[1] The case where "other methods deemed reasonable in light of the substance and practice of other transactions" under Article 4 subparagraph 3 of the former Enforcement Decree of the Adjustment of International Taxes Act can be applied to the arm's length price calculation method

[2] Method of calculating the arm's length price for a transaction between a resident and a foreign related party based on the arm's length price under Article 4 (1) of the former Adjustment of International Taxes Act / Whether the tax authority bears the burden of proving that the arm's length price was lawfully calculated through the above process (=tax authority)

[1] Article 5(1) of the former Adjustment of International Taxes Act (amended by Act No. 9266 of Dec. 26, 2008); Article 4 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 17832 of Dec. 30, 2002) / [2] Article 4(1) of the former Adjustment of International Taxes Act (amended by Act No. 9266 of Dec. 26, 2008)

[2] Supreme Court Decision 2011Du6127 Decided December 26, 2012 (Gong2013Sang, 256)

Han Bank Co., Ltd. (Attorneys Kim Jong-soo et al., Counsel for the plaintiff-appellant)

The director of the Nam-gu Tax Office (Law Firm Corporation, Attorneys Soh Ho et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2012Nu3141 decided May 22, 2013

All appeals are dismissed. The costs of appeal are assessed against each party.

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

1. Judgment on the Plaintiff’s grounds of appeal

(5) The court below shall comprehensively examine the evidence adopted: ① the Plaintiff shall hold a board of directors on December 29, 2003 to amend the existing regulations on remuneration, welfare, and travel expenses for executives (hereinafter “existing regulations on remuneration for executives”); (1) during November 2003 due to the restructuring of governance structure under the inducement of foreign capital, the non-party 1, etc., who retired from office, shall be paid piece rates for the improvement of financial ratio through inducement of foreign capital in 2003; (2) the amended regulations on remuneration for executives shall apply to the non-party 1, who retired from office, by applying the amended regulations on remuneration for executives, to pay 270% of basic salary to the non-party 1 who retired from office; and (3) the new regulations on remuneration for executives shall apply mutatis mutandis to the evaluation of executives’ performance in accordance with the above provisions on remuneration for executives’ performance; and (4) the new regulations on remuneration for executives’ performance rate of the non-party 1, who was determined to be paid 120% or 270% of the applicable provisions on remuneration for executives’s.

Based on such factual basis, the lower court determined that it was justifiable to exclude the aforementioned piece rate from deductible expenses on the ground that: (a) the performance rate of an existing executive officer should be calculated by applying the provisions on remuneration for executive officers under Article 2 of the Addenda to the amended Regulations on Remuneration for Executive Officers; (b) the Plaintiff calculated and paid piece rate by applying the provisions on remuneration for executive officers, such as Nonparty 1, etc.; and (c) such performance rate cannot be deemed as “amount paid by the standards for payment determined by the articles of incorporation, the general meeting of shareholders, the general meeting of shareholders, or the board of directors according to the resolution of the articles of incorporation, the general meeting of shareholders, or the board of directors of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8,

In light of the relevant legal principles and records, the judgment of the court below is just and acceptable, and contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of the legal principles as to the inclusion of executive officers' performance

2. Judgment on the Defendant’s grounds of appeal

(a) Application of preferential interest rates to trust customers;

The lower court determined that even if the Plaintiff, who concurrently runs the trust business and banking business, compensates the customer’s loss incurred in the trust account as the expenditure of the bank account, thereby violating the provisions of the trust business supervision by compensating for the loss incurred by the customer from the trust account, this is due to the business necessity to prevent the outflow of funds due to the secession of trust customers and to maintain the profit-making foundation, and it is difficult to view that the inclusion of the expenses paid therefrom in the deductible expenses is in violation of the social order, and such expenses are not disbursed in the manner of entertainment, entertainment, entertainment, return, etc., but not disbursed for the purpose of stronging friendship,

In light of the relevant legal principles and records, the judgment of the court below is just, and contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the requirements for recognition of losses or the legal principles on

(b) Depreciation of business rights of electronic medical cards;

After compiling the adopted evidence, the lower court acknowledged the facts as indicated in its reasoning, and determined that the instant electronic medical card business right was purchased for the Plaintiff’s business profit, and constitutes an intangible fixed asset under Article 24(1)2(a) of the former Enforcement Decree of the Corporate Tax Act, and that the depreciation costs thereof cannot be deemed as entertainment expenses.

In light of the relevant legal principles and records, the judgment of the court below is just, and contrary to the allegations in the grounds of appeal, there were no errors of misapprehending the legal principles on goodwill or entertainment expenses.

(c) Exemption from redemption fees before maturity for customers of good loans;

The lower court determined that the exemption amount cannot be deemed as entertainment expenses, on the ground that it is reasonable in business management as it prevents excellent customers from escaping from other banks in accordance with the credit rules, which are the Plaintiff’s internal rules.

In light of the relevant legal principles and records, the judgment of the court below is just, and contrary to the allegations in the grounds of appeal, there is no error of law by misapprehending the legal principles

(d) Taxation adjustment for the purchase of bonds held by overseas subsidiaries;

Article 5(1) of the former Adjustment of International Taxes Act (amended by Act No. 9266 of Dec. 26, 2008; hereinafter “former Adjustment of International Taxes Act”) provides for the method of computing the arm’s length price in a comparable third party’s length price (Article 1), resale price method (Article 2), cost plus (Article 3) and other reasonable methods (Article 4 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 17832 of Dec. 30, 2002) only where it is impossible to calculate the arm’s length price by a comparable third party’s length price method (Article 1), resale price method (Article 2(1)2), and any other reasonable method deemed reasonable in light of the substance and practice of transaction (Article 5(4) through (3) of the same Act, and Article 5(4) of the same Act provides for the method of computing the arm’s length price in a successive manner as prescribed by Presidential Decree.

According to these regulations, “the methods deemed reasonable in light of the substance and practice of other transactions” under Article 4 subparag. 3 of the former Enforcement Decree of the International Tax Adjustment Act among the methods of calculating the arm’s length price as above is a supplementary method where the arm’s length price cannot be calculated by the method under Article 5(1) subparag. 1 through 3 of the former Adjustment of International Taxes Act, and where the method under Article 4 subparag. 1 and subparag. 2 of the Enforcement Decree of the same Act cannot be applied

The lower court determined that the Defendant’s exclusion of the difference between the Plaintiff’s purchase price and its purchase price was unlawful on the ground that the evidence submitted by the Defendant alone was insufficient to recognize that it was impossible to calculate the arm’s length price of the treatment claim at the price of 32.3% of the principal from the overseas creditors who purchased the so-called treatment claim, etc. from the Korea Asset Management Corporation around 2000 and 2001 as 32.3% of the principal amount, etc. from the overseas creditors who did not have a special relationship, and there was no other evidence to acknowledge that the arm’s length price of the treatment claim at the price of 32.3% of the principal from the overseas subsidiary of the Korea Asset Management Corporation on April 24, 2001 is insufficient to recognize that the arm’s length price of the Plaintiff’s purchase price exceeds the arm’s length price, and there was no other evidence to prove otherwise.

In light of the above provisions and records, the judgment of the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles as to the arm's length price under the former International Tax Adjustment Act.

(e) Offering an office to a company engaged in the overseas sales industry;

After comprehensively taking account of the adopted evidence, the lower court determined that the Plaintiff’s act of providing offices in the overseas industry and bearing management expenses cannot be deemed as the object of avoidance of wrongful calculation, on the grounds that the evidence submitted by the Plaintiff alone is insufficient to acknowledge that the overseas-oriented industry falls under a specially related person under Article 87(1) of the former Enforcement Decree of the Corporate Tax Act, and there is no other evidence to acknowledge it.

In light of the relevant legal principles and records, the judgment of the court below is just, and contrary to the allegations in the grounds of appeal, there is no error of law by misapprehending the legal principles on the denial

(f) Management adviser fees, etc. for retired executives;

The court below acknowledged the facts as stated in its decision after comprehensively taking account of the adopted evidence. It is reasonable to view that the plaintiff entered into an advisory contract with the former president, who was actually provided with management advisory services, and paid management advisory fees in return. This may assist the management of the company by transferring the experience of retired executive officers to the former president and stabilizing the organization. Since Nonparty 2 and Nonparty 3, who is the former vice president or executive officers, were unilaterally dismissed and voluntarily retired at the request of the plaintiff controlling shareholder without any reason attributable to the plaintiff, the payment of the remaining term of office or the amount equivalent to the remuneration for the employment contract period can be deemed appropriate and useful measures for the stabilization and smooth operation of the management and management organization, and on the ground that the payment of the remaining term of office or the amount equivalent to the remuneration for the employment contract period can be deemed appropriate and useful measures for the stabilization and smooth operation of the management adviser and management organization, the court below rejected the defendant's assertion that Nonparty 1 voluntarily retired without any management adviser and the rest of executive officers.

In light of the relevant legal principles and records, the fact-finding and determination by the court below are just, and contrary to the allegations in the grounds of appeal, there were no errors of exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, or of misapprehending

(g) Management expenses for company houses, rental fees for company houses, etc. for foreign executives;

The court below found the facts as stated in its reasoning after comprehensively taking account of the adopted evidence. The plaintiff concluded a memorandum of understanding with two foreign officers dispatched from Comerz as the largest shareholder, and provided company houses to them in accordance with the "Rules on Remuneration, Welfare, and Travel Expenses for Foreign Officers" which are the plaintiff's internal rules, which are the plaintiff's internal rules, and borne company house rental fees for about two months after the plaintiff retired and left the country. However, the court below held that it was unlawful for the plaintiff to exclude the management expenses, rental fees, or rental deposits paid to them from the company house lease because they were due to a change in the majority shareholder, or due to a change in the majority shareholder, they could not be refunded the rental fees paid in advance under the company house lease agreement, or to additionally bear the rental fees for about two months in consideration of the period required for termination of the lease contract. The court below held that the non-party 4, the standing director of the plaintiff, was a person eligible to provide company houses under the plaintiff's internal rules.

In light of the relevant legal principles and records, the judgment of the court below is just and acceptable. Contrary to the allegations in the grounds of appeal, there were no errors by misapprehending the legal principles on requirements for inclusion in deductible expenses or operating expenses.

(h) Management support expenses for overseas local corporations;

In order for a tax authority to impose a tax on a transaction between a resident and a foreign related party based on the arm's length price, it shall choose the most reasonable arm's length price calculation method based on the data collected through a request, etc. for submission of data to the taxpayer. In a case where the difference in the compared circumstances has a significant impact on the compared transaction price or net profit, the difference must be reasonably adjusted and calculated, and the tax authority bears the burden of proving that the arm's length price, which forms the basis for the taxation, was lawfully calculated through the above process (see Supreme Court Decision 2011Du6127, Dec. 26, 2012, etc.).

The lower court determined that the inclusion of the Plaintiff’s non-performance of management support expenses of approximately KRW 4 billion in the amount of the Plaintiff’s overseas subsidiaries in the business year 2001 to 2005 in the gross income is unlawful on the grounds that the Plaintiff’s non-payment of management support expenses of KRW 4 billion in the gross income is limited to ordinary expenses for its services paid by the Plaintiff in relation to the overseas subsidiaries, and that the amount of the Defendant’s non-payment of management support

Examining the reasoning of the judgment below in light of the records, as long as it is impossible to calculate a legitimate arm's length price for the Plaintiff's provision of services, such as failure to submit data to verify the contents of services actually provided to an overseas subsidiary beyond the scope of the Plaintiff's business status, the court below's conclusion that it cannot be included in gross income is acceptable. In so doing, contrary to what is alleged in the grounds of appeal, the court below did not err by misapprehending the legal principles on arm's length price

3. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against each party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim So-young (Presiding Justice)