[1] The criteria for determining “specially related persons” under Article 52(1) of the former Corporate Tax Act and Article 87(1) of the Enforcement Decree of the former Corporate Tax Act, and where a corporate taxpayer exercises de facto influence on the management of the opposite contractual party, whether the opposite contractual party constitutes “specially related persons” under Article 87(1)1 of the former Enforcement Decree of the Corporate Tax Act (negative)

[2] In a case where a right which causes income has become final and conclusive and a tax liability is established, where income is not realized due to a subsequent cause, whether corporate tax may be imposed thereon (negative in principle), and in a case where the amount of the initial purchase price or service payment was reduced due to a legitimate cause of business, whether corporate tax may be imposed including the reduced amount in the income amount for the business year in which the right to the initial purchase price or service payment becomes final and conclusive (negative in principle

[3] Article 16(1) of the former Value-Added Tax Act; Article 59 of the former Enforcement Decree of the Value-Added Tax Act; and Article 59 of the former Enforcement Decree of the Value-Added Tax Act where the value of supply decreases

[1] Article 52(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 87(1)1 of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22951, Jun. 3, 2011) / [2] Article 40(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 45-2(2) of the Framework Act on National Taxes / [3] Article 16(1) of the former Value-Added Tax Act (Amended by Act No. 8142, Dec. 30, 2006); Article 57(1)1 of the former Enforcement Decree of the Value-Added Tax Act (Amended by Presidential Decree No. 19892, Feb. 28, 2007)

[1] Supreme Court en banc Decision 2008Du150 Decided July 21, 201 (Gong2011Ha, 1813) / [2] Supreme Court Decision 2003Du14802 Decided November 25, 2004 / [3] Supreme Court Decision 2011Du8178 Decided April 11, 2013 (Gong2013Sang, 877)

Huddson Sadson Korea Co., Ltd. (Law Firm LLC, Attorneys Yoon Sejong-ri et al., Counsel for the plaintiff-appellant)

Head of the District Tax Office and one other (Law Firm, Attorneys Lee Jae-sin et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2010Nu3346 decided July 7, 2011

The part of the judgment of the court below against the plaintiff regarding the imposition of corporate tax for the business year 200 or 2004 shall be reversed, and that part of the case shall be remanded to the Seoul High Court. The remaining grounds of appeal by the plaintiff and the appeal by the defendants shall be dismissed. The costs of appeal by the director of Seoul Regional Tax Office shall

The grounds of appeal are examined.

1. The plaintiff's ground of appeal No. 1

A. Article 52(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “Corporate Tax Act”) provides that “Where it is deemed that the tax burden of a domestic corporation has been unjustly reduced due to an act or transaction with a person with a special relationship prescribed by the Presidential Decree (hereinafter “specially related person”), the head of the district tax office having jurisdiction over the place of tax payment or the head of the competent regional tax office having jurisdiction over the place of tax payment may calculate the income amount of the corporation for each business year regardless of the act or calculation of the income amount of the corporation (hereinafter “Calculation”),” and Article 87(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22951, Jun. 3, 2011; hereinafter “Enforcement Decree of the Corporate Tax Act”) provides that “a person with a special relationship prescribed by the Presidential Decree” in Article 52(1) of the Act refers to a person with a relationship falling under any of the following subparagraphs with the corporation:

As above, Article 52(1) of the Corporate Tax Act provides for the calculation of the amount of income arising from a transaction with a specially related person by a tax obligor or a transaction with a specially related person as the object of the wrongful calculation avoidance, and delegates the scope of the specially related person to the Presidential Decree. Accordingly, Article 87(1) of the Enforcement Decree of the Corporate Tax Act provides that a person who is a tax obligor and a related person falling under any of the subparagraphs of the above subparagraphs is a specially related person. Thus, where a tax obligor is a specially related person on the basis of a corporation that is a tax obligor and a party that made a transaction with a tax obligor, deeming that a tax obligor falls under a specially related person under any of the above subparagraphs is not permissible against the language and text of the above Article 87(1)1 of the Enforcement Decree of the Corporate Tax Act (see Supreme Court en banc Decision 2008Du150, Jul. 21, 201). Accordingly, a person recognized as exercising a de facto influence on the management of a corporation that is a tax obligor does not constitute a practically related person under Article 87(1).

B. Under the premise that if a taxpayer corporation exercises de facto influence on the other party’s management, the other party constitutes a specially related person under Article 87(1)1 of the Enforcement Decree of the Corporate Tax Act, the lower court determined that the part of the disposition imposing corporate tax for the business year from 2000 to 2004 of the Plaintiff’s imposition of corporate tax on the grounds that the Plaintiff and the special purpose company of this case were in a special relationship under Article 87(1)1 of the Enforcement Decree of the Corporate Tax Act, which applied the provision on entertainment expenses for the transaction with a specially related person under Article 25(1)2 proviso of the Corporate Tax Act, was lawful. In light of the above legal principle, the lower court erred by misapprehending the legal principle on the scope of a specially related person, thereby adversely affecting the conclusion of the judgment. The Plaintiff’s ground of appeal pointing this out has merit.

2. Plaintiff’s ground of appeal No. 2 and Defendants’ ground of appeal

A. Part on the imposition of corporate tax and notice of change in income amount

(1) Article 40(1) of the Corporate Tax Act provides that “The business year in which earnings and losses of a domestic corporation accrue shall be the business year which includes the date on which the income and losses are determined.” Therefore, even if a right which has become the cause of income has not been actually established, it shall be deemed as realizing the income, and the so-called principle of confirmation of right is adopted for the purpose of calculating taxable income. Such principle of confirmation of right is deemed as having the income at the time when the right which is the cause of income is established and the time when the income is realized, rather than the time when the income is realized, and it shall be deemed as having the income at the time when the right which is the cause of income is finally generated, and thus, it shall be deemed as having the final and conclusive method of calculating the income of the pertinent business year under the premise that it would be realized in the future (see, e.g., Supreme Court Decision 2003Du14802, Nov. 25, 2004).

Furthermore, in light of the language, purport, system, etc. of the relevant provision, it is reasonable to deem that the latter causes in this context include cases where the initial purchase price or the service price has been reduced due to justifiable business reasons. Thus, if a domestic corporation reduced the initial purchase price or the service price due to justifiable business reasons after transferring assets or providing services, barring any special circumstance, it cannot be subject to corporate tax including the amount of income for the business year in which the right to the initial purchase price or the service price was finalized

(2) After finding the facts as stated in its reasoning based on evidence, the lower court determined that the Defendants’ reduction of the fees for the pertinent business year and for the pertinent business year, on the premise that it cannot be an unlawful ground for the imposition of corporate tax on the pertinent business year, on the grounds that the reduction of the fees for the instant LS 2 (hereinafter referred to as “LS 2”) was made on the ground that the fees for the instant business year and for the instant business year, which were already provided on the ground that the reduction of the fees for the instant business year cannot be arbitrarily changed by the parties’ ex post facto agreement, on the ground that the reduction of the fees for the instant business year cannot be an illegal ground for the imposition of corporate tax on the said services. On the other hand, the lower court determined that the Defendants’ reduction of the fees for the instant business year and for the instant business year, including the fees for the incidental services related to the instant building and for the instant 6 business years (2003 business years), the incidental services charges for foreign exchange banks (hereinafter referred to as “LS 204 business years”), and the fees for the instant business year were unlawful.

(3) In light of the aforementioned legal principles and records, we affirm the part of the judgment of the court below that the Defendants imposed corporate tax on the Plaintiff and notified changes in the amount of income as unlawful on the ground that the Defendants included the amount of reduction of fees in the gross income for the pertinent business year during which the services were rendered. In so doing, contrary to what is alleged in the grounds of appeal by the Defendants, the court below did not err by misapprehending the legal principles on the legitimate reasons for reduction in amount of

However, in the case of the fee No. 2 of this case, the court below should have deliberated whether the reduced amount could be included in the gross income for the pertinent business year in which each service was provided, and judged that the disposition imposing corporate tax on the fee No. 2 of this case was lawful for the reasons stated in its holding without further examining whether the reduced amount could be included in the gross income for the pertinent business year. In so doing, the court below erred by misapprehending the legal principles on the legitimate reasons for the reduction of the price, which is the basis for the right confirmation principle or the deduction of gross income, and thereby failing to exhaust all necessary deliberations, which affected the conclusion of the judgment. The plaintiff's ground of appeal pointing this out has

B. Imposition of value-added tax

(1) The proviso of Article 59 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 19892, Feb. 28, 2007) delegated by Article 16(1) of the former Value-Added Tax Act (amended by Presidential Decree No. 20142, Dec. 30, 2006) provides that where an amount added to or deducted from the initial value of supply arises, a revised tax invoice shall be prepared and issued at the time of occurrence. The purport of the proviso is to enable the tax authority to issue revised tax invoices as of the date of occurrence in order to promote the convenience of both the tax authority and the taxpayer when the amount of supply in the initial tax invoice increases or decreases due to a subsequent cause or decrease, thereby reflecting the increase or decrease in the value of supply to the tax base for the taxable period including the date of occurrence of such cause. Therefore, where the value of supply has decreased due to justifiable cause after the supply of goods or services, the tax base for the pertinent taxable period shall be calculated by subtracting such reduction from the total value of supply in the taxable period.

(2) The lower court determined that: (a) in the case of the incidental service fees and the incidental service fees related to the Lone Star Building among the instant fees, the reduction of the commission was made for a business reason in the pertinent taxable period in which the service was provided, or there was no ground under the Plaintiff’s contract for the provision of the service; (b) in the case of the incidental service fees to the Plaintiff, including the value of supply in the pertinent taxable period in which the service was provided, the amount of the reduction was unlawful; (c) however, in the case of the incidental service fees to the 14 special purpose companies out of the instant fees, the reduction of the fee was made after the lapse of the pertinent taxable period in which the service was provided, and thus, the lower court determined that it was lawful for Defendant

(3) In light of the above legal principles and records, the judgment of the court below is just, and there is no error in the misapprehension of legal principles as to the value of supply of value-added tax, contrary to what is alleged in the grounds of appeal

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal by the Plaintiff, the part against the Plaintiff regarding the disposition imposing corporate tax for the business year 200 or 2004 among the part against the Plaintiff is reversed, and that part of the case is remanded to the lower court for further proceedings consistent with this Opinion. The remainder of the Plaintiff’s appeal and the Defendants’ appeal are all dismissed. The costs of appeal by the Commissioner of Seoul Regional Tax Office are assessed against the Defendant. It is so decided as per Disposition by the assent of all participating

Justices Kim Shin (Presiding Justice)