[1] Whether "the holding of stocks" under the provision that does not include interest on a corporation's loan, which holds stocks of another corporation under the former Corporate Tax Act, in deductible expenses, includes the acquisition of stocks under another person's name (affirmative)

[2] Legislative intent of the provision that does not include interest on a corporation’s loan holding stocks of another corporation under the former Corporate Tax Act in deductible expenses, and whether the provisions of the former Enforcement Decree of the Corporate Tax Act are invalid that are contrary to the parent law (negative)

[1] The issue of holding a corporation's stocks under Article 18-3 (1) 1 of the former Corporate Tax Act (amended by Act No. 4282 of Dec. 31, 1990) and Article 18-3 (2) 1 of the former Corporate Tax Act (amended by Act No. 4664 of Dec. 31, 1993) that provides for the exclusion of deductible expenses for interest on loans that hold another corporation's stocks under the principle of substantial taxation under Article 14 of the Framework Act on National Taxes shall be based on the substance regardless of its title. Thus, the issue of holding a corporation's stocks shall not be deemed as holding a stocks without acquiring the stocks of another corporation under its own name.

[2] The provisions of Article 18-3 (1) 1 of the former Corporate Tax Act (amended by Act No. 4282 of Dec. 31, 1990) and Article 18-3 (2) 1 of the former Corporate Tax Act (amended by Act No. 4664 of Dec. 31, 1993) are to regulate not only the acquisition of stocks of another corporation with loans, but also the continued holding of stocks of another corporation. Thus, the corporation acquires stocks of another corporation with loans, or continuously holding stocks of another corporation with equity capital, but it cannot be said that there are different effects on the corporation. Thus, the non-deductible interest should not be limited to the interest paid for the loan directly required for the acquisition or holding of stocks of another corporation. Thus, the provisions of Article 43-2 (1) and (3) of the former Corporate Tax Act (amended by Presidential Decree No. 13195 of Dec. 31, 190) are not applicable to the exclusion of deductible expenses under the provisions of the Enforcement Decree of the Corporate Tax Act.

[1] Article 14 of the Framework Act on National Taxes, Article 18-3(1)1 of the former Corporate Tax Act (Amended by Act No. 4282, Dec. 31, 1990; see current Article 28(2)1); Article 43-2(1) and (3) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 13195, Dec. 31, 1990; see current Article 28(2) of the Corporate Tax Act); Article 18-3(2)1 of the former Corporate Tax Act (Amended by Act No. 4664, Dec. 31, 1993; see current Article 28(2)1 of the former Corporate Tax Act (Amended by Act No. 4281, Dec. 31, 1992; see current Article 19-3(2)1 of the former Corporate Tax Act (Amended by Presidential Decree No. 9413, Dec. 2, 9992)

Musan Construction Co., Ltd. (Attorney Kim Young-soo, Counsel for the plaintiff-appellant)

Head of Yeongdeungpo Tax Office

Seoul High Court Decision 96Gu30368 delivered on June 24, 1998

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

We examine the grounds of appeal.

1. Details of the relevant regulations;

(a) Provisions applicable to the business year 190 ( January 1, 1990, December 31, 1990);

Article 18-3 (1) of the former Corporate Tax Act (amended by Act No. 4282 of Dec. 31, 1990) provides that among interest on loans paid during each business year by a domestic corporation which owns assets falling under any of the following subparagraphs, the amount determined by the Presidential Decree within the limit of the total amount of assets in each business year shall not be included in deductible expenses for the calculation of income amount of each business year, and Article 43-2 (1) of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 13195 of Dec. 31, 190) provides that "the amount determined by the Presidential Decree" refers to the amount calculated by the formula in each of the following subparagraphs, and subparagraph 1 provides that "payment interest" 】 (Article 18-3 (1) 1 and 2 of the Act refers to the total amount of assets falling under Article 18-3 (1) 1 and 2 of the Act and Article 43-2 (1) of the Enforcement Decree of the Corporate Tax Act provides that stocks acquired by an institutional investor falling under subparagraph 13 (1).

(b)the provisions applicable to business years 191 and 1992;

Article 18-3 (2) of the Corporate Tax Act (amended by Act No. 4664 of Dec. 31, 1993) provides that where a corporation which holds borrowings in excess of the standards prescribed by the Presidential Decree holds assets falling under any of the following subparagraphs among the interest on borrowings paid during each business year shall not be included in deductible expenses in calculating the income amount for each business year, and Article 43-2 (6) of the Enforcement Decree of the Corporate Tax Act (amended by the Presidential Decree No. 13803 of Dec. 31, 1992) provides that the amount calculated in accordance with the Presidential Decree shall not be included in deductible expenses, and Article 43-2 (6) of the Enforcement Decree of the Corporate Tax Act (amended by the Presidential Decree No. 13803 of Dec. 31, 1992) provides that the amount calculated in accordance with the classification of each of the following subparagraphs shall be the total amount calculated in accordance with the same formula as that of the above paragraph, and subparagraph 1 provides that "stocks prescribed by the Presidential Decree" means stocks falling under any of the following subparagraphs:

2. Judgment on the grounds of appeal

A. On the first and third grounds for appeal

According to the principle of substantial taxation under Article 14 of the Framework Act on National Taxes, whether a corporation owns stocks under the above provisions of the Corporate Tax Act shall comply with the substance regardless of its title. Thus, it cannot be said that the Plaintiff acquired the stocks of the non-party company under its own name without acquiring them under its own name, and that they do not hold stocks. In addition, even if the Plaintiff acquired the stocks of the non-party company, as alleged in the grounds of appeal, insofar as the instant stocks do not constitute stocks that are excluded under the provisions of the Enforcement Decree of the Corporate Tax Act, so long as the instant stocks do not constitute stocks that are excluded under the above provisions of the Enforcement Decree of the Corporate Tax Act

B. On the second ground for appeal

In sum, the argument in the grounds of appeal is that each of the above provisions of the Corporate Tax Act is aimed at preventing the aggravation of the financial structure by focusing on excessive external loans by a corporation. In light of these provisions, the non-deductible interest should be limited to the scope of interest paid on loans directly used to acquire or hold stocks of another corporation. However, since each of the above provisions of the Enforcement Decree of the Corporate Tax Act providing the method of calculating the non-deductible interest, it should be deemed null and void within such scope.

However, even if the purport of the above provision of the Corporate Tax Act is alleged in the grounds of appeal, it should be deemed that the corporation acquires the shares of another corporation with borrowed money as well as its holding of the shares of another corporation, and since it cannot be said that the corporation has acquired the shares of another corporation with borrowed money, or that it has appropriated other expenses as borrowed money due to holding the shares of another corporation with equity capital, or that the effect on the corporation is different, the non-deductible interest should not be limited to the interest paid on borrowed money directly required for the acquisition or holding of shares of another corporation. Thus, the above provision of the Enforcement Decree of the Corporate Tax Act does not limit the non-deductible interest to the scope of the interest paid on borrowed money directly required for the acquisition or holding of shares of the other corporation. Thus, it cannot be said that the above provision of the Enforcement Decree of the Corporate Tax

3. 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 on the bench.

Justices Shin Sung-sung (Presiding Justice)