Whether the stock option received from the foreign mother corporation constitutes Class B employment income

The profit from exercising stock option is paid by foreign parent companies which directly or indirectly affect the management of domestic subsidiaries, etc. and the performance of their duties, and there is a quid pro quo relationship based on economic rationality.

Article 20 of the Income Tax Act

The appeal is dismissed.

The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined.

1. As to the grounds of appeal Nos. 1, 2, and 5

Wage and salary income under Article 20 (1) of the Income Tax Act, regardless of the form or name of payment, shall include not only all economic benefits in the nature of the provision of labor and the relationship of compensation, but also benefits which form the contents of the working conditions closely related to the provision of labor on the premise of the work.

According to the reasoning of the judgment below, the court below determined as follows: (a) the plaintiffs worked as an executive officer or employee of ○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○○.

In the same way, the Plaintiffs’ exercising stock option benefits are paid by foreign parent companies directly or indirectly affecting the management and performance of their duties to the Plaintiffs, and it is reasonable to deem that there exists a quid pro quo relationship or an economic rationality with the labor provided by the Plaintiffs to domestic subsidiaries. Therefore, the exercising profit of the instant stock option falls under Class B earned income under Article 20(1)2(b) of the Income Tax Act. This does not change because there is no direct employment relationship between the Plaintiffs and foreign parent companies, and the employer under employment contract and the stock options are different, or there is no difference between the Plaintiffs and foreign parent companies, or as at the time of exercising the said stock option, each of the above subparagraphs of Article 38(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17825, Dec. 30, 2002) did not

The decision of the court below to the same purport is just, and there is no error in the misapprehension of legal principles as to the nature of profit from exercising stock option, or in the misapprehension of legal principles as to retroactive taxation under Article 20 (1) of the Income Tax Act.

2. As to the third ground for appeal

In order to determine that income which is subject to income tax has been realized, even if it is unnecessary until it is realized, the income should be considerably mature and confirmed in the possibility of realizing the income, and it is merely established without reaching such a degree (see, e.g., Supreme Court Decision 2001Du7176, Dec. 26, 2003). The stock option is entirely entrusted to the choice of the officers and employees who have been granted the stock option, so it cannot be deemed that any income has accrued merely by the granting of the stock option, and only by exercising the stock option, it shall be deemed that the income has accrued.

The court below's determination that the exercising profit of stock options in this case constitutes earned income in the taxable period to which the exercising price belongs is just in accordance with the above legal principles, and there is no error of law such as misunderstanding of legal principles as to the timing of

3. As to the fourth ground for appeal

Article 24 (2) of the Income Tax Act provides that the income amount shall be calculated on the basis of the price at the time of transaction, so the court below's calculation of the profit from exercising the stock option of this case as of the date of exercising the stock option of this case by converting the difference between the price at which the stock option is exercised at the market price and the price at which the stock option is exercised at the market price as of the date of exercising the stock option of this case

4. Regarding ground of appeal No. 6

Under the tax law, where a taxpayer violates various obligations, such as a return and tax payment, without justifiable grounds, in order to facilitate the exercise of the right to impose taxes and the realization of a tax claim, an additional tax is an administrative sanction imposed as prescribed by the Act, and the taxpayer’s intent or negligence is not considered, but does not constitute a justifiable reason that does not cause the taxpayer to breach of his/her duty (see, e.g., Supreme Court Decision 2002Du10780, Jun. 24, 2004).

In the same purport, at the time of exercising the stock option of this case, the court below was just in holding that there was no direct or explicit provision on stock option under the Income Tax Act and the Enforcement Decree of the Income Tax Act at the time of 1997 to 2000, or that there was a question as to whether the profits from exercising the stock option are subject to taxation, or that there was a justifiable reason not to be a ground for misunderstanding the plaintiffs' duty due to the fact that the Defendants rendered the instant disposition as it was against the disposition in 2002 to 2003, and there was no error in the misapprehension of legal principles as to additional tax as

5. Conclusion

Therefore, the appeal is dismissed, 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.

[Seoul High Court Decision 2004Nu3740 (No. 12, 2007)]

1. All appeals filed by the plaintiffs are dismissed.

2. The costs of appeal are assessed against the Plaintiffs.

The judgment of the first instance court shall be revoked. The notice of the disposition date in the separate sheet shall be revoked by the Defendants, on each date stated in the separate sheet, the "amount of global income tax for which cancellation is sought" and the "amount of resident tax for which cancellation is sought" as stated in the same Table, respectively.

1. Details of the disposition;

A. The plaintiffs, while serving as executive officers or employees in each company listed in [Attachment List] column (hereinafter referred to as a "domestic subsidiary company"), were granted appraisal rights (hereinafter referred to as "Stockholm option") from each relevant foreign company listed in the "foreign parent company" column of the same list as stated in the "foreign parent company" (hereinafter referred to as "foreign parent company"), and the "the time of exercising the "Stockholm option" column stated in [Attachment List] was the amount computed by converting the difference between the price of the Stockholm option (actual price) at the market price of the shares transaction as of the day of the event and the price of the Stockholm option (the actual acquisition price) at the basic exchange rate by exercising the Stockholm option as mentioned above in each year.

B. The Plaintiffs did not report and pay the resident tax on global income tax and income tax on which the profits from the Stockholm options of this case do not constitute taxable income. Accordingly, the Defendants (the authority of the head of the ○○○ Tax Office listed in No. 10 among them belonged to the head of the ○○ Tax Office before the organizational reform enforced on April 1, 2004) issued on the date of disposition “the date of disposition” in the same Table, each of the instant dispositions issued by the Defendants, each of which was calculated by including each of the instant Stockholm options in the amount of Class B earned income on the ground that the gains from the exercise of the Stockholm options of this case constituted Class B earned income on the grounds that they are included in the amount of Class B earned income, as well as the global income tax (including each additional tax) indicated in the “amount of global income tax on which the revocation is sought” in the same Table, calculated as the tax base.

[Reasons for Recognition] Unsatisfy, Gap evidence 1, 2, 3, Gap evidence 1 to 4, Gap evidence 4 through 9, Gap evidence 10-1 through 5, Gap evidence 11-1 to 4, Eul evidence 12, Eul evidence 1-2, Eul evidence 3-1, 2-2, Eul evidence 4, Eul evidence 5-1, 6, 7, 8-1 through 4, Eul evidence 9, 10-1, 2, and 11-2, and the purport of the whole pleadings

2. Whether each disposition of this case is lawful;

A. The plaintiffs' assertion

(1) The instant Stockholm is merely an incentive provided for the continued employment of outstanding human resources, and thus cannot be deemed as benefit in return for the provision of labor. No legal employment relationship or occupational direction system exists between a foreign parent company and the Plaintiffs that granted Stockholm options. The size of the profit from the exercise of Stockholm options depends entirely on whether the grantedr selects the time of the exercise of the Stockholm options, and thus cannot be deemed as a payment for labor. Article 38(1)17 of the Enforcement Decree of the Income Tax Act (hereinafter “Enforcement Decree of the amended Act”) amended by Presidential Decree No. 17825, Dec. 30, 2002 stipulates the benefit from the exercise of the Stockholm options as earned income, and thus, it should be deemed as a creation provision of the Income Tax Act, so that each disposition of this case constitutes an earned income subject to the premise that the exercise benefit accrued prior to the exercise of the Stockholm options is unlawful.

(2) Even if each of the Stockholm options benefits of this case can be seen as earned income, it is unclear whether the benefits from the Stockholm option exercise are subject to taxation because of its ambiguous legal nature, and the Defendants imposed tax at the time when the exclusion period of the right to impose the benefits from the exercise of the Stockholm expires. If the Defendants exercised the right to impose tax from the first taxable period, the Plaintiffs were dissatisfied with the payment of tax in advance to avoid the burden of additional tax, and thus, the Defendants were liable for additional tax by imposing additional tax at the later time. In light of the above circumstances, there is justifiable reason that the Plaintiffs failed to return and pay labor income tax on the profits from the exercise of the Stockholm option of this case. Accordingly, the part imposing additional tax of each of the dispositions of this case is unlawful.

(b) Related statutes;

[Income Tax]

Article 20 (Earned Income) (1) Any earned income shall be the following incomes accruing during the current year:

1. Class A:

(a) pay, salary, remuneration, remuneration, annual allowance, wage, bonus, allowance, and other benefits of a similar nature similar thereto received due to the offer of labor;

2. Class B:

(b) Pay received from a foreigner or foreign corporation located abroad (excluding a domestic branch or domestic business office);

Article 24 (Calculation of Total Amount of Income)

(1) The total amount of income of a resident shall be calculated based on the total amount received or received in the relevant year.

(2) In cases under paragraph (1), if any income other than money is imported, such income shall be calculated according to the value at the time of transaction.

Article 39 (Accretion Year, etc. of Gross Income and Necessary Expenses)

(1) The year to which the total income amount and necessary expenses of a resident are reverted, shall be the year in which the total income amount and necessary expenses are determined.

[Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17825 on December 30, 2002)

(1) The scope of the employment incomes as prescribed in Article 20 of the Act shall include the following incomes:

17. Profits (referring to the difference between the market price and the actual purchase price at the time of exercising the stock option, and the stocks include preemptive rights) accruing from exercising the stock option granted to an officer or employee of the relevant corporation or a corporation in a special relationship under Article 87 of the Enforcement Decree of the Corporate Tax Act with the relevant corporation (hereafter in this subparagraph, referred to as the “relevant corporation, etc.”) during the period of work at the relevant

Article 49 (Receipt Date of Earned Income)

(1) The receipt date of the total labor income shall be the following dates:

1. Salaries;

The Labor Day;

(2) Notwithstanding the provisions of paragraph (1) 1, if the benefits are paid under a contract or similar contract, and the relevant benefits are not finalized before the beginning of the period for final return on the tax base of the current taxable period, it shall be deemed to have been imported on the date of its final return: Provided, That the amount actually received before

Addenda

Article 1 (Enforcement Date) This Decree shall enter into force on January 1, 2003: Provided, That the amended provisions of Articles 38(1), 62(2)2, 63, 64 (excluding subparagraph 5 of paragraph (1)), 143(3)1, 146-2, and 208-2(4) shall enter into force on the date of its promulgation.

Article 5 (Application Scope of Earned Income) The amended provisions of Article 38(1) shall apply to the portion of income generated in the taxable period to which the date of promulgation belongs.

[The Regulation of Tax Reduction and Exemption Act (amended by Act No. 5195 of Dec. 30, 1996)

Article 13-2 (Special Taxation on Stock Options) (1) The profits (referring to the difference between the actual purchase price of stocks and the formula, and the stock shall be deemed to include preemptive rights) which an employee gains by obtaining stock option meeting the requirements falling under each of the following subparagraphs from a domestic corporation as prescribed by the Presidential Decree and a listed corporation or off-the-board registered corporation (hereafter in this Article, referred to as a “business start-up corporation, etc.”) who is a business proprietor or an off-board registered corporation meeting the requirements as prescribed by the Presidential Decree, and exercising it,

(c) Fact of recognition;

(1) A foreign parent company listed in the [list of Company] attached Form 2 granting Stockholm options to the Plaintiffs held shares of 100% of the shares as stated in the [list of Company] ratio for each corresponding domestic subsidiary to which the Plaintiffs work.

(2) Stockholm options are granted by a foreign parent company to select and assign subjects in accordance with the Stockholm options plan that the foreign parent company voluntarily prepares. A domestic subsidiary selects those subjects and recommends them to a foreign parent company. Without such recommendation procedures, a foreign parent company directly selects those subjects based on the work performance of officers and employees reported through the domestic subsidiary company.

(3) Although the purpose, type, exercise price, time of exercise, etc. of Stockholm options are different for each foreign parent company, the Stockholm options granted by the Plaintiffs are generally having the following common characteristics:

(A) The purpose of Stockholm options is to secure the most suitable human resources for the position substantially responsible, to provide them with additional incentives, and to promote the company’s business success by bringing the economic benefits of the Plaintiffs, an employee, in conjunction with the value according to the long-term holding of shares.

(B) The time of the exercise of the Stockholm option is determined to be able to exercise its entire right after a certain period of time has elapsed from the date of grant, or to exercise at a certain rate of time every year or every six months after a certain period of time has elapsed from the grant date, so that in order to exercise all or part of the Stockholm options granted to the Plaintiffs, it is required to work at a domestic subsidiary for the future period determined by the board of directors of the foreign parent

(C) The Plaintiffs acquired the shares of a foreign parent company at the price of the exercise determined in advance by exercising the Stockholm option. The exercise price is ordinarily set at or higher than the market price as of the time of granting the Stockholm option. In any case, the Plaintiffs may benefit from exercising the Stockholm option at a price lower than the market price by exercising the Stockholm option at the time when the foreign parent company’s share price was formed higher than the market price. Accordingly, according to a foreign parent company, if the share price as of the date of exercising the Stockholm option is set at a price lower than the market price, the Stockholm option may be exercised at a price lower than the market price as of the date of the event.

(D) Stockholm options may be exercised while the Plaintiffs maintain their status as employees of the domestic subsidiary company, and, in the case of retirement, the Stockholm options may be exercised within a certain short period of time after retirement to the extent of the number of shares available at the time of retirement.

(E) The Plaintiffs cannot transfer or dispose of Stockholm options by means other than wills or inheritances, and only the Plaintiffs may exercise Stockholm options during their existence.

(4) Before the Enforcement Decree of the Income Tax Act was amended by Presidential Decree No. 17825, Dec. 30, 2002, the Income Tax Act and the Enforcement Decree thereof did not directly and explicitly provide for Stockholm options, but the National Tax Service has expressed its view that the profits from exercising Stockholm options constitute earned income through the following established rules, etc.

(1) With respect to income on May 31, 1986, 22601-1803 and May 31, 1986: The difference between the acquisition value and market value of stocks in case where the employees of a corporation receive without compensation from the relevant corporation, and those of a corporation excluding members of an employee stock ownership association, acquire stocks

(2) Income: Income (the amount obtained by subtracting the actual acquisition value from the market price at the time of acquisition) gained by an employee working for a domestic branch of a foreign corporation by actually acquiring the relevant stocks through a parent company’s stock purchase right granted in connection with provision of labor shall be taxed as earned income.

(3) On February 13, 1998, 46017-70, and February 13, 1998: Where a foreign-invested corporation or a domestic place of business grants its employees a right to acquire stocks of a mother company or head office located abroad at a price lower than market price under certain conditions, the difference between the acquisition value of stocks and the market price shall constitute earned income under Article 20 (1) 1

(4) Income 4601-503 and February 27, 1998: Where a foreign corporation having a special relationship with a domestic corporation pursuant to Article 2 of the Enforcement Decree of the Adjustment of International Taxes Act grants the employees of the domestic corporation a right to acquire stocks at a specific price at a certain time as compensation for past service period, and pays an amount equivalent to the difference between the market price and the specific price at the time of the exercise, such paid amount shall constitute earned income.

[Ground of recognition] Evidence No. 9-2, Evidence No. 10-2, each entry of Evidence No. 10-2, this court's ○○○○ Human Management Korea Co., Ltd., △△ Computer Fishing Korea Co., Ltd., and the purport of the whole pleadings

D. Determination

(1) Employment income under Article 20 of the Income Tax Act

Article 20 (1) 1 (a) of the Income Tax Act provides that "the salary, salary, remuneration, annual allowance, wage, bonus, bonus, allowance, and other benefits of a similar nature that are received from the provision of labor," with regard to the scope of earned income subject to income subject to income tax, in principle, includes all monetary benefits derived from employment relations or employment relationships or benefits of economic value that are derived from employment relations except retirement income. Thus, the income listed in the above legal provision does not necessarily constitute earned income, and the same applies to "wages" under Article 20 (1) 2 (b) of the same Act.

Furthermore, the term "in the course of providing labor" under the above legal provision means that the provision of labor and the payment of wages are dealt with either a quid pro quo or a swin-free relationship. The above earned income includes not only all the economic benefits in the relation of the provision of labor by nature, regardless of the cycle of the payment of wages, etc., the means of payment or form, etc., but also all the economic benefits in the relation of the provision of labor (see Supreme Court Decision 2003Du4089, Apr. 15, 2005) but also the benefits that are regularly paid under the premise of labor (see Supreme Court Decision 2003Du4089, Apr. 15, 2005). In order to recognize that there is a quid pro quo relationship between the work provided by the employee and the quid pro quo relationship provided by the employee, it is sufficient that there is a quid pro quo relationship or an economic rationality relationship between the work provided by the employee (see Supreme Court Decision 2006Du1305, Oct. 13, 2006).

(2) Whether the profit from the Stockholm option event is an economic benefit that was received by the provision of “work”

(A) According to the above, the purpose of granting Stockholm options to the Plaintiffs is to fundamentally respond to the Plaintiffs’ domestic subsidiaries and foreign parent companies’ contribution, and to encourage them to continue to work in the future. Furthermore, when granting Stockholm options to the Plaintiffs, a foreign parent company must work in its domestic subsidiaries for a certain period in the future on the condition that it would exercise in whole or in part the Stockholm options in the future, and to maintain its status as an employee of a domestic subsidiary, the foreign parent company can exercise Stockholm options during a certain period of time in the future. When the employment contract is terminated, the exercise of rights is possible only within the limit of the number of shares available at the time of retirement, and the period of exercise is limited within a short period of time, and as such, it is prohibited from transferring the Stockholm options itself. Furthermore, according to the above facts, the fundamental reason behind the Stockholm options system maintained is that the employee’s ability to work is formed by various factors that contribute to the improvement of the market price of the company in question, and thus, the performance of the company in question can be seen as a significant factor that the employee’s ability to work.

In light of the above purpose of the Stockholm option system and the method of its exercise, etc., the Stockholm options granted by a foreign parent company to the Plaintiffs are secured and maintained as necessary human resources by lowering the market price of the Plaintiffs’ economic benefits, while making efforts to increase the share price through the improvement of the performance of domestic subsidiaries and allowing the Plaintiffs to acquire the benefits of exercise by exercising the Stockholm options if the share price increases by such efforts. In addition, it is naturally planned that the Plaintiffs can obtain the benefits of exercise of the Stockholm options by granting the Stockholm options to the Plaintiffs, as well as that it is an essential element that is inherent in the Stockholm options system. Accordingly, from the perspective of the Plaintiffs, it can be deemed that the Stockholm options was granted by expectation of the above benefits of exercise of the Stockholm options and providing labor to domestic subsidiaries.

(B) On the other hand, the existence and amount of profit from the Stockholm option exercise is affected by the determination of the price change after the Stockholm option was granted and the time when the person to be given the Stockholm option was exercised, and it is difficult to view that there was a correlation between the quality and quantity of the work provided by the employee and the quality of the work provided by the employee.

However, in the event that the Plaintiffs once exercised Stockholm, a foreign parent company is obligated to deliver stocks to the Plaintiffs as the price of exercise determined in advance, so economic benefits equivalent to the difference between the market price and the exercise price as determined at the time of the exercise shall be granted to the Plaintiffs, and as a result, the Plaintiffs gain profits from acquiring stocks at a price lower than the market price. This can be said to be a result of an agreement between a foreign parent company and the Plaintiffs to the effect that the foreign parent company will transfer the economic benefits equivalent to the difference between the market price and the exercise price at the time of the exercise of the right to the Plaintiffs at the time of the exercise of the right to the Plaintiffs. In other words, the Plaintiffs’ economic benefits and the economic sacrifice of the foreign parent company, which is a foreign parent company granting the Stockholm option, are payment of economic rehabilitation equivalent to the profits from the exercise of the Stockholm option, while the foreign parent company, which is a foreign parent company granting the Stockholm option, are in a quid pro quo relationship.

(C) Ultimately, in light of the aforementioned various circumstances, i.e., the objective of the Stockholm option system to secure and maintain able executives and employees and to promote a high-quality work in the future, the indivisible relationship between the Stockholm option and the labor, the occurrence of profit from exercising the Stockholm option is an essential element of the Stockholm option system, and the relationship between the employee’s labor and the stock owner cannot be denied, etc. In light of the fact that the Plaintiffs’ exercising profit from the Stockholm option is based on a certain correlation or economic rationality with the labor provided by the Plaintiffs, and that there is no definite correlation between the quality and quantity of the labor provided by the Plaintiffs and the economic interest that the Plaintiffs acquired, it cannot be viewed as different solely on the ground that there is no conclusive correlation between the quality and quantity of labor provided by the Plaintiffs.

(3) As to the difference between the employer under an employment contract and the Stockholm option provider

(A) As seen earlier, Article 20(1)1 (a) of the Income Tax Act only provides that “the salary, salary, etc., and other benefits similar thereto, which are received from the provision of labor” as to wage and salary income does not require the employer and the payer to coincide with it as a premise for constituting wage and salary income. Moreover, the Income Tax Act classifys income into interest income, dividend income, real estate rental income, business income, wage and salary income, temporary property income, pension income, other income, retirement income, income, forestry income, and forest income. Such classification of each income according to its source or nature is intended to consider the difference of each taxable capacity in calculating the amount of income, applying the tax rate, etc. However, in light of the fact that no difference exists between the nature of income and the taxable capacity depending on whom the person who is liable to pay the benefits, it is difficult to view that there is a reasonable reason to require the person who is the employer and the payer to be the same. Therefore, the circumstance that the employer does not coincide with the wage does not constitute one ground for determining whether the wage is paid due to work or labor.

Ultimately, as seen earlier, the Income Tax Act provides for the scope of wage and salary income in the form of an exemplary legislation, not a specific way to list it, and in view of the fact that wage and salary income is included in the wage and salary income if the substance of the wage offered and received from an employer or a person corresponding thereto falls under the wage and salary income if it is deemed that the economic benefit that the employee receives from the employer or a person corresponding thereto is a consideration for labor provided in accordance with the employer’s direction and order based

(B) In the instant case, the foreign parent company listed in the [Attachment List] is a company with 100% shares for the domestic subsidiary company for which the plaintiffs worked, and the foreign parent company grants Stockholm options to the plaintiffs, who are employees of the domestic subsidiary company, because the shares of the domestic subsidiary form part of the assets of the foreign parent company, and the performance of the subsidiary can increase the company's interests by increasing the assets of the foreign parent company if the shares of the domestic parent company are improved by the efforts of the employees of the domestic subsidiary company. This accords with the original purpose of the Stockholm options system to secure excellent human resources and offer high-quality jobs, as in the case of granting Stockholm options to the employees of the company.

Therefore, considering these circumstances, it is reasonable to view that the saw options of this case granted by a foreign parent company to the Plaintiff, etc., who is an employee of a domestic subsidiary, were paid in consideration of the Plaintiffs’ non-independent, labor, and labor provided on the basis of “employment contract or any other similar cause.” In this case, the difference between the employer and the Stockholm options grantr does not affect the fact that the Stockholm options of this case constitute earned income.

(4) Whether the benefits from the Stockholm options can be subject to taxation

(A) The Plaintiffs asserted to the effect that each of the instant Stockholm options benefits cannot be subject to taxation, on the grounds that it is merely a benefit that the subject of taxation ought to be Stockholm options itself, or that the benefit accrued at the time of the Stockholm options is merely a benefit obtained at a price lower than the market price, and that the amount of final benefit is not determined until the disposal of the stocks acquired at the time of the Stockholm options and cashizing the stocks acquired at the time of the Stockholm options.

(B) While there may be room to view that the Stockholm option itself holds a certain economic value as the right of expectation or formation in the future, in order for a certain economic benefit to constitute an earned income under Article 20(1) of the Income Tax Act, such economic benefit should be recognized as constituting an income under the Income Tax Act, i.e., an economic benefit increased a tax-bearing capacity. Stockholm option itself is not a right to demand delivery of shares as a pre-sale right or a pre-sale right arising out of a similar legal relationship, but is merely an economic benefit that can only establish a stock transfer contract, and as such, it is difficult to regard such Stockholm option itself as an economic benefit that increases the tax-bearing capacity on the ground that it is difficult to regard it as an economic benefit that is equivalent to the difference between the share price at the time of the exercise and the exercise price at the time of the exercise, as seen earlier, not only can it be distinguished from the Stockholm option itself, but also can be deemed as an economic benefit that can increase the tax-bearing capacity different from the Stockholm option.

(C) Meanwhile, Article 39(1) of the Income Tax Act provides that "the year to which the total amount of income and necessary expenses of a resident accrue shall be the year to which the date when the necessary expenses are determined, shall be the year in which the total amount of income and necessary expenses are determined." Thus, the profit at the time of the Stockholm option is the profit acquired at lower than the market price and its own profit does not yet be cashized, and there may be changes in the scale of final profit depending on the price of the stocks in the future. However, in order for the income to be determined in the year to which the income belongs pursuant to the above provision, it is not necessary to realize the income in a specific case by taking into account the management, control and income-generating, the degree of the income generated, and the timing of securing the taxpayer's fees, and it is appropriate to deem that the profit at the time of the exercise of the Stockholm option, which is likely to freely dispose of the stocks acquired by the plaintiffs, has been realized or realized at the time of the exercise of the Stockholm option (see Supreme Court Decision 91Nu8180, June 22222, 1998).

(D) If so, the Stockholm option exercise profit is deemed to constitute earned income in the taxable period to which the time of the exercise belongs, and thus, the instant taxation that takes the subject of taxation as the exercising profit of the Stockholm option is lawful.

(5) Whether legal grounds for the instant taxation disposition exist

(A) In 197 to 200, the time when the plaintiffs exercised Stockholm options, there was no direct and explicit provision on Stockholm options under the Income Tax Act and the Enforcement Decree thereof. However, Article 38(1) of the Enforcement Decree of the amended Enforcement Decree specifies the profits from the exercise of Stockholm options as earned income, and Article 5 of the Addenda of the amended Enforcement Decree provides that "Article 38(1) of the amended Enforcement Decree shall apply from the income derived from the taxable period in which the date of its promulgation belongs." Thus, the issue is whether there is a legal basis for the instant taxation.

(C) In full view of the provisions of Article 20 of the Income Tax Act and Article 38 (1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 17825, Dec. 30, 2002; hereinafter “former Enforcement Decree”), the scope of wage and salary income subject to income tax is, in principle, determined pursuant to Article 20 of the Income Tax Act, and the scope of wage and salary income under Article 38 (1) of the former Enforcement Decree of the Income Tax Act shall include the following income in the scope of wage and salary income under Article 20 of the Income Tax Act. It is interpreted that the provision of Article 38 (1) of the former Enforcement Decree of the Income Tax Act prior to the amendment is a provision that only list the types of wage and salary income.

Furthermore, considering that the Income Tax Act comprehensively provides for earned income, Article 5 of the Addenda to the Enforcement Decree of the Act does not stipulate that profits from the exercise of Stockholm prior to the amendment of the same Enforcement Decree cannot be taxed as earned income, but it shall be interpreted that after the amendment of the above Enforcement Decree, it can be taxed by applying Article 38(1)17 of the same Enforcement Decree to profits from the exercise of Stockholm options generated in the taxable period in which the date of promulgation of the above Enforcement Decree belongs.

(c)Therefore, regardless of the application of Article 5 of the Addenda to the revised Enforcement Decree, each of the dispositions of this case is a legitimate disposition based on Article 20(1) of the Income Tax Act [Article 13-2(1) of the former Tax Reduction and Exemption Control Act (amended by Act No. 5195, Dec. 30, 1996) which was enforced on January 1, 1997, prior to the revision of the above Enforcement Decree does not regard as earned income the benefits derived from the exercise of Stockholm options granted to employees, such as a certain start-up corporation, as an earned income, by providing that the benefits from the exercise of Stockholm options fall under the original earned income];

(6) Whether the imposition of additional tax in this case is lawful

In order to facilitate the exercise of taxation rights and the realization of tax claims under the tax law, additional tax is an administrative sanction imposed as prescribed by individual tax law in cases where taxpayers violate various duties, such as a return and tax payment, without justifiable grounds, and it is unreasonable for them to be aware of their duties. Thus, unless there are justifiable grounds to believe that it is unreasonable for them to expect them to fulfill their duties, it shall be imposed as to non-performance of their duties under the tax law (see, e.g., Supreme Court Decision 2001Du8100, Feb. 14, 2003). In light of the above, since the National Tax Service expressed that it constitutes an earned income from exercising Stockholm options after around 1986, the Plaintiffs did not have any justifiable grounds to recognize it as being subject to imposition of additional tax under the tax law and the Enforcement Decree of the Income Tax Act from 1997 to 200, and there was no reason to acknowledge it as to whether it constitutes a direct or non-performance of the duty under the tax law.

3. Conclusion

Therefore, the plaintiffs' claims seeking revocation on the grounds that each of the dispositions of this case is unlawful are all dismissed. The judgment of the court of first instance is just in this conclusion, and all of the appeals of the plaintiffs are dismissed. It is so decided as per Disposition.