Cho Jae-2018-Gu-78 (Law No. 15, 2018)

The difference between the book value of the shares converted into equity and the market value of the shares actually received under the rehabilitation plan approval plan shall not be confirmed to be irrecoverable.

Unless there are special circumstances, in principle, the difference between the book value of the shares converted into investment under the rehabilitation plan and the market value of the shares actually received shall not be deemed to be a claim determined as impossible, unless there are special circumstances, such as the provision that the shares issued through a conversion into investment will be retired free of charge, and as long as the shares were substituted for repayment of existing rehabilitation claims, etc.

Article 45 of the former Value-Added Tax Act (Special Cases concerning Deduction of Bad Debts)

2018Guhap2212 Revocation of Disposition of Imposition of Value-Added Tax

○○○ Incorporated Company

○ Head of tax office

April 3, 2019

May 1, 2019

1. The Defendant’s imposition of value-added tax of KRW 193,04,90,00, which was imposed on the Plaintiff on May 2, 2017, 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. On May 15, 2012, the Plaintiff was engaged in steel manufacturing business, etc. at ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○ District Court rendered a decision to commence rehabilitation procedures and received a decision to authorize the rehabilitation plan on October 11, 2013 (hereinafter “instant rehabilitation plan”).

B. On October 12, 2013, the remainder 2,426,086,263 won was converted into 4,852,172 shares of the Plaintiff’s ordinary share (the face value of 500 won) on the grounds that the Plaintiff’s common share (the face value of 500 won) was converted into 2,42,172 shares, excluding the portion of the rehabilitation claim of ○○○○○○○ (hereinafter “○○○

C. ○○○○○ deemed that a bad debt under the Value-Added Tax Act has occurred on the difference between KRW 2,341,841,663 of the book value of the debt-to-equity swap among the rehabilitation claims against the Plaintiff and KRW 218,347,740 of the market value at the time of acquisition of the shares issued through a debt-to-equity swap (Article 45 of the market value per share x 4,852,172 of the market value) and KRW 2,123,493,923 of the market value at the time of acquisition of the shares, and thus, it was deducted from the bad debt tax amount for the amount equivalent to the value-added tax for the second period, which is the taxable period

D. Accordingly, on May 2, 2017, the Defendant issued a revised notice of KRW 193,04,90 in value-added tax for the second period of value-added tax in 2013 to the Plaintiff on May 2, 2017 (hereinafter “instant disposition”).

E. The Plaintiff dissatisfied with the instant disposition and filed an objection against the Defendant on July 31, 2017, but the objection was dismissed on August 24 of the same year. On November 22 of the same year, the Plaintiff filed an appeal with the Tax Tribunal, but the appeal was dismissed on March 15, 2018.

Facts that there is no dispute over recognition, Gap evidence 1 through 6, Eul evidence 1 and 2, the purport of the whole pleadings, and the purport of the whole pleadings.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

It is reasonable to view that the portion of the rehabilitation claim ○○○○’s conversion into shares was fully repaid according to the instant rehabilitation plan. As such, the difference in this case cannot be deemed as a bad debt amount stipulated in Article 45 of the Value-Added Tax Act, which is confirmed as impossible by the decision to authorize the rehabilitation plan under the Debtor Rehabilitation and Bankruptcy Act (hereinafter “DRB”) or by the court’s decision on immunity

Nevertheless, the instant disposition based on the premise that the instant difference falls under the bad debt amount stipulated in the Value-Added Tax Act is unlawful.

B. Relevant statutes

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

C. Determination

1) Purport and contents of the bad debt tax deduction system and interpretation of the relevant provisions

The Value-Added Tax Act imposes value-added tax on the part corresponding to added value created at the transactional stage by collecting the value-added tax from the other party (Article 31 of the Value-Added Tax Act) when supplying goods or services (hereinafter referred to as "goods, etc.") and paying the value-added tax from the transactional partner as the output tax amount (Article 31 of the Value-Added Tax Act), and paying the difference between the value-added tax collected at the time of the transaction’s supply of the goods, etc. after deducting the value-added tax (purchase tax amount) from the amount of tax collected at the transactional stage (Article 31 of the Value-Added Tax Act). The Korean value-added tax, which adopts the pre-stage tax credit method, has the form of transaction tax imposed on the external transaction type, which is not a substantial income, unlike the income tax and corporate tax, is levied on the external transaction type (see Constitutional Court Decision

A person liable to pay value-added tax is not a person who supplies goods, etc. (Articles 2 subparag. 3 and 3 subparag. 1 of the Value-Added Tax Act), and a supplier of goods, etc. should report and pay value-added tax within the reporting and payment period for the taxable period to which the time of supply of goods, etc. belongs, rather than the time of actual payment. As such, in cases where an entrepreneur supplied goods, etc. on credit and fails to receive the payment for reasons of the opposite contractual party’s default or bankruptcy, etc., the entrepreneur suffers economic loss as well as the value-added tax paid by the State. In such a case, Article 45 of the Value-Added Tax Act provides for a system that deducts the amount equivalent to the value-added tax that the entrepreneur has not received from the opposite contractual party, i.e., the amount equivalent to the bad debt tax that the supplier has to pay from the output tax that should later pay (see, e.g., Supreme Court Decision 2006Du13855, Apr. 24, 2008).

The legislative intent of this bad debt tax deduction system is also known in its history. The Value-Added Tax Act enacted by Act No. 2934 of Dec. 22, 1976 does not provide for bad debt tax deduction, and the provision for bad debt tax deduction is newly established from the Value-Added Tax Act amended by Act No. 4663 of Dec. 31, 1993 to Article 17-2, so that bad debt tax deduction can be applied from the first supplied or supplied after Jan. 1, 1994 to the first time. Article 63-2 of the Enforcement Decree of the Value-Added Tax Act, amended by Presidential Decree No. 14081 of Dec. 31, 1993, provides that the scope of bad debt tax deduction under Article 63-2 of the Enforcement Decree of the Value-Added Tax Act, which is revised by Presidential Decree No. 14081, Dec. 31, 1996.

However, under the principle of no taxation without law, the interpretation of tax laws and regulations shall be interpreted in accordance with the text of the law, barring any special circumstance, and it shall not be extensively interpreted or analogically interpreted without reasonable grounds. In particular, it accords with the principle of fair taxation to strictly interpret the provisions that clearly consider preferential provisions among the requirements for reduction and exemption as a transaction tax (see Supreme Court Decision 2008Du11372, Aug. 20, 2009). In addition, in light of the fact that the value-added tax has the nature of transaction tax, it shall not be permissible to interpret the reason that the Corporate Tax Act governing the taxation of corporate income does not recognize as the secondary bad debt as the grounds for the deduction of bad debt tax in the case of value-added tax, barring special circumstances.

2) Whether the difference in the instant case constitutes “a claim confirmed to be impossible to recover”

A) The main sentence of Article 45(1) of the Value-Added Tax Act provides that where an entrepreneur supplies goods or services subject to the imposition of value-added tax and receives a bad debt tax credit under paragraph (1) of the whole or any other sales credit (referring to those including value-added tax) from the person who has received the supply due to bankruptcy or compulsory execution or other causes prescribed by Presidential Decree, 10/110 of the irrecoverable amount due to bad debt (hereinafter referred to as " bad debt tax amount") may be subtracted from the output tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive, from the input tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive. In applying Article 45(3) main sentence of the Value-Added Tax Act, where the entrepreneur who has received the goods or services has the whole or part of the amount equivalent to bad debt tax amount deducted from the bad debt tax amount under Article 38 before the entrepreneur closes the bad debt tax amount under paragraph (1), the entrepreneur who has received the goods

In addition, Article 87(1) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 26071, Feb. 3, 2015; hereinafter the same) provides that "any of the grounds prescribed by Presidential Decree such as bankruptcy and compulsory execution under Article 45(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 25194, Feb. 21, 2014; hereinafter the same) shall be deemed bad debt pursuant to Article 19-2(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 25194, Feb. 21, 2014; hereinafter the same)" and Article 19-2(1)5 of the Enforcement Decree of

Meanwhile, when it is decided to grant authorization for the rehabilitation plan, the rights of rehabilitation creditors, rehabilitation secured creditors, shareholders, and equity right holders are modified according to the rehabilitation plan (Article 252(1) of the Debtor Rehabilitation Act); and the court may determine the rehabilitation plan on matters such as the amount of debts that are decreased due to the issuance of new shares and allow the debtor, a stock company, to issue new shares without having rehabilitation creditors, rehabilitation secured creditors, or shareholders make new payments or make investments in kind

B) Comprehensively taking into account the purport and content of the system of bad debt tax deduction and the following circumstances revealed, the instant difference part is difficult to be deemed as falling under “a claim confirmed as impossible to be recovered according to the decision to grant authorization for the rehabilitation plan or the court’s decision to grant immunity” under Article 19-2(1)5 of the former Enforcement Decree of the Corporate Tax Act. Therefore, the instant disposition based on the premise that the instant difference part falls under bad debt under bad debt under Article 19-2(1)5 of the former Enforcement Decree of the Corporate Tax Act and is subject to bad debt tax deduction among rehabilitation creditors pursuant to Article 87(1)

(1) The debt-equity swap is a type of debt and debt adjustment that a debtor issues equity securities (stocks) to repay all or part of the debt, resulting in the adjustment of debt through a change in the capital structure converted into equity capital. As can be seen, in a case where the debt-equity swap is to substitute for repayment of the existing debt through a debt-equity swap, if the creditor and the debtor agree on the value of the existing debt which ceases to exist due to the debt-equity swap, and if there is no agreement thereon, it is reasonable to deem that an existing claim equivalent to the appraised value of new shares as of the effective date of the issuance of new shares as of July 24, 2008 has been repaid, barring any special circumstance (see Supreme Court Decision 2008Da18376, Jul. 24, 2008). However, in a rehabilitation plan, the rehabilitation creditor consent of at least 2/3, rehabilitation secured creditor-3/4, or 5/5 or more of the requirements (Article 237 of the Debtor Rehabilitation Act) obtained approval from the court, the interested parties are in accordance with the rehabilitation plan.

The proviso of Article 72(2)4-2 and Article 15(4)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 2518, Apr. 2, 2001; Presidential Decree No. 2010, Feb. 1, 2011; Presidential Decree No. 2010, Feb. 21, 2011; Presidential Decree No. 2010, Feb. 201; Presidential Decree No. 2010, Feb. 23, 2011; Presidential Decree No. 20135, Feb. 2, 2011; Presidential Decree No. 20135, Feb. 1, 2011; Presidential Decree No. 2010, Feb. 23, 2011; Presidential Decree No. 2010, Feb. 3, 201).

In the case of this case, 60% of the principal and interest prior to commencement of rehabilitation claims shall be converted into equity, 40% of the amount of debt-to-equity swap shall be made in cash, but the amount of debt-to-equity swap shall be substituted for the repayment of rehabilitation claims concerned on the date when the shares newly issued by the Plaintiff take effect, so long as the remaining rehabilitation claims, excluding the portion of debt-to-equity swap, shall be extinguished in lieu of the repayment of the debt-to-equity swap, and the acquisition value of shares acquired at this time shall be deemed to be the book value of the bonds converted into equity swap pursuant to Article 72 (2) 4-2 of the former Enforcement Decree of the Corporate Tax Act. Thus, the difference in this case, which is part of the rehabilitation claim converted into equity, shall not be deemed to constitute "a claim confirmed to be impossible to be recovered pursuant to the decision of

(2) If rehabilitation creditors are entitled to a bad debt tax deduction, and if rehabilitation procedures commence after the rehabilitation procedures commence by the Defendant excluded the Plaintiff from the input tax amount as much as the relevant amount of tax, the rehabilitation creditors who received a bad debt tax credit, unlike other rehabilitation creditors who do not have the liability to pay value-added tax, are entitled to a refund of the amount of value-added tax through a bad debt tax credit in addition to rehabilitation claims paid in proportion to other rehabilitation creditors at the same ratio as that of other rehabilitation creditors according to the rehabilitation plan, and as a result, the Defendant is entitled to a refund of the amount of value-added tax equivalent to the amount of the bad debt tax credit (see Article 179 (1) 9 (b) of the Debtor Rehabilitation Act), and the rehabilitation company bears the relevant tax liability. This would result in difficult difficulties in promoting efficient rehabilitation of the rehabilitation company which is the subject of the Debtor Rehabilitation Act, and would result in unreasonable discrimination between rehabilitation creditors, which would result in the remaining rehabilitation creditors’ claims being lower than the amount of the bad debt tax credit of the rehabilitation creditors, and it is difficult to apply the scope of the tax credit exemption case as seen in this case.

(3) According to Articles 421(1) and 423(1) and (2) of the Commercial Act, in the case of issuance of new shares, the underwriter of new shares is obligated to pay in full the subscription price of the shares he/she has acquired on or before the due date. If the underwriter of new shares fails to pay in kind or make an investment in kind on or before the due date, the effect of the issuance of new shares is limited to the shares that have been made on or before the due date of payment out of the shares to be issued. In light of the legal relationship of the issuance of new shares, in the case of issuance of shares through a debt-to-equity swap, it is recognized that the whole debt to be converted into a debt-to-equity swap has been paid as the subscription price of the shares to be issued, but the issuance of new shares becomes effective as the whole shares to be issued. As such, it is difficult to deny the substance of the shares as the payment for the shares (see Supreme Court en banc Decision 2010Du17564, Nov. 22

(4) A rehabilitation plan may be approved only when rehabilitation creditors pass a resolution, and rehabilitation creditors may freely pass a resolution as to whether the remaining rehabilitation claims are entirely converted into equity and only a part of them are converted into equity and are exempt from payment, on the premise that rehabilitation claims are modified according to the rehabilitation plan. Therefore, it is difficult to deem that it is unreasonable to acknowledge a change of the rehabilitation claim according to the rehabilitation plan. Even though a certain ratio of the rehabilitation claim is converted into equity and are determined as a substitute for repayment, if it is deemed unreasonable to recognize the change of the rehabilitation claim later, the rehabilitation company will assume an unforeseeable debt, and some rehabilitation creditors are considered to have an unforeseeable profit, thereby contrary to equity in relation to other rehabilitation creditors, thereby going against the purport of the rehabilitation plan to seek efficient rehabilitation of the debtor and his/her business.

3. Conclusion

Therefore, the plaintiff's claim is reasonable, and it is decided as per Disposition by admitting it.