[1] Where there is an input tax amount that is commonly used for a taxable business and a non-taxable business and thus it is impossible to distinguish the actual attribution thereof, the method of adding the input tax amount divided in the non-taxable business / Where an entrepreneur receives a national subsidy, etc. for the supply of services falling under the non-taxable business, and it is not possible to regard it as a consideration for the supply of such services, whether Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act can be applied by analogy (negative), and

[2] The meaning of Article 13 (2) 4 of the Value-Added Tax Act excluding national subsidies from value-added tax base

[3] The case holding that Article 61 (1) of the former Enforcement Decree of the Value-Added Tax Act concerning the calculation method of common purchase tax cannot be applied by analogy or analogy, in case where Gap corporation engaged in railroad passenger transport business concluded a contract for compensation of public service expenses for the year 2008 with the Minister of Land, Transport and Maritime Affairs under the former Framework Act on Railroad Industry Development, provided public service such as reduction of and exemption from railroad fares for senior citizens, and received compensation for public service expenses from the Minister of Land, Transport and Maritime Affairs, and reported the value-added tax on Gap corporation, on the ground that the amount of compensation for Gap corporation is borne by the State on behalf of the State for the services provided to the railroad users, and thus constitutes a non-taxable object under the Value-Added Tax Act, since it constitutes a national subsidy that is excluded from the value-added tax base pursuant to

[1] In principle, an input tax amount related to a taxable business and a non-taxable business shall be calculated according to the actual attribution. If an input tax amount is related only to a non-taxable business, it shall not be deducted from the output tax amount. If an input tax amount cannot be separated from the actual attribution due to a common use for a taxable business and a non-taxable business, in principle, the input tax amount divided in the non-taxable business shall be applied by analogy to the provisions of the Enforcement Decree of the Value-Added Tax Act on the proportional distribution of common input tax amount in the case of concurrent operation of a taxable business and a non-taxable business. However, if the pertinent business operator receives a national subsidy, etc. from the State or a local government and cannot be seen as a consideration for the supply of a service corresponding to a non-taxable business, it shall not be inferred that Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 22043, Feb. 18, 2010; hereinafter the same) provides that the shared input tax amount shall not be applied.

[2] Article 13(2)4 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010) stipulates a national subsidy as one of the items not included in the tax base of value-added tax. This means that where an entrepreneur liable to pay value-added tax by supplying goods or services supplies goods or services as an executor of a subsidized project subject to a national subsidy and receives a national subsidy, the said entrepreneur does not include the amount equivalent to the above national subsidy in the tax base of value-added tax for the supply of goods or services.

[3] In a case where Party A, who runs a railroad passenger transport business, entered into an indemnity agreement for public service costs in 2008 with the Minister of Land, Transport and Maritime Affairs under the former Framework Act on Railroad Industry Development (amended by Act No. 11690, Mar. 23, 2013), and filed a value-added tax after receiving the amount of compensation for public service costs (hereinafter “compensation amount”), such as reduction of and exemption from railroad fares from the Minister of Land, Transport and Maritime Affairs, from the Minister of Land, Transport and Maritime Affairs, and the tax authorities imposed a disposition of correction and notification of value-added tax reflecting the common purchase tax calculated on the ground that the amount of compensation for Party A was borne by the State for the services provided to the railroad users on behalf of the State, which constitutes a non-taxable object under the Value-Added Tax Act, the other party to the said services shall be deemed to be the railroad users who were directly provided with the above public service, and further, the amount of compensation for the public service provider was paid by the State under the above indemnity agreement, and thus excluded the amount of value-added tax (amended by Presidential Decree No. 21310.

[1] Article 61(1) and (4) (see current Article 81(1) and (4)) of the former Enforcement Decree of the Value-Added Tax Act (Amended by Presidential Decree No. 22043, Feb. 18, 2010) / [2] Article 13(2)4 (see current Article 29(5)4) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010) / [3] Article 13(2)4 (see current Article 29(5)4) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010); Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act (Amended by Presidential Decree No. 22043, Feb. 18, 2010)

[1] Supreme Court Decision 2009Du16268 Decided September 8, 201 (Gong2016Sang, 625) Supreme Court Decision 2013Du19875 Decided March 24, 2016 (Gong2016Sang, 625) Supreme Court Decision 2015Du45731 Decided June 23, 2016 / [2] Supreme Court Decision 2000Du369 Decided October 9, 201 (Gong2001Ha, 2484)

Korea Railroad Corporation (Law Firm LLC et al., Counsel for the defendant-appellant)

Head of Yeongdeungpo-gu Tax Office and fourteen others (Law Firm LLC, Attorneys Nam Young-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2017Nu35211 decided June 27, 2017

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. In principle, an input tax amount related to a taxable business and non-taxable business shall be calculated according to the actual attribution. If an input tax amount is related only to a non-taxable business, it shall not be deducted from the output tax amount. If an input tax amount cannot be separated from the actual attribution due to a common use for a taxable business and non-taxable business, in principle, if an input tax amount is used for a taxable business and a non-taxable business, it shall be applied by analogy to the Enforcement Decree of the Value-Added Tax Act on the proportional distribution of common input tax amount (see, e.g., Supreme Court Decision 2009Du16268, Sept. 8, 201). However, if the pertinent entrepreneur receives a separate subsidy from the State or a local government, and if it is impossible to view it as a consideration for the supply of a non-taxable business, it shall not be applied by analogy of the common input tax amount pursuant to Article 61(1)4 of the former Enforcement Decree (amended by Presidential Decree No. 22043, Feb. 18, 2019).

2. A. The lower court acknowledged the following facts by citing the first instance judgment.

(1) Under the Value-Added Tax Act, the Plaintiff is running passenger transportation services for high-speed railroads, cargo transportation services, leasing services, etc. subject to tax exemption and general railroads and metropolitan railroads passenger transportation services.

(2) On June 26, 2008, pursuant to Articles 32 and 33 of the former Framework Act on Railroad Industry Development (amended by Act No. 11690, Mar. 23, 2013; hereinafter the same), the Plaintiff entered into a contract for compensation of public service costs in 2008 (hereinafter “instant compensation contract”) with the Minister of Land, Transport and Maritime Affairs (hereinafter “the Minister of Land, Transport and Maritime Affairs”). The main contents are as follows: (a) three types of public service pursuant to Article 3 subparag. 11 and 32(2) of the former Framework Act on Railroad Industry Development from January 1, 2008 to December 31, 2008; (b) the reduction or exemption of railroad fares for senior citizens, persons with disabilities, persons with distinguished services to the State, and persons with distinguished services to the State; and (c) the Minister of Land, Transport and Maritime Affairs provides basic railroad service for public interest restrictions or suspension due to extreme difficulty in using the railroad; and (c) the operation of the special route (hereinafter “special route”).

(3) Subsequent to the instant compensation agreement, the Plaintiff received KRW 266,168,00,000 in total from the Minister of Land, Transport and Maritime Affairs for the amount of compensation for the provision of public services in 2008 (the amount of 92,354,00,000 for the reduction of freight, KRW 172,298,000 for the operation of remote routes, KRW 172,298,000 for the operation of special trains, KRW 1,516,00,00 for the operation of special trains, and KRW 1,516,00 for the operation

(4) When filing a return on the second taxable value tax in 2008, the Plaintiff calculated the input tax amount related to the tax-free business by applying the supply value ratio of the business subject to VAT and the total supply value of the business subject to VAT as seen earlier, and did not deduct the amount from the output tax amount.

(5) On January 22, 2014, the Defendants issued the instant disposition to correct and notify the Plaintiff of the total value-added tax of KRW 5,713,236,200 (including additional tax) for the second period of value-added tax in 2008, on the ground that the Plaintiff bears the burden of the State for the services provided to railroad users on behalf of the Plaintiff, and is subject to non-taxation under the Value-Added Tax Act.

B. Based on these facts, the lower court, on the premise that the instant public service provided by the Plaintiff constitutes a non-taxable business, determined that the instant disposition was lawful, on the grounds stated in its reasoning that the instant compensation amount paid in return for the instant public service ought to be divided by analogical application of Article 61(1) of the former Value-Added Tax Act by deeming it as a non-taxable income amount.

3. However, in light of the legal principles as seen earlier, the lower court’s determination cannot be accepted for the following reasons.

A. Article 13(2)4 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010; hereinafter the same) stipulates a national subsidy as one of the items not included in the tax base of value-added tax. This means that where a business operator liable to pay value-added tax by supplying goods or services supplies goods or services as an executor of a subsidized project subject to a national subsidy and receives a national subsidy, the said national subsidy amount shall not be included in the value-added tax base based on the supply of goods or services (see, e.g., Supreme Court Decision 200Du369, Oct. 9, 201).

B. The Plaintiff, a railroad operator, provides the instant public service, one of the railroad services, regardless of the business activities of the State or a local government for policy or public purpose, etc. (Article 3 subparag. 11 of the former Framework Act on Railroad Industry Development). To maintain such public service function, a cause provider directly demanding the pertinent public service bears the burden of expenses incurred in the provision of public service, and the specific details are stipulated in a contract on compensation for public service costs between a cause provider and a railroad operator (Articles 32 and 33 of the former Framework Act on Railroad Industry Development).

C. Accordingly, in light of the circumstances such as the provision of the instant public service and the provision of compensation contract, etc., the Plaintiff’s provision of the instant public service, and the Plaintiff’s provision of the said public service only pays the fare reduced or exempted for the Plaintiff’s rolling stock, or makes it possible to continue to use the said service by paying the price lower than the actual cost for the railroad services on remote routes. Furthermore, the other party to whom the instant public service is provided ought to be deemed the railroad user who was directly provided with the instant public service. Furthermore, given that the amount of compensation for the instant public service was paid by the State pursuant to the instant compensation contract that the Plaintiff concluded with the Minister of Land, Transport and Maritime Affairs to receive compensation for the costs incurred from the provision of the service to the railroad user, it constitutes the facility and operation fund granted for the purpose of financial assistance, not the consideration for the provision of the service itself. Therefore, it is reasonable to deem that the amount of compensation for the public service in

D. Therefore, the pertinent amount of compensation for public service falls under the national subsidy not directly related to the supply of the service, and cannot be deemed the proceeds from the supply of the service on the premise of the lower court. Therefore, Article 61(1) of the former Enforcement Decree of the Value-Added Tax Act concerning the calculation of common purchase tax based on the above amount of compensation cannot be applied or inferred

4. Nevertheless, the lower court determined otherwise on the ground as indicated in its reasoning that the instant disposition was lawful by deeming the instant compensation amount as the revenue amount of the independent non-taxable business. In so determining, the lower court erred by misapprehending the legal doctrine on the nature of the instant compensation amount, thereby failing to exhaust all necessary deliberations regarding the method of calculating the common purchase tax amount for taxable and non-taxable businesses.

5. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Sang-ok (Presiding Justice)