In cases where a debt guarantee that a corporation has paid a transaction amount related to its business does not fall under the type listed in Article 61(4) of the former Enforcement Decree of the Corporate Tax Act, whether the bad debt of claims for indemnity arising therefrom can be included in deductible expenses (negative)

Article 34(3)1 of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008) (hereinafter “the former Corporate Tax Act”) aims at facilitating the soundness of the financial structure by preventing excessive loans through debt guarantee of a company and strengthening the competitiveness by promoting the restructuring of a company. As such, in principle, the amount of bad debts of indemnity claims arising from debt guarantee should be excluded from deductible expenses: Provided, That Article 61(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328 of Feb. 9, 2006) lists the types of debt guarantees exceptionally permitted to be included in deductible expenses.

In light of the form, language, content, and legislative intent of the provisions of the law and the Enforcement Decree, the debt guarantee exceptionally allowed to be included in deductible expenses with respect to the bad debt amount for indemnity is limited to the type of debt guarantee listed in the provisions of the Enforcement Decree delegated by the law and the provisions of the Enforcement Decree. Therefore, even if a corporation provided debt guarantee in order to receive the transaction amount related to the business, if the debt guarantee does not fall under the type listed in the provisions of the Enforcement Decree of the Act, the bad debt amount

Article 34 (2) (see current Article 19-2) and (3) 1 of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008); Article 61 (4) of the former Enforcement Decree of Corporate Tax Act (Amended by Presidential Decree No. 19328, Feb. 9, 2006);

Lee Tech Construction (Attorneys Son Ji-yol et al., Counsel for the defendant-appellant)

The Head of Gangnam District Tax Office (Law Firm Corporation, Attorneys Soh Ho et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2012Nu13162 decided June 14, 2013

The judgment below is reversed and the case is remanded to Seoul High Court.

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

1. As to the fourth ground for appeal

A. According to Article 34(2) of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same), the amount of bonds which cannot be recovered due to the debtor’s bankruptcy, etc. among bonds held by a domestic corporation (hereinafter “deductible expenses”) may be included in deductible expenses in calculating the income amount for the pertinent business year.

B. According to the reasoning of the judgment below and the evidence duly admitted by the court below, ① upon the initial adjudication on January 20, 2004, the registration of preservation of ownership of the building of this case was made by MM Korea Co., Ltd. (hereinafter “MM Korea”), and the first priority order was completed for the establishment of a mortgage of 7,00,000 won for the National Bank Co., Ltd. (hereinafter “National Bank”), and the second priority was completed for the establishment of a mortgage of 23,561,902,875 won for the remainder of 23,561,80,000 won for the remainder of 2nd priority order. ② The plaintiff transferred a claim against MM Korea on October 26, 200 to the National Bank on the second priority order of 4,420,000,000 won for a loan of this case, ③ the National Bank of Korea as the first priority order of 7,000,706,570 and 5710 won for the loan of this case as the first priority order.

According to the above facts, loans and construction cost claims of KRW 569,40,680, which the Plaintiff failed to recover, are collected from IM Korea in accordance with the method that the Plaintiff transferred the second-class collateral security claims and received dividends in the auction procedure. Thus, even if the Plaintiff collected the claims of KRW 1,521,69,690,584 against IM Korea by means that it was not transferred the second-class collateral security claims to the national bank, the Plaintiff cannot recover the above claims of KRW 569,406,680,00 from IM Korea by means of receiving dividends directly in the auction procedure, even if the Plaintiff collected the claims of KRW 1,521,69,406,684 from IM Korea.

C. Therefore, the ground of appeal on the premise that the Plaintiff could recover the above claim amounting to KRW 569,406,680, if the Plaintiff did not transfer the second priority mortgage claim to the National Bank, cannot be accepted. Ultimately, the lower court’s conclusion that the above claim amounting to KRW 569,40,680 can be included in deductible expenses as bad debt, contrary to what is alleged in the ground of appeal, did not err by misapprehending the legal doctrine on inclusion of bad debt amount in deductible expenses as

The Supreme Court precedents cited in the grounds of appeal are different from the instant case, and thus, are inappropriate to be invoked in the instant case.

2. As to the grounds of appeal Nos. 1 through 3

A. As seen earlier, Article 34(2) of the former Corporate Tax Act provides that a bad debt shall be included in deductible expenses, while Article 34(3)1 of the same Act provides that “The provisions of paragraph (2) shall not apply to a claim for reimbursement arising from a debt guarantee (excluding a debt guarantee as provided by the Presidential Decree)” (hereinafter “instant provision).

In addition, Article 61(4)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328 of Feb. 9, 2006) (hereinafter “Enforcement Decree of this case”) provides that “a debt guarantee under the Presidential Decree” under Article 34(3)1 of the former Corporate Tax Act refers to a debt guarantee under any of the following subparagraphs, and each subparagraph provides that “a debt guarantee falling under any of the subparagraphs of Article 10-2(1) of the Monopoly Regulation and Fair Trade Act (Article 10-2(1)1 of the Monopoly Regulation and Fair Trade Act (Article 10-2(1)", “a debt guarantee (Article 2) made by a financial institution established with authorization under the Banking Act and an asset management company under the Indirect Investment Asset Management Business Act (Article 3),” “a debt guarantee made by a corporation operating a credit guarantee business under the Act,” and “a truster company under the Act on the Protection of Business Area of Small and Medium Enterprises and Promotion of Intercorporate Cooperation with a Consignee Council against a consignee company (Article 4).”

The legal provisions of this case aim at facilitating the soundness of the financial structure and promoting corporate restructuring by preventing excessive loans due to corporate debt guarantees. As such, in principle, the bad debts of indemnity claims arising from debt guarantees should be excluded from deductible expenses. However, the provisions of the Enforcement Decree of this case lists the types of debt guarantees exceptionally permitted to be included in deductible expenses.

In light of the legal provisions of this case and the legislative purport of the Enforcement Decree of this case, it is reasonable to interpret that the debt guarantee, exceptionally allowed to be included in deductible expenses with respect to the bad debt of indemnity claims, is limited to the type of debt guarantee listed in the Enforcement Decree of this case delegated by the legal provisions of this case. Therefore, even if a corporation provided a debt guarantee for the payment of transaction fees related to its business, if the debt guarantee does not fall under the type listed in the Enforcement Decree of this case, the bad debt of indemnity claim arising therefrom cannot be included in deductible expenses.

B. According to the reasoning of the judgment below and the evidence duly admitted by the court below, ① the Plaintiff was awarded a new construction contract for the instant building with the construction cost of KRW 24,420,000,000 from MM Korea on March 19, 200, and the said construction cost was increased to KRW 26,048,000 until July 15, 2003, ② MM Korea leased the store of the instant building that was newly built from July 2002, and the lessee received the loan from the national bank under the joint and several guarantee of MM Korea and paid the lease deposit with MM Korea. Among them, approximately KRW 12,260,00,000 from July 19, 202 to June 2003, the Plaintiff could not be seen as the total amount of the loan to the Plaintiff from July 19, 200 to June 4, 2015, and the Plaintiff could not recover its claim for reimbursement from the national bank.

Examining these facts in light of the legal principles as seen earlier, even if the Plaintiff jointly and severally guaranteed a lessee’s obligation to pay the construction cost related to the construction of the instant building, the Plaintiff’s joint and several liability does not constitute a type of debt guarantee listed in the instant Enforcement Decree provision, and thus, the bad debt of indemnity claim arising therefrom cannot be included in deductible expenses.

C. Nevertheless, the lower court found that, even if a debt guarantee is not listed in the Enforcement Decree of the instant Act, it could include the bad debt of indemnity claim arising from the debt guarantee that does not contravene the legislative purpose of the instant provision in deductible expenses, on the premise that it could be included in deductible expenses, and determined that the non-deductible debt of indemnity claim arising from the Plaintiff’s joint and several liability guarantee constitutes a debt guarantee that does not violate the legislative purpose of the instant provision, and that this part of the disposition was unlawful.

Therefore, in so determining, the court below erred by misapprehending the legal principles on the interpretation of the legal provisions of this case and the Enforcement Decree of this case, which affected the conclusion of the judgment, and the ground of appeal assigning this error is with merit.

3. Conclusion

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)