[1] The purport of Article 40(1) and (2) of the Corporate Tax Act, the main text of Article 68(1)3 of the former Enforcement Decree of the Corporate Tax Act, which clearly provides for the time when the profit and loss is attributed to the corporation, by adopting the principle of confirmation of the right and duty that are deemed realized

[2] The case holding that in case where a foreign securities company Gap, a liquidity supplier, purchased shares at a price for the business year to which the date of sale of securities belongs, sold them to investors, and traded over-the-counter derivatives identical with the above securities to the issuer, and included the difference between the acquisition price of securities and the sale price of the securities acquired from the issuer for the first time sold to investors in the market price during the pertinent business year, the tax authority imposed corporate tax on Gap on Gap on the ground that the loss recognized by Gap, which was not due to the initial sale, should not be included in the deductible expenses, and that the tax authority imposed corporate tax on Gap on Gap, on the ground that the tax authority imposed corporate tax on Gap on Gap, on the ground that the amount calculated by subtracting the sale price from the acquisition price of the securities acquired from the issuer by selling the shares to investors, should be included in the deductible expenses for the business year to which the time of sale of the securities belongs, on the ground that Gap included in the deductible expenses for the pertinent business year as above, was not in a transaction form or appearance that differs from the substance for the purpose of avoiding tax burden

[1] Article 40(1) and (2) of the Corporate Tax Act; Article 68(1)3 of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 23589, Feb. 2, 2012) / [2] Article 40(1) and (2) of the Corporate Tax Act; Article 68(1)3 of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 23589, Feb. 2, 2012); Article 14(2) and (3) of the Framework Act on National Taxes

[1] Supreme Court Decision 2003Du10329 Decided February 13, 2004 (Gong2017Sang, 895) Supreme Court Decision 2016Du51511 Decided March 22, 2017 (Gong2017Sang, 895)

UPS Securities US (LLC, Kim & Lee LLC, Attorneys Park Jae-young et al., Counsel for the plaintiff-appellant)

The director of the tax office

Seoul High Court Decision 2015Nu63465 decided August 26, 2016

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

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

Article 40(1) of the Corporate Tax Act provides, “The fiscal year of accrual of earnings and losses of a domestic corporation for each fiscal year shall be the fiscal year which includes the date on which the concerned earnings and losses are determined.” According to the delegation under Article 40(2) of the Corporate Tax Act, Article 68(1)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 23589, Feb. 2, 2012) provides, “The fiscal year of accrual of losses incurred from the transfer of assets other than goods, etc.” (amended by Presidential Decree No. 23589, Feb.

As can be seen, the Corporate Tax Act adopts the principle of confirmation of rights and obligations that the profit and loss is to be realized at the time when the rights and obligations are determined, and clearly stipulates the timing to vest in the profit and loss. This is to promote legal stability and to ensure fairness in taxation and at the same time to exclude taxpayers from taxation (see Supreme Court Decision 2016Du51511, Mar. 22, 2017).

Based on its stated reasoning, the lower court determined that the Plaintiff’s loss should be included in the deductible expenses for the business year in which the ELW sales date belongs, on the ground that the Plaintiff’s loss was realized and finalized by deducting the sale price from the acquisition price of the ELW acquired from the issuer by selling the stocks and eLW (hereinafter “ELW”) to investors.

Examining the records in accordance with the aforementioned legal principles, the above determination by the lower court is justifiable. In so doing, it did not err by misapprehending the legal doctrine regarding the period of attribution of profit and loss under

2. Regarding ground of appeal No. 2

(1) Article 14 of the Framework Act on National Taxes provides for the application of tax-related Acts by deeming the tax-related Acts as a direct or continuous single act or transaction according to the economic substance, in cases where it is recognized that the benefit of the tax-related Acts is to be unduly obtained by either an indirect method via a third party or a method through two or more acts or transactions, regardless of the title or form of such act or transaction (Paragraph 2).

(2) In light of the following circumstances, the lower court determined that the Plaintiff could not be taxed by applying the substance over form principle under Article 14(2) and (3) of the Framework Act on National Taxes, on the grounds that the Plaintiff could not be deemed to have taken the form or appearance that differs from the substance without reasonable grounds for the purpose of evading tax burden.

① The Plaintiff, who is a foreign securities company, was prohibited from issuing ELW in the name of the Plaintiff or a domestic branch, was a liquidity supplier by accepting the ELW from the issuer at the issue price, selling the ELW to investors, and separately selected a method of selling the ELW and the product content of the EL to the issuer.

② The possibility of realizing profit accrued from the fluctuation in the prices of underlying assets through such transactions is not transferred to the Plaintiff, a liquidity supplier. However, since the issuer receives a fixed fee for the issuance of ELW and goes beyond the risk of loss due to the decline in the prices of underlying assets, it cannot be readily concluded as an unreasonable transaction.

③ In light of the regulation of the minimum issue price at the Korea Exchange, it is difficult to deem that the Plaintiff and the same liquidity supplier or issuer could not arbitrarily determine the issue price at their own discretion, and that the Plaintiff could have received them at a price close to the market price because the Plaintiff could not subsequently determine the market price at the time of selling to the first investor at the later stage of accepting

④ As a result, in the business year in which the Plaintiff acquired and sold ELW, only a disposal loss may be reflected and the unrealized valuation profit and loss may not be recognized, but this may not be deemed unlawful or unjust as it is in accordance with the provisions of tax-related Acts.

(3) Examining the foregoing provisions and related legal principles, the lower court’s determination is justifiable. In so doing, it did not err by misapprehending the legal doctrine on the principle of substantial taxation.

3. Conclusion

Therefore, the defendant's 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 Min You-sook (Presiding Justice)