[1] In the case of the denial of wrongful calculation under Article 52 of the Corporate Tax Act, the method of determining whether the market price, which is the basis for inclusion in earnings, is a type of wrongful calculation that is different from the market price, and constitutes monetary lending or provision

[2] Whether Article 27 subparagraph 1 of the Corporate Tax Act, which provides for expenses for the acquisition and management of real estate for non-business use, can be applied to a corporate company's company house (negative)

[1] Where a corporation provides a related party with money and other assets or services free of charge or at an interest rate, tariff, or rent lower than the market price, and thereby it is deemed that a corporation’s tax burden on the corporation’s income has been reduced unfairly, it shall be deemed as an unfair act and calculation, and the difference between the market price and its income should be included in its gross income (Article 52(1), (2), and (4) of the Corporate Tax Act, and Articles 88(1)6 and 89(5) of the Enforcement Decree of the Corporate Tax Act). In such cases, the market price shall be calculated differently in accordance with Article 89(3) of the Enforcement Decree of the Corporate Tax Act in the case of lending money, and in the case of providing other assets or services, pursuant to Article 89(1), (2), and (4) of the Enforcement Decree of the Corporate Tax Act in accordance with Article 89(2) and (3) of the Corporate Tax Act (amended by Presidential Decree No. 25194, Feb. 21, 20

Whether a type of wrongful calculation constitutes a lending of money or a provision of assets or services shall be reasonably determined in accordance with the transaction concept and social norms, comprehensively taking into account the transaction form and substance, such as the content and form of the transaction, intent of the parties, the details of the contract, the actual and economic consideration relationship of the transaction price, the progress

[2] According to Articles 27 and 28 (1) 4 (a) of the Corporate Tax Act, Article 49 (1) 1 (a) and Article 50 (1) 2 of the Enforcement Decree of the Corporate Tax Act, and the structure, language, and legislative history and purport of the Corporate Tax Act, Article 27 subparagraph 2 of the Corporate Tax Act concerning non-business-free expenditure may apply to a corporate company's company's company's company's company's company's company's company's company's company's company's house. Article 27 subparagraph 1 of the Corporate Tax Act concerning

[1] Article 52(1), (2), and (4) of the Corporate Tax Act; Article 89(2) and (3) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 25194, Feb. 21, 2014); Articles 88(1)6, 89(1), (4), and (5) of the Enforcement Decree of the Corporate Tax Act / [2] Articles 27 and 28(1)4(a) of the Corporate Tax Act; Article 49(1)1(a), and Article 50(1)2 of the Enforcement Decree of the Corporate Tax Act

[1] [2] Supreme Court Decision 2014Du4301 Decided August 29, 2017 (Gong2017Ha, 1875)

KSS Shipping Co., Ltd. (Attorney Kim Yong-deok, Counsel for the plaintiff-appellant)

Head of tax office and one other

Seoul High Court Decision 2017Nu30292 decided July 20, 2017

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. Wrongful calculation (Ground of appeal No. 1)

A. Where a corporation provides a related person with money and other assets or services free of charge or at an interest rate, tariff, or rent lower than the market price, and thereby it is deemed that the corporation’s tax burden on the corporation’s income has been reduced unfairly, it shall be deemed as an unfair calculation and shall include the difference between the market price and its gross income (Article 52(1), (2), and (4) of the Corporate Tax Act, and Articles 88(1)6 and 89(5) of the Enforcement Decree of the Corporate Tax Act). In such cases, the market price shall be calculated differently in accordance with Article 89(3) of the Enforcement Decree of the Corporate Tax Act in the case of lending money, and in the case of providing other assets or services, pursuant to Article 89(1), (2), and (4) of the Enforcement Decree of the Corporate Tax Act in accordance with Article 89(2) and (3) of the Enforcement Decree of the Corporate Tax Act (referring to the foregoing Article before being amended by Presidential Decree No. 25194, Feb. 21, 201

Whether a type of wrongful calculation constitutes a lending of money or a provision of assets or services ought to be reasonably determined in accordance with the transaction concept and social norms, comprehensively taking into account the transaction form and substance, such as the content and form of the transaction, intent of the parties, the process of concluding the contract, the actual and economic consideration relationship of the transaction price, and the progress of the transaction (see Supreme Court Decision 2014Du4301, Aug. 29, 2017).

B. Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following facts.

(1) On October 26, 2005, the Plaintiff purchased the instant real estate from Fink Co., Ltd. for the purpose of providing it as accommodation and resting places for domestic and foreign customers who return to the Plaintiff, on July 28, 2006, and its ground buildings (hereinafter referred to as “instant real estate by combining the land and buildings”) by uniting them, and completed the registration of ownership transfer on June 1, 2007. However, on October 20, 2005, the Plaintiff stated that the Plaintiff acquired the instant real estate for the purpose of providing it as accommodation and resting places for domestic and foreign customers who return to the Plaintiff. Even if the Plaintiff completed the registration as its own ownership, there is no circumstance to deem that the Plaintiff failed to acquire the instant real estate.

(2) The Nonparty, as the Plaintiff’s founder and the major shareholder, has been employed as an adviser since 2002. Since August 2005, upon the medical personnel’s recommendation, the Nonparty: (a) completed the instant real estate sold in lots from September 2005 to Jeju-do; (b) since April 2007, the Nonparty entered into a lease contract with a rent of 18 million won per annum from October 29, 2008; and (c) extended the lease contract by December 31, 2013 when increasing the rent. It is difficult to find other circumstances to deem that the Nonparty directly purchased the instant real estate.

(3) The Defendants included a sum of KRW 325,845,229 in the gross income for the business year from 2011 to 2013, and disposed of the amount included in the gross income as a bonus to the Nonparty on the ground that the Nonparty lent the acquisition fund, etc. to the Plaintiff in acquiring the instant real property, which constitutes a provisional payment without charge of business.

C. Examining in light of the aforementioned legal principles, the Plaintiff’s acquisition of the instant real estate at its own expense and provision of the instant real estate at a free or at a low price to the Nonparty. The Nonparty cannot be deemed as having acquired the right to use, profit from, or dispose of the instant real estate as an owner beyond his/her temporary use and benefit right as his/her employee or lessee solely on the ground that the Nonparty was actively involved in the new construction of the instant real estate or that there was no person other than the Nonparty who resided in the instant real estate. Moreover, there is no circumstance to deem that the Plaintiff had provided the instant real estate at a free or at a low price, compared to the case where the Plaintiff lent the instant real estate to the Nonparty for the purpose of reducing tax burden compared with the case where the Plaintiff lent the real estate to the Nonparty, there is no circumstance to deem that the Plaintiff had provided the instant real estate at a low price or at a low price. Accordingly, aside from counting the difference between the market price and its market price pursuant to Article 89(1), (2), and (4) of the Enforcement Decree of the

Nevertheless, the lower court determined that the Defendants’ disposition on this part was lawful by deeming the Plaintiff’s lending of the instant real estate acquisition fund to the Nonparty, which practically constituted a non-party’s transfer of the real estate acquisition fund, and thereby deemed as constituting a non-business-related provisional payment, and that the recognized interest was included in the gross income, and that the said disposition was lawful. In so determining, the lower court erred by misapprehending the legal doctrine

2. Expenditure in relation to non-business assets (Ground of appeal No. 2)

A. Article 27(1)1 of the Corporate Tax Act provides for “the acquisition and management expenses of assets irrelevant to business,” and Article 49(1)1(a)2 of the Enforcement Decree of the Corporate Tax Act provides for “other expenses unrelated to business,” with respect to the non-deductible of expenses unrelated to business of a corporation. Following delegation, Article 49(1)1(a) of the Enforcement Decree of the Corporate Tax Act provides that real estate not directly used for business of a corporation (hereinafter “real estate for non-business use”) shall be assets irrelevant to business of the corporation, and Article 50(1)2 of the Corporate Tax Act classifys the maintenance expenses, management expenses, and user fees of the company house used by an executive, who is a stockholder of the relevant corporation (excluding minority shareholders, etc. less than 1 per cent of the equity ratio), as other expenses unrelated to business. Meanwhile, Article 28(1)4(a) of the Corporate Tax Act provides that if assets irrelevant to business, the interest calculated by a specific formula among the loans shall be excluded

B. Upon citing the judgment of the first instance court, the lower court determined that: (a) the depreciation costs and maintenance costs of the instant real estate in the business year 2011 through 2013 pertaining thereto were excluded from deductible expenses; and (b) the Defendants’ initial grounds for disposition, which were disposed of as bonus to the Nonparty, were lawful. Moreover, the lower court did not separately determine that the Defendants’ additional grounds for disposition, which were disposed of as bonus to the Nonparty, were excluded from deductible expenses according to the depreciation costs and maintenance costs in the business year 2011 through 2013;

C. However, the lower court’s determination is difficult to accept for the following reasons.

According to the structure, language, amendment history, and purport of the aforementioned relevant statutes, Article 27 Subparag. 2 of the Corporate Tax Act concerning non-business expenses can be applied to a corporate company’s company house in certain cases, and Article 27 Subparag. 1 of the Corporate Tax Act concerning non-business real estate is not applicable (see Supreme Court Decision 2014Du4301, Aug. 29, 2017).

As seen above, the Plaintiff offered the instant real estate to the Nonparty, who was in office as a major shareholder and adviser for about 18 months at a low price, and thereafter, at a temporary dwelling for the medical treatment of his disease. As such, allowing an officer, who is a shareholder, to use a house for residence free of charge or for a fee, to use the house for the purpose of medical treatment of his/her disease, is subject to the provision on the provision of the company house, and as such, the provision on non-business real estate cannot be applied.

Nevertheless, the lower court determined otherwise, that the Defendants’ initial disposal of the instant real estate was lawful. In so determining, the lower court erred by misapprehending the legal doctrine on the relationship under Article 27 subparag. 1 and 2 of the Corporate Tax Act, and the scope of non-business real estate under the Corporate Tax Act, thereby failing to exhaust all necessary deliberations. The allegation in the grounds of appeal

3. Conclusion

The lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Chang-suk (Presiding Justice)