[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, has imposed corporate tax on Gap in accordance with the disposition of imposing corporate tax on Gap, on the ground that the difference between the acquisition price of the securities acquired from the issuer and the sale price of the securities acquired from the issuer should not be included in the deductible expenses in the pertinent business year when the securities company Gap, as a liquidity supplier, purchased the securities at the issuing price of the securities and sold them to investors and sold the same OTC derivatives as the securities at the issuing company for the first time, and the difference between the acquisition price of the securities acquired from the issuer and the sale price of the securities for the pertinent business year when the securities were sold at the market price for the first time to investors; and that the tax authority did not recognize losses as being caused by Gap's initial sale of the securities which were not due to the maturity of the pertinent business year

[3] The case holding that in a case where a foreign securities company Gap, a liquidity supplier of the foreign securities company Gap, made a disposition imposing corporate tax on Gap on Gap on the ground of Article 14 (2) and (3) of the Framework Act on National Taxes, in the business year in which the securities company acquired a large-scale loss from the issuer and sold them to investors and sold to investors the same OTC derivatives as the securities at the first market price, and the difference between the acquisition price and the sale price of the securities acquired from the issuer was included in deductible expenses for the pertinent business year

[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 relevant gross income and losses are determined.” According to the delegation under Article 40(2) of the Corporate Tax Act, the main text of Article 68(1)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 23589, Feb. 2, 2012) sets the fiscal year of accrual of “deductible expenses incurred from the transfer of assets other than the goods, etc.” as “the fiscal year which includes the date on which the payment is settled.” As such, the Corporate Tax Act adopts the principle of confirmation of rights and obligations that the profits and losses are deemed realized at the time of the confirmation of rights and obligations, and clearly sets the fiscal year of accrual of profits and losses. This is to promote legal stability and promote fairness in taxation, and at the same

[2] In a case where a foreign securities company Gap, which is a liquidity supplier, made a transaction by which the securities company Gap acquires the stock warranty securities from the issuer under a liquidity supply contract and sells them to investors, and sells them to the issuer and first sells over-the-counter derivatives with the same contents as the securities to investors, the difference between the acquisition price and the sale price of the securities acquired from the issuer during the business year when the securities are first sold to investors shall be included in the deductible expenses of the pertinent business year, and the tax authority did not recognize losses by accepting and selling the securities with the maturity of which is not yet arrived at the corresponding business year, and imposed corporate tax on Gap, the case affirming the judgment below that Gap's loss should be included in the deductible expenses for the pertinent business year, on the ground that the sales price of the securities acquired from the issuer by selling the stock warranty securities to investors, and it should be included in the deductible expenses for the pertinent business year.

[3] In a case where a foreign securities company Gap, which is a liquidity supplier, made a corporate tax against Gap on the ground that it did not include losses known by accepting and selling securities, the maturity of which is not yet arrived at the pertinent business year, and based on Article 14(2) and (3) of the Framework Act on National Taxes, in the business year where a foreign securities company Gap purchased securities from the issuer and sells them to investors, and first sells over-the-counter derivatives, the same as the securities, to investors, the case affirming the judgment below that the acquisition price and the sale price of securities acquired from the issuer should be included in deductible expenses for the pertinent business year; on the ground that the tax authority did not include losses recognized by the issuer Gap at the time of initial sale, and that the possibility of realization of profits arising from the price of underlying assets, etc. through the above transaction is not transferred to Gap who is a supplier of the securities, but it cannot be readily concluded that a large scale of losses arising from the issuance of securities cannot be determined as unlawful because it does not fall in the form of the underlying asset and the sales price.

[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) / [3] 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 Delivered on February 13, 2004

c. Ledices (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant-appellant)

The director of the tax office

Seoul High Court Decision 2015Nu70722 decided August 23, 2016

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

The grounds of appeal are examined.

1. The time when profits and losses accrue under the Corporate Tax Act (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 relevant gross income and losses are determined.” According to the delegation under Article 40(2) of the Corporate Tax Act, the main text of Article 68(1)3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 23589, Feb. 2, 2012) sets the fiscal year of accrual of losses incurred from the transfer of assets other than goods, etc. as “the fiscal year which includes the date on which the payment is settled.” As such, the Corporate Tax Act adopts the principle of confirmation of rights and obligations that the profits and losses are deemed realized at the time of the confirmation of the rights and obligations, and clearly sets the time of accrual of profits and losses. This is to promote legal stability by uniformly understanding taxable income of the taxpayer and at the same time exclude the taxpayer’s children (see, e.g., Supreme Court Decision 2003Du10329, Feb. 13).

The lower court determined that the Plaintiff’s loss should be included in the deductible expenses for the business year to which the time of the ELW sale belongs, on the ground that the Plaintiff’s loss was realized and confirmed as a result of deducting the sale price from the acquisition price of the ELW taken over from the issuer by selling the stocks warranty securities (hereinafter referred to as “ELW”).

The above determination by the lower court is justifiable in light of the foregoing legal doctrine. In so determining, the lower court did not err by exceeding the bounds of the principle of free evaluation of evidence inconsistent with logical and empirical rules, or by misapprehending the legal doctrine regarding the timing when

2. Whether the substance over form principle is violated (Ground of appeal No. 2)

A. Article 14(2) of the Framework Act on National Taxes provides, “The provisions on the calculation of tax base in the tax-related Acts shall apply to such substance, irrespective of the name or form of the income, profit, property, act or transaction,” and Article 14(3) of the same Act provides, “Where it is recognized that the benefit of this Act or the tax-related Acts is to be unduly obtained by indirect method via a third party, or by means of two or more acts or transactions, it shall be deemed that the party has directly traded or has engaged in a single act or transaction in succession, and thus, this Act or the tax-related Acts shall apply.”

B. In light of the following circumstances, the lower court determined that the instant disposition based on Article 14(2) and (3) of the Framework Act on National Taxes was unlawful on a different premise, on the grounds that the Plaintiff cannot be deemed to have taken an unreasonable form or appearance that differs from the substance of the fact requiring taxation with the intent to avoid tax burden by recognizing a large-scale loss early.

(1) When the Plaintiff, a foreign securities company, was unable to issue ELW in the name of the Plaintiff or a domestic branch, the Plaintiff, as a liquidity supplier, was selected by accepting the ELW from the issuer at the issue price, selling the ELW to investors, and selling the ELW and the product content to the issuer.

(2) The possibility of realizing profits arising from the fluctuation in the prices of underlying assets through such a transaction is transferred to the Plaintiff, a liquidity supplier, but the issuer is not obligated to suffer losses due to the decline in the prices of underlying assets after receiving a conclusive fee for the issuance of ELW. Therefore, it cannot be readily concluded as a unreasonable transaction.

(3) It is difficult to deem that a liquidity supplier or issuer, such as the Plaintiff, could not arbitrarily determine the issue price of the ELW in light of the Korea Exchange’s minimum issue price regulation, and that the Plaintiff could have received it 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 stage of accepting the ELW

(4) Accordingly, in the business year in which the Plaintiff acquired and sold ELW, only the disposal loss may be reflected and the unrealized valuation profit and loss may not be recognized, but it cannot be deemed unlawful or unjust as it is in accordance with the provisions of tax law.

C. Examining the reasoning of the lower judgment in light of the foregoing provision and related legal principles, such determination by the lower court is justifiable. In so determining, the lower court did not err by misapprehending the legal doctrine on the principle of substantial taxation, contrary

3. 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 on the bench.

Justices Park Poe-young (Presiding Justice)