If capital has been reduced after conversion into investment pursuant to the rehabilitation plan, it shall not be deemed that it constitutes a claim confirmed as impossible to recover.

In the event that a debt-equity swap is conducted according to the rehabilitation plan, the claim to be extinguished by the debt-equity swap cannot be considered as a "claim confirmed to be impossible to be recovered according to the decision of authorization for the rehabilitation plan or the court's decision on immunity."

Article 45 (Special Cases of Deduction of Bad Debt Tax Amount) (3) of the Value-Added Tax Act

2018Guhap23239. Revocation of the imposition of value-added tax

AAA

BB Director of the Tax Office

October 18, 2018

November 22, 2018

1. The Defendant’s imposition of value-added tax of KRW 16,604,670 on April 5, 2018 against the Plaintiff on April 5, 2018 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff, established on May 2, 2003, engaged in the manufacture and sale of electronic parts, and filed an application for commencement of rehabilitation procedures with the OOCO under the OOCO of the Seoul District Court on September 16, 2015 on the ground of the management difficulties. The Plaintiff was determined by the above court to commence rehabilitation procedures on October 22, 2015, and was decided to authorize the rehabilitation plan on May 9, 2016 (hereinafter referred to as “the approved rehabilitation plan”).

B. The instant rehabilitation plan, with respect to the method of changing the right to rehabilitation claims and paying the repayment thereof, distributes the amount calculated by multiplying the principal of the bonds by the ratio of 10.8198%, and pays in cash the remainder of the principal of the bonds that have not been paid in cash, to fully convert the total amount of the principal of the bonds, and to reduce the amount of 10,000 common shares per common share after the authorization is granted for the rehabilitation plan.

C. Meanwhile, CCC Co., Ltd (hereinafter “CCC”) held a total amount of KRW 204,81,695 against the Plaintiff. However, according to the instant rehabilitation plan, KRW 22,160,216, which is 10.8198% of the total amount of the claims under the instant rehabilitation plan, was repaid in cash, the remaining claims were converted into equity shares of KRW 10,000, and the shares converted into equity shares were reduced at the rate of KRW 300:1.

D. On January 23, 2017, the instant creditor company: (a) determined the amount of bad debt subject to a bad debt tax deduction under the Value-Added Tax Act after deducting KRW 22,160,216 from the total amount of claim against the Plaintiff of the instant creditor company 204,81,695 from the total amount of claim 204,81,695 against the Plaintiff of the instant creditor company (i.e., KRW 204,81,695 - KRW 22,160,216) as the bad debt amount subject to a bad debt tax deduction under the Value-Added Tax Act; and (b) filed a declaration to the effect that the bad debt tax should be deducted from the output tax amount for the year 1, 2016, which belongs to the taxable period in which bad debt becomes final and conclusive due to debt-equity swap.

E. Upon acceptance of the above declaration, the head of the OO tax office imposed a disposition imposing value-added tax on the creditor company of this case, which deducts bad debt tax amount of KRW 16,604,679 (hereinafter “the deductible amount”) from the output tax amount for the first quarter of 2016.

F. After being notified by the head of the OO head of the tax office of the above taxation data, the Defendant denied the Plaintiff’s input tax deduction corresponding to the bad debt tax amount deducted as above, and subsequently corrected and notified the Plaintiff on April 5, 2018 of value-added tax 16,604,670 for the first period of April 5, 2016 (hereinafter “instant disposition”).

G. On April 30, 2018, the Plaintiff appealed to the Tax Tribunal for the revocation of the instant disposition. However, the Tax Tribunal rendered a decision to dismiss the said claim on July 9, 2018.

H. The statutes related to the instant disposition are as shown in the attached Form.

Facts without any dispute over recognition, Gap's 1, 2, Eul's 1 to 7, the purport of the whole pleadings, and the purport of the whole pleadings.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The creditor company of this case's claim against the plaintiff is not a claim established as impossible to recover, but a debt extinguished by debt-to-equity swap or set-off. Thus, the debt extinguished by debt-to-equity swap shall be the whole amount of debt-to-equity swap. Thus, the difference between the commercial sales claim and the market price of stocks shall not be deemed as the bad debt

Although it is reasonable to recognize the deduction of the bad debt tax amount of the plaintiff, the plaintiff's claim of this case

The instant disposition that deducts the deductible amount from the input tax amount of value-added tax is unfair on the ground that part of the total debt to the company was repaid in cash and the remainder was fully repaid through debt-equity swap and the business operator fully or partially repaid the bad debt amount under Article 45(4) of the Value-Added Tax Act.

Therefore, the Plaintiff’s disposition of this case, which deducts the deduction amount from the input tax amount of the first quarter of 2016, is unlawful.

B. Determination

1) Article 45(1) of the Value-Added Tax Act provides for a bad debt tax amount calculated according to the following formula (hereinafter referred to as " bad debt tax amount") may be subtracted from the output tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive: Provided, That where the entrepreneur recovers all or part of the bad debt amount (hereinafter referred to as " bad debt amount") from the bad debt amount, the bad debt tax amount related to the recovered bad debt amount shall be added to the output tax amount in the taxable period whereto belongs the date when the bad debt amount is recovered. Article 87 of the Enforcement Decree of the Value-Added Tax Act provides that " bad debt tax amount x 10 percent" and Article 45(1) of the Enforcement Decree of the Value-Added Tax Act provides that "the bad debt tax amount x 10 percent of the bad debt amount x the bad debt amount x the bankruptcy execution or other reasons prescribed by Presidential Decree referring to the grounds recognized as bad debt under Article 55 (2) of the Enforcement Decree of the Income Tax Act and Article 19-2 (1) of the Enforcement Decree of the Corporate Tax Act."

In addition, Article 45 (3) of the Value-Added Tax Act provides that where an entrepreneur supplied with goods or services deducts all or part of the bad debt tax amount as an input tax amount under Article 38, and the supplier of the goods or services receives a bad debt tax amount deduction under paragraph (1) before the entrepreneur closes his/her business, the entrepreneur supplied with the goods or services shall deduct the relevant bad debt tax amount from his/her input tax amount in the taxable period to which

Provided, That where an entrepreneur who has received the supply fails to deduct the amount equivalent to the bad debt tax amount, the head of the competent tax office having jurisdiction over the entrepreneur shall determine or correct the input tax amount to be deducted, as prescribed by Presidential Decree.

2) In light of the above provisions and the provisions of the Debtor Rehabilitation Act, in a case where a debt is converted into a debt according to the rehabilitation plan authorized by the conversion into a debt, the claim to be extinguished due to the conversion into a debt cannot be deemed to constitute “a claim confirmed as impossible to be recovered according to a decision to authorize the rehabilitation plan or a court’s decision on immunity.” As such, the head of the competent tax office cannot determine or rectify that a bad debt becomes final and conclusive, and thus, it cannot be said that a bad debt would be deducted from the input tax amount of the person supplied with the debt (it cannot be said that even if a supplier’s bad debt becomes final and conclusive, even if the bad debt becomes final and conclusive, it cannot be said that the bad debt

① Article 252(1) of the Debtor Rehabilitation Act provides that the rights of rehabilitation creditors, rehabilitation secured creditors, shareholders, and equity right holders may be altered according to the rehabilitation plan when it is decided to authorize the rehabilitation plan. This provision provides that the rights of rehabilitation creditors, etc., according to the decision to authorize the rehabilitation plan, etc. shall be substantially changed according to the content of the rehabilitation plan. As such, when a decision to authorize the rehabilitation plan is made, the rights of rehabilitation creditors, etc., if the rehabilitation creditors, etc. have an effect of full or partial exemption from obligations under the provisions of the rehabilitation plan, and the grace period is determined to extend the deadline for obligations pursuant to the provisions of the rehabilitation plan, and if rehabilitation claims or rehabilitation security rights are converted into equity swap, their rights shall be terminated at the time of the decision to authorize the rehabilitation plan or at the time prescribed in the rehabilitation plan (see, e.g., Supreme Court Decisions 2002Da20964, Mar. 14, 2003; 201Da64073, Aug. 22, 2003).

② Article 206(1)4 of the Debtor Rehabilitation Act provides that "the amount of liabilities to be reduced by the issuance of new shares" shall be one of the matters to be prescribed in the rehabilitation plan when the debtor who is a stock company conducts the conversion of investment into new shares for rehabilitation claims, etc. by means of issuing new shares. This provision also seems to be premised on the fact that when the rehabilitation plan provides for the conversion into investment, the rehabilitation creditor is issued new shares at the same time, i.e., the total amount of liabilities converted into investment

③ Article 72(2) of the Enforcement Decree of the Corporate Tax Act provides that, in principle, “stocks acquired through a debt-to-equity swap with respect to the acquisition value of assets shall be based on the market price as at the time of acquisition: Provided, That in cases where a corporation whose rehabilitation plan including the content of converting its liabilities into investments under the Debtor Rehabilitation Act conducts a debt-to-equity swap, the book value of the debt-to-equity swap should be deemed the acquisition value of stocks; thus, there is no taxation problem at the time of the debt-to-equity swap; and later, in disposing of the stocks at a price lower than

④ Under Article 252(1) of the Debtor Rehabilitation Act, the rehabilitation plan is formulated and approved on the premise that the rights of rehabilitation creditors, rehabilitation secured creditors, shareholders, and equity right holders are modified according to the rehabilitation plan. However, even though a certain ratio of rehabilitation claims or rehabilitation security rights are decided to be substituted for the repayment by conversion of investment, the denial of this decision is the only amount equivalent to the market price of shares, and the remainder is deemed to constitute an irrecoverable claim, such as the instant disposition, if the rehabilitation debtor bears an unexpected obligation. This contradicts the purport of the Debtor Rehabilitation Act (Article 1 of the Debtor Rehabilitation Act) for efficient rehabilitation of the debtor or his/her business.

⑤ Rehabilitation creditors shall be deemed to have been fully exempted from claims under the premise that rehabilitation creditors’ rights are changed according to the rehabilitation plan, and only a part of the claims shall be repaid, and the remaining part shall be deemed to have consented to or have objection to the substitution of repayment through a conversion of investment. If, in the case of a conversion of investment, the difference between the market price of shares and the claim in substitution for repayment is not repaid, but is deemed to be an irrecoverable bad debt, rehabilitation creditors who have selected the conversion of investment take advantage of the profits not anticipated in the rehabilitation plan, and

(6) The debtor rehabilitation system intends to seek rehabilitation of a debtor or his/her business. As shares acquired through a debt-equity swap are likely to increase its value if rehabilitation procedures are implemented smoothly, and rehabilitation creditors who have selected a debt-equity swap have selected a debt-equity swap by comprehensively taking into account various factors, such as these circumstances. Therefore, it is difficult to deem that it is unreasonable to recognize the change of rehabilitation claims according

7) Under the principle of no taxation without law, the requirements for taxation, non-taxation, or tax exemption should be avoided, and the interpretation of tax laws should be made in accordance with the provisions of the law, barring any special circumstance, and it is not permitted to expand or analogically interpret without reasonable grounds (see Supreme Court Decision 2001Du5521, Jul. 26, 2002). In a case where a rehabilitation plan is formulated and approved as a substitute for the repayment of rehabilitation claims, the repayment takes effect as stated in the rehabilitation plan, and thus, it cannot be deemed that it constitutes “a claim confirmed as impossible to recover according to a decision to authorize the rehabilitation plan.”

Unlike the contents of the rehabilitation plan, there is no provision to the effect that the amount of sales bonds to be substituted for repayment through debt-equity swap shall be repaid only by the actual market price and the remainder shall be determined as irrecoverable.

3) We look back to the instant case, as seen earlier, the instant rehabilitation plan stipulates 89.1802% of the principal amount among the claims against the Plaintiff of the instant creditor company against the Plaintiff to make a conversion into equity in lieu of repayment, and determines the amount of the face value of the shares issued through a conversion into equity as KRW 10,000, and the ratio of the said conversion into equity shares to 300:1. As such, the instant rehabilitation plan determines the amount of the claim value of the creditor company of this case extinguished by a conversion into equity, it is deemed that the claim equivalent to the value thereof is extinguished on the date when the issuance of new shares becomes effective, and cannot be deemed to have been finalized as impossible.

Therefore, since the deduction amount of this case is a bad debt tax amount under Article 45(1) of the former Value-Added Tax Act, it cannot be deemed that it should be deducted from the output tax amount of the creditor company of this case, the disposition of this case, which was made by deducting the deduction amount of this case from the input tax amount of the first quarter of 2016 pursuant to Article 45(3) of the Value-Adde

3. Conclusion

Therefore, the plaintiff's claim is reasonable, and it is so decided as per Disposition.