[1] Scope of earned income under Article 20 (1) of the former Income Tax Act

[2] In a case where Gap, a foreign parent company, etc., working as the head of the accounting team at a domestic subsidiary of a foreign corporation, received contingent fees from the parent company for sales of the stocks of the subsidiary, and returned and notified the comprehensive income tax by classifying it as "other income," and the tax authority imposed and notified the comprehensive income tax on the ground that it constitutes "labor income," the case affirming the judgment below that the aforementioned contingent fees constitute earned income under Article 20 (1) of the former Income Tax Act on the ground that there exists a quid pro quo relationship with the provision of

[1] Article 20 (1) of the former Income Tax Act (amended by Act No. 9270 of Dec. 26, 2008) / [2] Article 20 (1) of the former Income Tax Act (amended by Act No. 9270 of Dec. 26, 2008)

[1] Supreme Court Decision 2007Du1941 Decided October 25, 2007 (Gong2007Ha, 1866), Supreme Court Decision 2016Du39726 Decided October 27, 2016 (Gong2016Ha, 1838)

Plaintiff (Attorney Choi Byung-hee et al., Counsel for the plaintiff-appellant)

Samsung Head of Samsung Tax Office

Seoul High Court Decision 2013Nu13725 decided May 2, 2014

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined.

1. Article 20(1)1(a) of the former Income Tax Act (amended by Act No. 9270, Dec. 26, 2008; hereinafter the same) provides that “the salary, salary, remuneration, annual allowance, wage, bonus, allowance, and other benefits of a similar nature that are received due to the provision of employment” as Class A earned income, and subparagraph 2(b) of subparagraph 2 of the same Article provides that “the wage that a foreigner or a foreign corporation in a foreign country receives from the foreigner or a foreign corporation in a foreign country” as Class B earned income. Such earned income under the former Income Tax Act includes not only all economic benefits, regardless of the form or name of payment, which are related to the provision of employment, but also benefits that constitute working conditions closely related to the provision of labor on the premise of labor (see Supreme Court Decision 2007Du1941, Oct. 25, 2007, etc.).

2. A. The lower court acknowledged the following facts in full view of the admitted evidence.

(1) Korea, which is a Netherlands, has been holding 100% of the shares of Haart Co., Ltd. (hereinafter “Haart”).

(2) On May 1, 2004, the Plaintiff, who is a certified public accountant, was employed as the head of the accounting team and worked as the head of the accounting team, prepared a statement of profit and loss, etc., and reported it at the board of directors or the general meeting of shareholders. The Plaintiff submitted a set related to the finance to Affdens Lb. HK (hereinafter “F”) which is an investment asset management company operating Korea Holdings.

(3) Around the end of June 2007, Lart set up an investment proposal in which Lart’s sales, cash flow analysis, and future financial presumption (from 2006 to 2011) were written, and then requested the Plaintiff, the head of Lart’s headquarters, Nonparty 1, Nonparty 2, the head of the funding team, and the head of the accounting team, to assist in the sale of the Lart’s shares. Accordingly, Nonparty 1, Nonparty 2, and the Plaintiff borrowed a hotel hotel room from July 16, 2007 to September 14, 2007, prepared a company letter, etc. at which Lart’s sales, cash flow analysis, and future financial presumption (from 2006 to 2011) were made, and carried out duties, such as contact with potential purchasers.

(4) After January 30, 2008, Korea Holdings sold 100% of the Hart shares to the Jart Holdings Holdings Co., Ltd., and on February 15, 2008, with the contingent remuneration following the sale on February 15, 2008, Nonparty 1 paid KRW 5 billion to Nonparty 1, Nonparty 2, and the Plaintiff, respectively (hereinafter “instant income”). In addition, Korea has paid the special bonus at the cost of compensation to the Hart’s officers and employees, and in particular, it has paid the total of KRW 20 billion to the executives and employees, including the Lart’s representative director.

(5) On February 29, 2008, the Plaintiff retired Hart, and then returned and paid the global income tax by classifying the instant income as “other income”. On August 1, 2011, the Defendant imposed and notified the Plaintiff of global income tax amounting to KRW 325,224,30 (including additional tax) for the year 2008 on the ground that the instant income constituted “ earned income.”

B. Next, the lower court determined that the instant income constituted an earned income under Article 20(1) of the former Income Tax Act, on the grounds that it is reasonable to view that there exists a quid pro quo relationship based on a specific correlation or economic rationality with the labor provided by the Plaintiff, as the parent company of Hart, that Korea Holdings, which directly or indirectly affect the management and performance of Hart’s duties as the parent company of Hart, paid to the Plaintiff.

(1) Although the business of selling hybrid stocks can be deemed to be the business of Korea Holdings or the business of Korea branch, the business of assisting sales by providing inside materials of the company, such as sales, cash flow analysis, and future financial presumption, shall be deemed to be the business of Korea branch. Nonparty 1, Nonparty 2, and the Plaintiff shall not be deemed to have performed the said business independently regardless of whether he/she performed the said business as an officer or employee of Korea branch.

(2) The Plaintiff asserted that he carried out an independent work regardless of the Hart, such as renting the hotel guest room at his own expense and carrying out the above work using personal e-mail. However, the fact that the sale of the company as Hart is being promoted shall not be known externally and externally. Accordingly, Nonparty 1, Nonparty 2, and the Plaintiff appears to have carried out the business by leasing a hotel guest room to maintain confidentiality in light of the nature of the business and using personal e-mail.

(3) At the time, the Plaintiff continued to serve as an employee of the Hart without being set off in the Hart, and not only did it prepare a separate contract on Korea Holdings or the delegation of sale business with respect to Korea Holdings and the Hart, but also did not agree on the contract amount and the due date. In light of the circumstances, etc. in which the Plaintiff received the instant income unilaterally set from Korea Holdings, it cannot be deemed that the Plaintiff provided services to Korea Holdings or Hart in an independent position.

(4) After completing the successful sale of a set, Korea Holdings paid a large amount of special bonus to the executives of Hart as well as Nonparty 1, Nonparty 2, and the Plaintiff at the compensation vehicle. The instant income received by the Plaintiff does not differ from the special bonus received by other executives of Hart in light of the relevant payer, object, amount, time, etc.

3. Examining the aforementioned legal principles and records, the lower court did not err by exceeding the bounds of the principle of free evaluation of evidence by failing to exhaust all necessary deliberations as alleged in the grounds of appeal, or by misapprehending the legal doctrine on the scope of earned income under the former Income Tax Act.

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

Justices Park Poe-young (Presiding Justice)