Cho Jae-2017-China 4645 ( December 26, 2017)

It is not subject to value-added tax exemption even if it has supplied officetels of 85 square meters or less for residential use.

In the provisions of Article 106 (1) 4 of the Restriction of Special Taxation Act, the term "house" means only a building constructed for the purpose of housing with a construction permit lawfully obtained at the time of its supply, and it cannot be deemed that it includes a building constructed with a construction permit obtained for the purpose of business facilities (offices).

Article 106 of the Restriction of Special Taxation Act

Incheon District Court-2018-Gu 51496 ( November 29, 2018)

조☆봉 외 4

부★세무서장

November 8, 2018

November 29, 2018

1. The plaintiffs' claims are dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

Cheong-gu Office

The Defendant’s imposition of value-added tax of KRW 1,641,453,710 (including additional tax) for the second year of 2015 against the Plaintiffs on July 11, 2017 shall be revoked.

1. Details of the disposition;

A. New construction and sale of officetels by the plaintiffs

On January 20, 2015, the Plaintiffs had registered housing construction and sales business, etc., with the trade name of Hocheon-si, Busan-si, 2015, and had sold the said officetel in the second taxable period of value-added tax in 2015 (hereinafter referred to as “the instant officetel”). On August 2015, 201, the Plaintiffs newly built a business facility of the second basement and the fourth floor above the ground (including No. 6 and officetel No. 86) in the name of “AB” on the ground of 1,052 square meters above the second floor below the ground.

B. Plaintiffs’ failure to report value added tax and Defendant’s imposition of value added tax

1) The Plaintiffs are exempt from value-added tax pursuant to Article 106(1)4 of the Restriction of Special Taxation Act (hereinafter “instant exemption provision”) on the supply of the instant officetel since the instant officetel constitutes a house with an exclusive residential area of 85 square meters or less per household.

The value-added tax was not reported in 2015 on the supply of telecom.

2) On May 2017, the Director of the Regional Tax Office: (a) conducted a tax investigation with respect to the Plaintiffs, and (b) notified the Defendant that the instant officetel supply does not constitute national housing under the instant exemption provision, deeming that the instant officetel supply is not subject to value-added tax exemption, thereby notifying the Defendant of imposing value-added tax accordingly.

3) On July 11, 2017, the Defendant issued a correction and notification of KRW 1,641,453,710 (including additional tax) in 2015 to the Plaintiffs on the ground that the instant officetel supply is not subject to value-added tax exemption (hereinafter “instant disposition”).

[Ground of recognition] Class A evidence Nos. 1, 2, Eul evidence Nos. 1 and 2, and the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiffs' assertion

1) The instant officetel was granted a building permit for business facilities to meet the building permit requirements under the Building Act, and was designed and constructed from the beginning for residential purposes with rooms, kitchens, living rooms, bathing rooms, floor heating facilities, etc., and falls under substantial houses, such as residential buildings sold for residential purposes and used for residential purposes by occupants. As such, the instant officetel constitutes “national housing prescribed by Presidential Decree” under the instant exemption provisions, and the supply of the instant officetel constitutes subject to value-added tax exemption, and thus, the instant disposition was unlawful.

2) The Tax Tribunal decided to revoke the imposition of value-added tax on the ground that the supply of a residential officetel constitutes the subject of the exemption of value-added tax as stipulated in the instant exemption provision. Considering the fact that the Plaintiffs trustedly did not report and pay value-added tax on the supply of the instant officetel, and that the interpretation of the tax law or the practice of national tax administration, which the supply of a residential officetel constitutes the subject of the exemption of value-added tax as stipulated in the instant exemption provision, was already established prior to the instant disposition, and thus accepted by the taxpayers, the instant disposition was unlawful as it violates the good faith principle and the prohibition of retroactive taxation.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

1) Whether the instant officetel supply is not subject to value-added tax exemption

The instant exemption provisions and Articles 106(4)1 and 51-2(3) of the Enforcement Decree of the Restriction of Special Taxation Act stipulate that “the supply of housing below the scale of national housing under the Housing Act” as one of the objects of value-added tax exemption, and the main sentence of Article 2 subparag. 3 of the former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016; hereinafter the same) stipulates that “the housing whose area used only for the purpose of residence is not more than 85 square meters per house or household (the housing whose exclusive residing area per house or household is not more than 100 square meters in the Eup area or Myeon area other than the Seoul Metropolitan area under Article 2 subparag. 1 of the Seoul Metropolitan Area Readjustment Planning Act).”

Article 2 of the former Housing Act defines "house" as a whole or part of a building with a structure in which members of a household can carry on an independent residential life for a long time as well as land annexed thereto, and classify it into detached houses and apartment houses. Article 2-2 of the former Enforcement Decree of the Housing Act (wholly amended by Presidential Decree No. 2744, Aug. 11, 2016) defines "quasi-housing" as a building other than a house and its appurtenant facilities as a residential facility, and distinguish between houses and quasi-housing. Article 2-2 subparagraph 4 of the former Enforcement Decree of the Housing Act (wholly amended by Presidential Decree No. 27444, Aug. 11, 2016) provides officetels under subparagraph 14 (b) of the Enforcement Decree of the Building Act as one of quasi-housing. Article 2(2) of the Building Act, Article 3-5 [Attachment Table 1] of the Enforcement Decree of the Building Act classify the use of a building as an

(4) The scope of "house" under the provisions of the Housing Act should be interpreted in accordance with the purport and purpose of the provisions. On the other hand, the interpretation of tax laws and regulations is not allowed without any justifiable reason, and it is also consistent with the principle of fair taxation if it can be objectively interpreted that it is difficult for the taxpayer to use the relevant housing for the purpose of the construction of the building because the provisions of the Housing Act provides for the housing of 8 square meters or less as one of the items to be exempted from value-added tax (see, e.g., Supreme Court Decision 2007Du21242, Feb. 14, 2008) as one of the items to be exempted from value-added tax; 2) as one of the items to be exempted from value-added tax, it is difficult to view that the area of the housing of 5 square meters or less as one of the items to be exempted from value-added tax because it can be objectively determined that the area of the housing of 100 square meters or less is to be used for the purpose of the construction of the building.

Therefore, the supply of the instant officetel does not constitute the supply of housing below the national housing scale under the Housing Act, which is subject to the exemption of value-added tax as stipulated in the instant exemption provision.

2) Whether the instant disposition violates the principle of good faith and the principle of prohibition of retroactive taxation

The mere fact that there was a part of the Tax Tribunal’s revocation of the disposition imposing value-added tax on the grounds that the supply of a residential officetel constitutes an object of the exemption of value-added tax as stipulated in the provisions of this case, the Defendant cannot be deemed to have issued a public opinion to the Plaintiffs that the supply of the instant officetel constitutes an object of the exemption of value-added tax, or to have established interpretation of tax law or the practices of national tax administration. Thus, the instant disposition cannot be deemed to violate the principle of good faith and the principle

3) Whether the instant disposition is lawful

The instant disposition is legitimate in view that the supply of the instant officetels is not subject to value-added tax exemption.

3. Conclusion

The plaintiffs' claims are dismissed as it is without merit. It is so decided as per Disposition.

Related Acts and subordinate statutes

Value-Added Tax Act

Article 4 (Taxable Objects)

Value-added tax shall be levied on the following transactions:

1. Supply of goods or services by an entrepreneur;

Restriction of Special Taxation

Article 106 (Exemption, etc. of Value-Added Tax)

(1) The supply of any of the following goods or services shall be exempted from value-added tax:

4. National housing prescribed by Presidential Decree and the services for constructing such housing (including remodeling services prescribed by Presidential Decree);

Enforcement Decree of the Restriction of Special Taxation

Article 51-2 (Special Taxation on Self-Managed Real Estate Investment Company, etc.)

(3) "Scale prescribed by Presidential Decree" in Article 55-2 (4) of the Act means the size of national housing under the Housing Act (referring to the area based on the exclusive use area per household in cases of multi-family houses prescribed by Ordinance of the Ministry of Strategy

Article 106 (Exemption, etc. of Value-Added Tax)

(4) "National housing prescribed by Presidential Decree and construction services for the housing" in Article 106 (1) 4 of the Act means the following:

1. Houses not more than the size under Article 51-2 (3);

former Housing Act (wholly amended by Act No. 13805, Jan. 19, 2016)

Article 2 (Definitions)

1. The term "housing" means all or part of a building with a structure wherein members of a household may carry on an independent residential life for a long time as well as the land attached thereto, and it shall be classified into detached housing and collective housing;

1-2. The term "quasi-housing" means buildings other than housing, and facilities, etc. annexed thereto, which are available as residential facilities, and the scope and type thereof shall be prescribed by Presidential Decree;

2. The term "multi-family housing" means housing with a structure wherein each household that jointly uses all or part of the walls, hallways, stairs, and other facilities, etc. of a building, can carry on an independent residential life respectively within one building; its kind and scope shall be prescribed by Presidential Decree;

3. The term "national housing" means housing constructed or improved by being financed by the Housing and Urban Fund established under the Housing and Urban Fund Act (hereinafter referred to as the "Housing and Urban Fund"), the area of which used exclusively for residential purposes (hereinafter referred to as the "exclusive residing area") is not more than 85 square meters per house or household (referring to housing the exclusive residing area of which is not more than 100 square meters per house or household in an Eup or Myeon area that is not an urban area, with the exception of the Seoul Metropolitan area under subparagraph 1 of Article 2 of the Seoul Metropolitan Area Readjustment Planning Act; hereinafter the same shall apply);

In such cases, methods of calculating exclusive residing areas shall be prescribed by Ordinance of the Ministry of Land, Infrastructure

former Enforcement Decree of the Housing Act (wholly amended by Presidential Decree No. 27444, Aug. 11, 2016)

Article 2-2 (Scope and Type of Quasi-Housing)

The scope and types of quasi-housing defined in subparagraph 1-2 of Article 2 of the Act shall be as follows:

1. Dormitory under subparagraph 2 (d) of attached Table 1 of the Enforcement Decree of the Building Act;

2. Multi-living facilities under subparagraph 4 (o) and subparagraph 15 (c) of attached Table 1 of the Enforcement Decree of the Building Act;

3. A welfare house for the aged under Article 32 (1) 3 of the Welfare of the Aged Act among welfare facilities for the aged under subparagraph 11 (b) of attached Table 1 of the Enforcement Decree

4. Officetels under subparagraph 14 (b) of attached Table 1 of the Enforcement Decree of the Building Act.

Building Act

Article 2 (Definitions)

(2) Each building shall be classified into the following categories, and the detailed uses of each building shall be prescribed by Presidential Decree:

1. Single houses;

2. Apartment houses;

14. Business facilities;

Enforcement Decree of the Building Act

Article 3-5 (Types of Buildings by Use)

Types of buildings falling under the uses prescribed in subparagraphs of Article 2 (2) of the Act shall be as listed in attached Table 1.

[Attachment 1] Types of Buildings by Use (Related to Article 3-5)

1. Single houses (including homes, child-care centers, communal homes, local children's centers, and welfare facilities for older persons (excluding welfare houses for older persons) which have the form of single houses);

(a) Single houses;

(b) Multi-user housing: Housing that meets all of the following requirements:

(a) things with a structure that makes it possible for many people, such as students or employees to reside for a long time;

(ii)that does not have an independent residential form (a bath room may be installed for each room, but cooking facilities are not installed; hereinafter the same shall apply);

3. Those the total floor area of which does not exceed 30 square meters and the number of floors of which does not exceed three;

(c) A multi-family house: The house that meets all of the following requirements and is not a multi-family housing:

1. The number of floors (excluding underground floors) used for housing shall not exceed three: Provided, That where at least 1/2 of the floor area of the first floor is used as a parking lot with the piloti structure and the remainder is used for purposes other than housing, the relevant floor shall be excluded from the number of floors of housing;

(b) The total floor area (excluding the area of an attached parking lot; hereinafter the same shall apply) used for housing shall not exceed 660 square meters;

(iii) 19 or less households are able to reside;

(d) Diplomatic missions;

2. Multi-family housing (including home childcare centers, communal homes, local centers for children, welfare facilities for older persons (excluding welfare houses for older persons) and studio-type housing under Article 3 (1) of the Enforcement Decree of the Housing Act): Provided, That in calculating the number of floors referred to in items (a) or (b), where all of the first floor is used as a parking lot with a piloti structure, it shall be excluded from the number of floors, and where the remaining part is used as a parking lot with a pen structure of at least 1/2 of the floor area of the first floor when calculating the number of floors referred to in item (c), and where the relevant floor is used as a parking lot for purposes other than housing, the number of floors concerned shall be excluded from the number of floors of the housing,

(a) An apartment house: A house with at least five floors used for housing;

(b) A tenement house: A house with a total floor area (where at least two Dongs are connected to underground parking lots, each Dong shall be deemed respectively) exceeding 660 square meters, and the number of floors of which is four or less;

(c) Multi-household housing: Housing with the total floor area of not more than 660 square meters, and with not more than four floors (where not less than two Dongs are connected to underground parking lots, each Dong shall be deemed respectively);

(d) Dormitory: It shall be used for students, employees, etc. of schools, factories, etc., and at least 50 percent of the total number of households using one joint cooking facility under one consent (including student welfare housing referred to in Article 27 (2) of the Framework Act on Education);

14. Business facilities;

(b) General business facilities: Business facilities meeting the following requirements:

(b) Officetels (referring to officetels which meet the standards publicly notified by the Minister of Land, Infrastructure and Transport, and allow board and lodging in part of the partitioned land, the main business of which is sold or leased;

Officetel construction standards (Public Notice of the Ministry of Land, Infrastructure and Transport No. 2013-789)

Article 1 (Purpose)

The purpose is to establish the building standards for officetels under Article 3-4 of the Enforcement Decree of the Building Act and subparagraph 14 (b) of attached Table 1.

Article 2 (Standards for Construction of Officetels)

An officetel shall meet the following standards:

1. No balcony shall be installed by any office partition;

2. In cases where construction is conducted in combination with other purposes (excluding buildings with a total floor area of 3,00 square meters or less on the ground floor), exclusive entrance exits for officetels shall be separately installed: Provided, That in cases where detached houses and apartment houses are built in combination, the project owner need not install exclusive entrance exits in consideration of the residential functions, etc.;

3. Where the exclusive area by administrative section exceeds 85 square meters, floor heating using hot-water, hot-water and hot-water, electric heat heaters, etc. shall not be installed.

Special Act on Private Rental Housing;

Article 2 (Definitions)

The terms used in this Act shall be defined as follows:

1. The term "private rental housing" means housing provided for rent (including quasi-housing prescribed by Presidential Decree, such as housing constructed on leased land and officetels (hereinafter referred to as "quasi-housing"), and housing leased only part of it prescribed by Presidential Decree; hereinafter the same shall apply), which is registered by a rental business operator under Article 5, and is classified into privately constructed rental housing and buy-to-rent rental housing