seen as other income under the Income Tax Act, it was in an uncertain state for a considerable period of time whether the contract of this case was rescinded and whether the total amount of the performance guarantee of this case would be ultimately reverted to the Plaintiff. Therefore, the period of attribution of the pertinent income is not when the period of the performance guarantee of this case expires or when the public notice of this case was made, but when the Plaintiff sent the content certification of this case to the non-party company and confirmed the entire amount of the performance guarantee of this case. Nevertheless, it is unlawful for the Defendant to regard the performance guarantee of this case as the period of attribution of other income

B. Relevant statutes

It is as shown in the attached Form.

C. Determination as to whether it constitutes other income

1) Article 21(1)10 of the former Income Tax Act (amended by Act No. 9897, Dec. 31, 2009; hereinafter the same) provides that penalty and compensation received due to a breach or cancellation of a contract shall be other income. According to Article 41(7) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22034, Feb. 18, 2010; hereinafter the same), the term "defensive or compensation" under Article 21(1)10 of the former Enforcement Decree of the Income Tax Act means compensation received due to a breach or termination of a contract on property rights, which refers to the value of money or other goods to compensate for damages in excess of the payment itself which forms the original contents of the contract, regardless of its title. In this case, if the value of money, etc. returned due to a breach or termination of a contract does not exceed the total amount paid initially under the contract, it shall not be deemed the value of money, etc. exceeding the payment itself.

The term "damage to the payment itself, which is the content of the original contract," under Article 41 (7) of the former Enforcement Decree of the Income Tax Act, refers to the active damage to the payment itself, which is the purpose of the contract. Thus, in case where the seller, in the course of cancelling the contract by the buyer's default, received the money as the compensation for damages from the buyer, if it is paid to compensate for the real loss, it is not subject to other income under the Income Tax Act, but if it is paid in excess of it, it is subject to other income tax (see, e.g., Supreme Court Decision 2010Du11979, Oct. 28,

2) Based on the above legal principles, as to whether the Plaintiff incurred active and practical damages to the pertinent benefit itself due to the rescission of the contract in this case, it is not sufficient to recognize this by only the statement of evidence Nos. 3, 4, 28, 29, 30, and 31, and considering the following circumstances acknowledged by the evidence adopted earlier, the instant performance guarantee constitutes “money compensating for damages exceeding the damages to the payment itself, which is the content of the instant contract,” and the Plaintiff’s assertion is without merit.

① From the conclusion of the instant contract to the notice of the rescission of the instant contract, there was no evidence to prove thatCC had incurred a loss of KRW 1 billion due to the price fluctuation, etc. in about two months after the lapse of two months.

② The term “payment itself,” which forms the terms of this case’s contract, is the shares and management rights that the Plaintiff agreed to transfer to the non-party company. The Plaintiff continued to hold the shares and management rights subject to the said transfer.

③ If the contract of this case was not rescinded, the Plaintiff was able to receive KRW 5 billion with the purchase price of stocks and management rights under the contract of this case, but was unable to receive KRW 5 billion due to the rescission of the contract of this case. However, this constitutes a loss arising from failure to obtain performance benefits that would have been accrued if the contract of this case was performed properly, and thus, it is difficult to view it as a loss for the performance itself, which is the purpose of the contract

D. Determination as to the year to which the other income belongs

1) Relevant legal principles

Article 50 (1) 3 of the former Enforcement Decree of the Income Tax Act is a breach of a contract which is one of other income; or

It is stipulated that the receipt date of the total amount of the penalty or compensation received due to the cancellation shall be ‘the receipt date of the payment'.

The principle of confirmation of right, which is the principle of determining the time of attribution of income under the Income Tax Act, is not the time when income is realized, but the time of attribution is considerably mature and finalized to the extent that income is considerably high potential for realizing the income (see, e.g., Supreme Court Decision 2001Du809, Jul. 9, 2002). However, in the principle of confirmation of right, the concept of "determination" should not be defined as the general principle that does not include exceptions to the time of attribution of income, and the concept of "determination" should not be defined as the general principle that does not include exceptions to the time of attribution of income. In addition, when considering specific matters such as the management and control of income, the degree of the object of income generated, and the time of securing taxpayers' fees, the time of attribution should be determined on the basis of whether

In addition, the performance of the obligation within a given period is required to be performed at the same time.

In the absence of an intent to cancel a contract, the contract may be deemed to have been rescinded upon the lapse of the said period (see Supreme Court Decision 79Da1135, Sept. 25, 1979).

(ii) the time of accrual of penalty;

In this case, the plaintiff and the non-party company agreed that the performance bond of this case shall have the effect of contract deposit, and the non-party company agreed that the performance bond of this case shall revert the performance bond of this case to the plaintiff when the plaintiff terminated the contract. However, the non-party company did not pay the balance under the contract of this case to the plaintiff only after paying the performance bond of KRW 1 billion to the plaintiff and did not pay the balance under the contract of this case, but rather expressed the intention to waive the investment priority right toCC. On September 23, 2009,CC notified the non-party company of the rescission of this case. The non-party company did not perform its contractual obligation of this case even before September 30, 2009.

The following facts revealed with the above facts: ① the instant MOU and the instant MOU were concluded on the same day; ② the same purpose was to acquireCC by participating in the Plaintiff’s capital increase with capital gains and acquiring management rights from the Plaintiff; ② According to Article 4 of the instant MOU, the Plaintiff may rescind the instant contract if the Nonparty Company did not pay the remainder of 4 billion won before the temporary shareholders’ meeting was held; and ② upon the cancellation of the instant contract, the validity of the instant MOU and the validity of the instant MOU are closely related to the instant MOU, such as the instant MOU and the instant MOU, which provide that the effect of the instant MOU would be lost at the same time. ③ In the temporary shareholders’ meeting of theCC, the Nonparty Company was appointed as a director and the Nonparty Company did not legally achieve the ultimate purpose of the instant CC acquisition, and thus, it is reasonable to interpret the Plaintiff and the Nonparty Company’s withdrawal and cancellation of the instant MOU as well as the instant MOU’s cancellation of the contract.

Therefore, as the instant contract was cancelled on September 30, 2009, the instant performance bond was reverted to the Plaintiff as a penalty pursuant to Article 4(4) of the instant Additional Agreement, and the following circumstances acknowledged by each of the aforementioned evidence are as follows: ① the Plaintiff was managing and controlling the income (the penalty) by receiving the full payment of the instant performance bond prior to the cancellation of the contract; ② the amount of the penalty was determined as the full amount of the performance bond; ② the amount of the penalty was determined as the amount of the performance bond; ③ even if the instant contract was cancelled and the Plaintiff could have returned the instant performance bond or reduced the penalty partially in the relevant civil procedure, it can be deemed that the said contract could have been returned through the refund procedure, taking full account of the following circumstances:

3) Sub-determination

Therefore, it is legitimate for the defendant to regard the year 2009 as the time of attribution of other income, and this part of the plaintiff's assertion is without merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit. It is so decided as per Disposition.