[1] Requirements for taxation of the value of business rights as a merger evaluation marginal profit in the case of a merger of corporations, and the method for determining whether the value of business rights in this case can be inferred only on the basis that the business rights are calculated in accordance with the corporate accounting standards (negative)

[2] The case holding that in case where Gap corporation merged its affiliates with its affiliates, appropriated the difference between the value of new stocks on the date of merger and the net asset value of the merged corporation as sales rights in the accounting book, but the corporate tax return did not correspond to the business rights under tax law, and made tax adjustment by itself, such as the denial of depreciation of business rights, and the tax authority imposed corporate tax, etc. on Gap corporation on the premise that the above amount should be included in the gains from merger evaluation and the depreciation should be done every year on the premise that the above amount constitutes the business rights under tax law, the tax authority imposed corporate tax, etc.

[1] According to the proviso of Article 17(1)3 of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009); Articles 12(1)1, 15(2), and 24(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010); in the case of a corporate merger, in order to impose the value of business rights as a merger evaluation marginal profit, the merged corporation can be deemed to have paid the price by evaluating its business value by deeming the name, etc. of the merged corporation as an intangible asset value that can obtain excess profits from the merged corporation. Determination of the value of business value should be made objectively by comprehensively taking into account various circumstances such as the process and motive of the merger; the current business status of the merged corporation and the merged corporation after the merger; and details of tax return after the merger. It cannot be inferred that the business right is calculated in accordance with corporate accounting standards.

[2] The case holding that in case where Gap corporation merged its affiliates with its affiliates and appropriates the difference between the value of new stocks on the date of merger and the net asset value of the merged corporation in accordance with corporate accounting standards, but Gap corporation imposed corporate tax, etc. on Gap corporation, considering that it does not correspond to the business rights under tax law, and the tax authority should include the above amount as a profit from merger and make depreciation each year on the premise that the above amount constitutes the business rights under tax law and should be depreciated each year, the tax authority imposed corporate tax, etc. on Gap corporation, the case held that in light of all the circumstances, the amount appropriated as business rights in the accounting book is merely deemed to be in accordance with the relevant corporate accounting standards, and it cannot be deemed that Gap corporation recognized as an intangible asset value of the company's trade name, transaction relations, and other trade secrets, and it cannot be deemed that it paid the price by evaluating its business value, and thus it cannot be deemed that it satisfies the requirements for recognition of business rights under tax law, and thus, it cannot be viewed that the amount of the accounting on the business rights is allowed to be taxed.

[1] Article 17 (1) 3 of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009; see current Article 17 (1) 5); Article 12 (1) 1, Article 15 (2) (see current Article 17 (1) 5 of the Corporate Tax Act); Article 24 (4) / [2] Article 17 (1) 3 of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009; see current Article 17 (1) 5); Article 12 (1) 1, Article 15 (2) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22184, Jun. 8, 2010; see current Article 24 (1) 2 (a)); Article 17 (2) 4 of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009); Article 15 (2) of the former Enforcement Decree of the Corporate Tax Act (see current Article 4)

DBTex Co., Ltd. (formerly: DongbuTex, Ltd., Ltd., Counsel for the plaintiff-appellant-appellant)

Samsung Head of Samsung Tax Office (Law Firm Grandmark, Attorneys Kim Jae-hun et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2014Nu56545 decided April 3, 2015

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Case overview and key issue

A. Case summary

(1) On May 1, 2007, the Plaintiff: (a) merged the same assistant assistant director corporation (hereinafter “Dong assistant director”) and appropriated approximately KRW 293 billion as business rights in the account book; (b) when filing a corporate tax return, the Plaintiff treated tax adjustment as not constituting business rights under tax law.

(2) On the premise that the above amount constitutes a business license under tax law, the Defendant: (a) deemed that the said amount should be included in the gross income as a merger evaluation marginal profit; and (b) imposed corporate tax of approximately KRW 67.1 billion (including additional tax) on the Plaintiff in March 12, 2013 (hereinafter “instant disposition”).

(3) The Plaintiff sought the revocation of the instant disposition, and the first instance court and the lower court rendered a judgment in favor of the Plaintiff. The reason was that the business rights stated in the account book are merely in accordance with the corporate accounting standards, and it cannot be deemed that there was an actual business value assessment of the merged corporation’s intangible assets, and it does not constitute an goodwill under tax law

B. Issues

The key issue of the instant case is what is the requirements for recognizing business rights in the tax law in the case of a corporate merger, and imposing them on the same as a merger evaluation. In other words, in the corporate accounting, it is sufficient that the corporate accounting cost exceeds the net asset value of the extinguished corporation, or whether the corporate accounting cost requires the evaluation of the actual business value of intangible assets, and what is the criteria for determining the business value under such tax law.

The defendant asserts that, in case where the business rights are appropriated in the account books in accordance with the corporate accounting standards, they should be taxed as a merger evaluation marginal profit by deeming that there was an evaluation of the business rights under tax law. If the price for the merger exceeds the net asset value possessed by the merged corporation, the difference shall be deemed as a consideration for the business rights under tax law

2. Acts and subordinate statutes and their interpretation

A. In case where the merged corporation succeeds to the evaluation of assets from the merged corporation, the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same shall apply) shall be imposed as a merger evaluation marginal profit [Article 17(1)3 proviso, and Articles 15(2) and 12(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same shall apply]. In the case of a merger, where the merged corporation succeeds to the evaluation of the assets of the merged corporation, the business right appropriated by the merged corporation shall be deemed depreciable assets only if it has business value due to the trade name, transaction relation, and other trade secrets, etc. (hereinafter “trade name, etc.”) of the merged corporation and has paid compensation (Article 24(4) of the former Enforcement Decree of the Corporate Tax Act).

B. According to the relevant laws and regulations, in order to impose the value of business rights as a merger evaluation marginal profit in the case of a merger of corporations, the merged corporation is deemed as an intangible asset value that can obtain excess profits from the trade name, etc. of the merged corporation and evaluated its business value and paid compensation. The evaluation of business value in this case shall be objectively determined by comprehensively taking into account various circumstances, such as the details and motive of the merger, the current business status of the merged corporation and the merged corporation at the time of the merger, and the details of tax returns after the merger, etc., and the business rights shall not be inferred solely on the basis that the business

(1) In order to be taxed as a merger evaluation marginal profit of a merged corporation, it should be recognized as the assets of the merged corporation in the first place. Even if a corporation creates an intangible business right due to its internal business activity, it is not recognized as an asset under tax law, and it is recognized as an asset of the merged corporation only if it satisfies the requirements under the former Enforcement Decree of the Corporate Tax

Tax law and corporate accounting have different purposes and purposes and separately provided for in the corporate tax law. In the event of a merger, the requirements for recognition of goodwill are also included in such cases. The requirements for evaluation of business value with respect to goodwill under the Enforcement Decree of the Corporate Tax Act were introduced to be limited to the recognition of goodwill under the tax law at the time of amendment of the Enforcement Decree of the Corporate Tax Act on December 31, 1998, and the framework for the imposition of the merged taxation is also maintained under Article 80-3(2) of the Enforcement Decree of the Corporate Tax Act as amended on June 8, 2010.

(2) In the case of a merger, the issue of requirements for recognizing a business right as an asset under the tax law is different from the issue of whether it is appropriate to calculate the business right in excess of the net asset value of the merger price when determining the appropriateness of the specific method of assessment. Therefore, requiring the evaluation of the business value of a trade name, etc. is inconsistent with the case law that affirms the appropriateness of the evaluation of the business right according to the difference

(3) The taxation of merger evaluation marginal profit is imposed upon the acquisition of profits generated from tangible and intangible assets held by the merged corporation prior to the merger with a certain requirement. As such, Article 15(2) of the former Enforcement Decree of the Corporate Tax Act only refers to the calculation method under which Article 12(1)1 of the former Enforcement Decree of the Corporate Tax Act is accepted, and there is no relation to the capital reserve [Article 16(1)2(a) of the former Corporate Tax Act] under the concept. The merger marginal profit, which is the simple difference between the net asset value transferred by the merged corporation and the face value of the merged stocks, cannot be the requirement for taxation of merger evaluation marginal

3. We examine the value of business rights in this case as to whether they can be taxed as merger evaluation marginal profit.

A. According to the reasoning of the lower judgment and the record, the following facts are revealed.

(1) On February 16, 2007, the Plaintiff, as an affiliate company within the same group, conducted a merger on May 1, 2007 and completed the merger registration on May 3, 2007, through the resolution of the board of directors to absorb the dong director director who was engaged in the business of manufacturing and selling semiconductors and related equipment. Pursuant to the relevant statutes and regulations, the Plaintiff calculated the merger ratio based on the share price of the Plaintiff, a listed corporation, and the same vice director, and did not pay the merger subsidies in addition to new shares.

(2) In accordance with corporate accounting standards, the Plaintiff appropriated approximately KRW 293 billion, which is the difference between the value of the new shares on the date of merger and the net asset value of the merged corporation, in the account book. However, when filing a corporate tax return for the business year 2007, the above difference does not constitute an operating right under tax law, and thus, made tax adjustment, such as denying the depreciation

(3) Around the time of the merger, Dongsch Rexroth has continued to be in capital erosion, and around 333 billion won of net loss as of the end of 2006, and around 343.8 billion won of cumulative loss, compared to competition companies in the semiconductor industry, there was a concern over bankruptcy due to the weak technical and business capabilities. At the time, the Plaintiff had relatively sound and continuous financial structure within the same sub-groups, and therefore, the same sub-groups came to go beyond the crisis through the Plaintiff’s merger.

B. Examining the above facts in light of the legal principles as seen earlier, the amount calculated by the Plaintiff as a goodwill in the account book is merely deemed to be in accordance with the relevant corporate accounting standards, and it is difficult to view the trade name, transaction relations, and other trade secrets of the same assistant director, which are an extinguished corporation, as an intangible asset value with excessive profits, and as payment for the appraisal of business value, it cannot be deemed that the Plaintiff satisfies the requirements for recognition of business rights under tax law. As such, in the case of a corporate merger, since it does not meet the requirements for recognition of business rights as prescribed by the statutes, it is not allowed to impose tax on the account of the amount of business rights as a merger evaluation marginal profit. The precedent cited in the grounds of appeal

In general, in a lawsuit seeking revocation of a tax imposition disposition, the tax authority bears the burden of proving the taxable facts. In this case where the merged corporation does not have the business rights appropriated as the assets subject to depreciation, it cannot be inferred that the merged company meets the taxation requirement solely on the ground that the merger value exceeds the net asset value of the merged corporation.

As such, the lower court did not err by misapprehending the concept of business rights under the former Corporate Tax Act and subordinate statutes, requirements for recognition of assets, burden of proof, etc., as otherwise alleged in the grounds of appeal.

4. Conclusion

The Defendant’s appeal is dismissed as it is without merit, 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.

Justices Kim Chang-suk (Presiding Justice)