Non-Inclusion of provisional payments in expenses of a person with a special relationship

The loan of this case, which constitutes a provisional payment unrelated to business, is sold after converting the loan of this case into equity and disposed of in the form of stock disposal loss. As long as the loan of this case constitutes provisional payment unrelated to business, it is reasonable to view that the issue of disposal loss is also the bad debt of the provisional payment unrelated to business.

Corporate Tax Act

Suwon District Court 2018Guhap61650 Revocation of Disposition rejecting a request for corporate tax revision

Hanyang******

***The Director of the Tax Office

July 19, 2018

August 23, 2018

1. The plaintiff's claim is dismissed.

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

A disposition rejecting correction of the corporate tax of KRW 2,780,415,770 against the Plaintiff on October 12, 2016 by the former defendant working for the Gu office on October 12, 2016 shall be revoked.

1. Details of the disposition;

A. The Plaintiff is a company that is established around July 198 and whose main business is manufacturing semiconductor equipment, semiconductor manufacturing, semiconductor equipment, etc. (Evidence A No. 1).

B. On December 17, 2007, the Plaintiff entered into an agreement with AAFT Co., Ltd. (hereinafter referred to as "B PP" on July 30, 2007; hereinafter referred to as "the company of this case") with 00, 200, 30, 200, 200, 300, 200, 200, 300, 200, 200, 200, 300, 50, 60, 60, 200, 200, 60, 60, 60, 200, 200, 80, 60, 60, 200, 60, 60, 70, 200, 60, 60, 200, 60, 80, 200, 50, 200, 208.

D. From May 16, 2008 to October 8, 2008, the Plaintiff loaned to the instant company a total of KRW 1,294,000,000 on six occasions, including KRW 2,864,00,000, KRW 579,000,000 in 2011, KRW 2980,000,000 in 200,000 in 200,000 in 2011, KRW 4,200,000 in 20,000 in 20,000 in principal and KRW 4,658,000 in 20 in 16,575,00 in 20 in 200 in 200 in 200 in 205 of the loans (i.e., loans of this case). The company used KRW 8,000 in 30 in 200 in 200 in 3000 in 3.

E. Meanwhile, on July 8, 2008, the Plaintiff acquired 561,200 shares of the instant company for the first time (46%) and became a specially related person under the Corporate Tax Act (Evidence A9) and subsequently acquired shares of the instant company as follows.

F. On July 11, 2012, the Plaintiff converted the outstanding bonds into equity investment of KRW 4,00,000,000 among the instant loans, and KRW 11,042,00,000 on October 7, 2014, total of KRW 15,042,00,000 (the instant loans KRW 16,575,000,000, the outstanding amount of KRW 14,089,000,000, the outstanding amount of KRW 695,00,000,000, and the failed amount of the construction payment of the instant loans, and KRW 258,00,00,00, and KRW 250,000,000 (Evidence evidence 10-1,000,000,000). After that, the Plaintiff held the entire shares of KRW 10,000,00,000,000.

G. Upon filing a final return of corporate tax for the business year 2015, the Plaintiff did not report disposal losses of 14,242,00,000,000 won (i.e., the Plaintiff’s outstanding bonds value of 15,042,00,000 won - 80,000,0000 won for the transfer of stocks of this case - hereinafter “point disposal losses”) to deductible expenses. On August 9, 2016, the Plaintiff did not report to the Defendant on the inclusion of the disposal losses of 14,242,00,000 won in deductible expenses on the ground that the amount should be included in deductible expenses in calculating the amount of corporate tax for the business year 2015, on the ground that the amount of corporate tax calculated and the amount of tax payable should be the difference between the amount of corporate tax to be paid and the amount of corporate tax to be paid. However, on October 12, 2016, the Defendant made a request for rectification of the amount of bad debt payment (the loan losses).

H. The Plaintiff dissatisfied with the instant disposition and filed a request for review on January 2, 2017, but the Commissioner of the National Tax Service rendered a decision to dismiss the Plaintiff’s claim on November 30, 2017, and the Plaintiff received the written notification on the same day (Evidence A 3). The Plaintiff received the written notification on the same day. The Plaintiff did not have any dispute over recognition, the Plaintiff’s entries in subparagraphs A1 through 13, and Nos. 1 through 4 (including the number with each number), and the purport of the entire pleadings.

2. Whether the instant disposition is lawful

A. The parties' assertion

The defendant asserts that the disposition of this case is lawful on the grounds of the disposition and the relevant statutes. The plaintiff asserted that the disposition of this case is unlawful as follows.

In the course of running a construction business, the Plaintiff entered into the instant joint and several guarantee contract for the purpose of early collecting the construction cost claim, and the instant company failed to repay the principal and interest of the instant facility loan due to poor business performance.

In order to minimize the loss caused by the joint and several sureties agreement, the instant loan to the instant company is inevitably lent to minimize the loss. The instant loan is substantially identical to the Plaintiff’s construction cost claim, and the economic rationality is recognized in the lending act.

In particular, among the key disposal losses, ① the balance of the instant construction cost claim KRW 695,00,000 and interest KRW 258,000,000 are not recovered due to the loss of the company’s ability to perform its obligations, there are justifiable grounds for delay in recovery. ② The amount of KRW 10,403,00,00 used to repay the company’s loans of this case is the same as the Plaintiff subrogated the company’s obligations under the joint and several guarantee contract of this case and its economic substance are the same as the Plaintiff subrogated the company’s obligations under the joint and several guarantee contract of this case, and the actual cause for payment is related to the Plaintiff’s business, so the issue of disposal losses, which is the bad debt of the instant loan claim, shall be included in deductible expenses at the time of calculating the Plaintiff’s corporate tax for the

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Relevant legal principles

Comprehensively taking account of Article 19-2(2)2 of the Corporate Tax Act, Article 28(1)4(b) of the Corporate Tax Act, Article 52(1) of the Corporate Tax Act, Articles 19-2(7) and 53(1) of the Enforcement Decree of the Corporate Tax Act, the disposal loss of the claim for payment of the local income amount that is paid to a specially related person under Article 52(1) of the Corporate Tax Act without relation to the business of the relevant corporation is set as the object of non-deductible expenses. Article 53(1) of the Enforcement Decree of the Corporate Tax Act defines the amount of the loan that is not related to the business of the relevant corporation regardless of the title "for the claims for provisional payment which are not related to the business of the relevant corporation, the issue of whether the loan is related to the business of the relevant corporation shall be objectively determined based on the purpose of business or business contents of the tax payment corporation. However, if the loan to the affiliated company contributes directly and reasonably to the increase of the sales or profit of the tax payment corporation, it shall be deemed as related to 190.

On the other hand, delaying the recovery of the construction cost to be paid by a person with a special relationship without any justifiable reason shall be deemed to have been paid as provisional payment on the date when the construction cost is to be recovered, in that the construction cost actually has the same effect as the provisional payment has been recovered after the full recovery within the term of obligation under the contract. (See Supreme Court Decision 95Nu3589 delivered on December 26, 1995)

(ii) the facts of recognition

A) Under the agreement (No. 6-1 and Article 3-3 of the loan agreement of this case) that a national bank created a security interest within the limit of 130% of the loan amount for a factory newly built pursuant to the instant loan agreement at the time of the instant loan agreement (No. 5) with respect to a factory newly built by the Plaintiff on September 16, 2008 (No. 5).

B) Net loss of the company of this case was KRW 1,040,858,79 in 2008, KRW 3,576,59 in 2009, KRW 677,640, KRW 970 in 2010, KRW 2,757, KRW 399,938 in 201, KRW 2012,947, KRW 929,641 in 201 (Evidence 2-1 through 4).

C) On September 6, 2011, the National Bank notified the Plaintiff of the fact that the instant company, as the principal debtor on August 23, 2011, failed to pay a total of KRW 209,570,142 for one-month principal and interest repaid, thereby losing the benefit of time in accordance with the instant loan agreement (Evidence A14). The fact that no dispute exists as the basis for recognition, No. 5, A’s evidence 6-1, A’s evidence 6-1, 14, 2-1, 2-4, and 2-1 through 4, the purport of the entire pleadings, and the purport of the whole pleadings.

3) Whether the instant loan constitutes a tentative payment unrelated to business

In light of the above legal principles, in full view of the following circumstances, it is reasonable to view that the loan of this case was lent by the Plaintiff to the company of this case which is the subsidiary company without its own business relation and constitutes "provisional payment, etc. which was paid without its business relation to the business," and the plaintiff's assertion to the different purport is without merit.

① Although the Plaintiff’s main business purpose is the manufacturing business of semiconductor equipment, semiconductor manufacturing business, semiconductor equipment manufacturing business, L CD manufacturing business, etc., the instant company is a company engaged in the business of manufacturing, concentration, fishery products, food and beverage manufacturing and processing, etc., and it is difficult to view the instant loan as an investment related to the Plaintiff’s aforementioned objective business in light of the Plaintiff’s objective business and business contents.

② Until April 3, 2009, the instant company repaid the Plaintiff KRW 8,380,000,000 (including value-added tax, KRW 9,075,00,000) most of the construction cost of this case to the Plaintiff, and did not pay the remainder of KRW 695,00,000. The remainder of the construction cost of KRW 695,000,000 was not collected for a long time from the instant company, which is a related party. In light of the fact that the instant company did not make any effort to recover its claim, it is difficult to view that there exists a justifiable reason for delay in collecting the Plaintiff’s claim, and it is reasonable to deem that the Plaintiff’s business was not related to the Plaintiff’s business.

③ The Plaintiff, as a joint and several surety, did not subrogated the instant company’s debt, which is a primary debtor, but rather lent funds to the instant company as a separate corporation with a special relationship with the Plaintiff. In addition, in principle, the Corporate Tax Act provides that the bad debt amount of indemnity claims arising from debt guarantee shall be excluded from deductible expenses (Article 19-2(2)1 of the Corporate Tax Act). In cases where the Enforcement Decree exceptionally allows inclusion in deductible expenses does not fall under the category listed, the bad debt amount of indemnity claims arising from the instant loan cannot be included in deductible expenses even if the corporation provided debt guarantee in order to receive transaction fees related to the business (see Supreme Court Decision 2013Du17534, Jan. 14, 2016). Therefore, it cannot be deemed that the Plaintiff lent the said funds to the said company.

④ The Plaintiff’s claim KRW 4,00,000,000 against the instant company, accumulated on July 11, 2012, was extinguished by converting into equity shares of KRW 800,000,000, but the Plaintiff additionally lent KRW 11,042,00,000 to the instant company from July 7, 2012 to October 7, 2014 after converting into equity shares, and again extinguished on October 7, 2013. The Plaintiff’s lending purpose is to support the instant company’s operating funds.

⑤ There is no evidence suggesting that the Plaintiff lent the instant loan to the instant company for the purpose of contributing directly and reasonably to the increase of sales and profit of the Plaintiff company itself or contributed as such to the Plaintiff. Rather, if the instant company was not a person with a special relationship with the Plaintiff, it seems that there was no reason to continuously lend the instant loan to the instant company, which had been in a state of the Plaintiff’s continuous state, to use it as facility operation funds, etc.

④ For six years from 2008 to 2014, the Plaintiff did not include paid interest in deductible expenses on the premise that the instant loan constitutes a provisional payment irrelevant to business affairs, and continued tax adjustment including the recognized interest in deductible expenses.

7) The Plaintiff converted the loans of this case corresponding to provisional payments unrelated to its business into equity and sold them in the form of a stock disposal loss. As long as the loans of this case fall under the provisional payments unrelated to its business, it is reasonable to view the sales loss as also the bad debt of the provisional payments unrelated to its business.

3. Conclusion

Thus, the plaintiff's claim is dismissed as it is without merit.