[1] Where a corporation acquires real estate and uses it directly for business affairs, etc. on the corporate register following the grace period, and where real estate continues not to be used for business affairs even after the grace period expires, the scope of "period deemed not related to business affairs" under Article 26 (9) 1 of the Enforcement Rule of the Corporate Tax Act

[2] Whether a divided corporation’s transfer of assets to a corporation established through division by succession through a spin-off constitutes a transfer of assets under the Corporate Tax Act (affirmative)

[3] Whether a corporation whose main business is real estate sales can be deemed to have used the real estate sales land directly for the corporation’s business (affirmative), and whether it can be viewed differently by citing Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act, which is only a part of the criteria for exclusion of non-business assets (negative)

[4] In a case where a corporation whose main business is real estate sales transfers real estate through physical division, etc. after the grace period expires, whether it constitutes “cases of transfer without using it for business” under the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act (negative), and whether only the period from the day after the grace period expires to the day before direct use through transfer constitutes a period for which it has no relation to business (affirmative)

[1] Where a corporation acquires real estate and uses it directly for business affairs on the corporate register following the grace period, the period from the date following the expiration of the grace period to the date of direct use pursuant to the main sentence of Article 26 (9) 1 of the Enforcement Rule of the Corporate Tax Act shall be the period not related to business affairs, but where the real estate is not used for business affairs even after the expiration of the grace period, the entire period from the acquisition date to the date of

[2] Generally, if a corporation transfers its assets, the transfer value of assets constitutes gross income that is generated from transactions that increase net assets, and the book value, etc. of assets at the time of transfer becomes deductible expenses by becoming deductible expenses. In this case, the income of a corporation resulting from transfer transactions constitutes gains from the deduction of deductible expenses from gross income.

In the case of a spin-off, a corporation established through division succeeds to the rights and obligations of a divided corporation as prescribed by the division plan (Article 530-10 of the Commercial Act), and accordingly succession of assets is also carried out. Article 47(1) of the Corporate Tax Act provides for special provisions on deferred taxation, under the premise that a divided corporation acquires the stocks of a corporation established through division due to a spin-off, the transfer of assets due to a spin-off falls under the transfer of assets realizing gains from transfer of assets, and on the premise that the transfer of assets due to a spin-off falls under the transfer of assets, the transfer of assets due to a spin-off falls under the transfer of assets. This is wholly introduced under the Corporate Tax Act amended by Act No. 5581 of Dec. 28, 1998. Furthermore, Article 26(5)25 of the Enforcement Rule of the Corporate Tax Act provides for a “real estate transferred within a grace period due to a split-off” of real estate that is excluded from the real estate irrelevant to business.

Therefore, a divided corporation’s transfer of assets to a newly established corporation by way of succession through a physical division constitutes a transfer of assets under the Corporate Tax Act.

[3] Article 49(1)1(b) of the Enforcement Decree of the Corporate Tax Act provides various special provisions in consideration of the characteristics of the transaction itself of real estate, unlike a general corporation, in the case of a corporation that runs a real estate sales business as its main business. The main text of Article 49(1)1(b) of the Enforcement Decree of the Corporate Tax Act provides that “real estate transferred during a grace period without directly using it for the corporation’s business,” but excludes “the corporation that runs a real estate sales business as its main business as provided by Ordinance of the Ministry of Strategy and Finance” under the proviso. Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act provides that the real estate acquired by a corporation that runs a real estate sales business shall be deemed directly used for its business if it is transferred within the grace period. Article 26(7) and 26(1)2 of the Enforcement Rule of the Corporate Tax Act provides that real estate development and supply business (including graveyard sales business) and building construction business (limited to a self-construction business) under the Korean Standard Industrial Classification.

On the other hand, Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act, supra, reflects the business characteristics of a corporation that mainly engages in real estate sales business by applying the case where it can be deemed that real estate was directly used for business among the real estate transferred within the grace period.

Therefore, the transfer of land for real estate sale itself by a corporation that mainly engages in real estate sale shall be deemed to have been directly used for the corporation’s business, and it cannot be viewed differently by citing Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act, which is only a part of the exclusion criteria

[4] The case where a corporation mainly engaged in real estate sales transfers real estate through physical division, etc. following the grace period after the acquisition of the real estate for sale does not constitute “cases where the real estate is transferred without using it for business” under the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act. Therefore, pursuant to the proviso, the period from the date following the grace period under the main sentence to the date of transfer shall not be the whole period from the date of acquisition of real estate

[1] Article 27 subparagraph 1 and Article 28 (1) subparagraph 4 (a) of the former Corporate Tax Act (amended by Act No. 9898 of Dec. 31, 2009); Article 49 (1) subparagraph 1 (a) and (2) of the Enforcement Decree of the Corporate Tax Act; Article 26 (2) subparagraph 2 and Article 26 (9) subparagraph 1// [2] of the Enforcement Rule of the Corporate Tax Act / [3] Article 530-10 of the Commercial Act; Article 47 (1) of the former Corporate Tax Act (amended by Act No. 6047 of Dec. 28, 199); Article 26 (5) 25 of the Enforcement Rule of the Corporate Tax Act / [3] Article 49 (1) subparagraph 1 (b) of the Enforcement Decree of the Corporate Tax Act; Article 26 (1) subparagraph 2 and (3) 2 of the Enforcement Rule of the Corporate Tax Act; Article 49 (1) subparagraph 4-1) of the Corporate Tax Act

Busan High Court Decision 200Na1448 decided May 1, 200

The director of the tax office

Seoul High Court Decision 2013Nu51291 decided October 17, 2014

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. A. Article 28(1)4(a) and Article 27 subparag. 1 of the Corporate Tax Act provides that a certain ratio of interest on loans paid during each business year by a domestic corporation that acquires or holds assets as prescribed by the Presidential Decree, which are deemed not directly related to the business of the corporation (hereinafter “property irrelevant to business”) shall not be included in deductible expenses for the purpose of calculating the amount of income for the pertinent business year (Article 28(1)4(a) and Article 27 subparag. 1 of the Corporate Tax Act before the amendment by Act No. 9898, Dec. 31, 2009; Article 27 subparag. 1 of the former Corporate Tax Act; and the current Corporate Tax Act also provides the same contents). This aims

Article 49(1)1(a) of the Enforcement Decree of the Corporate Tax Act upon delegation refers to the real estate that is not directly used for the business of the corporation as an asset irrelevant to the business, so that the grace period prescribed by Ordinance of the Ministry of Strategy and Finance expires, and Article 49(1)1(a) of the Enforcement Decree of the Corporate Tax Act provides for matters necessary for the determination of whether the real estate falls under the provisions of paragraph

Accordingly, Article 26(2)2 of the Enforcement Rule of the Corporate Tax Act provides for one of the business affairs of the above corporations as “the purpose business indicated in the corporate register as of the end of each business year.” Article 26(9)1 of the Enforcement Rule provides that the period in which “real estate falling under Article 49(1)1(a) of the Decree is deemed irrelevant to the business affairs.” The main text of Article 26(9)1 of the Enforcement Rule provides that “the period excluding the period overlapping with the grace period during which the relevant real estate is not used directly for business affairs,” and the proviso provides that “the period from the date of acquisition to the date of transfer where the relevant real estate

Therefore, where a corporation acquires real estate and uses it directly for business affairs on the corporate register after the grace period expires, the period from the date following the expiration of the grace period to the date of direct use pursuant to the main sentence of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act, but where the real estate is not used for business affairs even after the grace period expires, the whole period from the date of acquisition to the date of transfer shall be the period irrelevant to business affairs

B. Generally, if a corporation transfers its assets, the transfer value of assets constitutes gross income that is generated from transactions that increase net assets, and the book value, etc. of assets at the time of transfer becomes deductible expenses by becoming deductible expenses. In such cases, income of a corporation resulting from transfer transactions constitutes gains from transfer after deducting deductible expenses from gross income.

In the case of a spin-off, a corporation established through division succeeds to the rights and obligations of a divided corporation as prescribed by the division plan (Article 530-10 of the Commercial Act), and accordingly succession of assets is also carried out. Article 47(1) of the Corporate Tax Act provides for special provisions on deferred taxation, under the premise that a divided corporation acquires the stocks of a corporation established through division due to a spin-off, the transfer of assets due to a spin-off falls under the transfer of assets realizing gains from transfer of assets, and on the premise that the transfer of assets due to a spin-off falls under the transfer of assets, the transfer of assets due to a spin-off falls under the transfer of assets. This is wholly introduced under the Corporate Tax Act amended by Act No. 5581 of Dec. 28, 1998. Furthermore, Article 26(5)25 of the Enforcement Rule of the Corporate Tax Act provides for a “real estate transferred within a grace period due to a split-off” of real estate that is excluded from the real estate irrelevant to business.

Therefore, a divided corporation’s transfer of assets to a newly established corporation by way of succession through a physical division constitutes a transfer of assets under the Corporate Tax Act.

C. Article 49(1)1(b) of the Enforcement Decree of the Corporate Tax Act provides for various special provisions in consideration of the characteristics that the transaction of real estate, unlike a general corporation, constitutes the corporation’s business. The main sentence of Article 49(1)1(b) of the Enforcement Decree of the Corporate Tax Act stipulates “real estate transferred without direct use in the corporation’s business during the grace period,” but excludes “the corporation operating real estate sales business as its main business as provided by Ordinance of the Ministry of Strategy and Finance” under the proviso. Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act, which leads to this, provides that real estate acquired by a corporation operating real estate sales business, shall be deemed directly used in the business during the grace period. Article 26(7) and 26(1)2 of the Enforcement Rule of the Corporate Tax Act provides that real estate development and supply business (including graveyard sales business) and building construction business (limited to self-owned construction business) under the Korean Standard Industrial Classification, shall be subject to the grace period of five years for the sale and purchase-use real estate acquired by a corporation (including the Korean Standard Industrial Classification).

Meanwhile, Article 26 (3) 2 of the Enforcement Rule of the Corporate Tax Act, supra, reflects the business characteristics of a corporation that mainly engages in real estate sales, when it can be deemed that the real estate was directly used for business among the real estate that was transferred within the grace period.

Therefore, the transfer of land for real estate sale itself by a corporation that mainly engages in real estate sale shall be deemed to have been directly used for the corporation’s business, and it cannot be viewed differently by citing Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act, which is only a part of the exclusion criteria

D. Ultimately, the case where a corporation mainly engaged in real estate sales transfers real estate for sale through physical division, etc. following the grace period following the acquisition of real estate for sale does not constitute “cases where the real estate is transferred without using it for business” under the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act. Therefore, pursuant to the proviso, the period from the date following the grace period under the main sentence to the date of transfer is not entirely the period from the date of acquisition of real estate

2. According to the reasoning of the lower judgment, the following facts are revealed.

A. The Plaintiff, a corporation that mainly engages in real estate development and supply business, etc., acquires and owns real estate for sale in order from 1997 to 2004 (hereinafter “instant land”). On December 30, 2009, the Plaintiff established a secondary housing company (hereinafter “non-permanent housing”) by spin-off on the housing construction sector, etc. on December 30, 2009, and then transferred the instant land to non-permanent housing due to corporate division.

B. The Plaintiff reported corporate tax for the business year of 2009 by applying the main sentence of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act. In other words, the instant land is not a business-free asset during the period from the date of acquisition to the date before the lapse of the five-year grace period, but constitutes a business-free asset during the period from the date of transfer to the non-permanent house following physical division.

In this regard, the Defendant applied the proviso of Article 26 (9) 1 of the Enforcement Rule of the Corporate Tax Act to the Plaintiff, which imposes corporate tax for the business year 2009 on the Plaintiff. Since the Plaintiff continuously transferred the instant land without using it for business purposes, it constitutes assets irrelevant to business affairs, and accordingly, the interest paid on the acquisition fund should be excluded from deductible expenses.

3. Examining these facts in light of the aforementioned legal principles, since the Plaintiff, a corporation that mainly engages in real estate sales, transfers the instant land, which is a sale real estate, to a sub-permanent house after the grace period expired, not entirely the period from the acquisition date to the date of transfer, but only the period from the date following the grace period to the date of transfer to the date of direct use through the transfer ought to be deemed as

4. Nevertheless, the lower court determined that the instant disposition was lawful on the erroneous premise that, where a corporation mainly engaged in real estate sales transfers the real estate for sale after the grace period expires, the entire period from the date of acquisition to the date of transfer should be deemed a period not related to the business. In so determining, the lower court erred by misapprehending the legal doctrine on the scope of assets irrelevant to business, thereby adversely affecting

5. The plaintiff's appeal is with merit, and 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

Justices Min You-sook (Presiding Justice)