[Defendant-Appellant] Plaintiff 1 and 3 others (Attorney Ahn Byung-hee, Counsel for defendant-appellant)

The director of the tax office.

March 19, 2014

Seoul Administrative Court Decision 2012Guhap34594 decided June 28, 2013

1. Of the judgment of the court of first instance, the respective corporate tax (including additional tax) for the business year 2006 and 2007 shall be revoked.

2. The Defendant’s imposition disposition of KRW 368,603,690 (including additional taxes) of corporate tax for the business year 2006, March 2, 2012, and the imposition disposition of KRW 787,229,940 (including additional taxes) of corporate tax for the business year 207, April 2, 2012, each of which exceeds KRW 225,68,940, shall be revoked.

3. The plaintiff's remaining appeal is dismissed.

4. Of the total litigation costs, 70% is borne by the Plaintiff, and the remainder is borne by the Defendant, respectively.

The judgment of the first instance is revoked. The Defendant’s imposition of KRW 368,60,690 (including additional taxes) of corporate tax for the business year 2006, March 2, 2012, and the imposition of KRW 225,68,940 (including additional taxes) of corporate tax for the business year 2007, and the imposition of KRW 787,229,940 (including additional taxes) of KRW 225,68,940, and the imposition of KRW 774,158,470 (including additional taxes) of corporate tax for the business year 2008, and the imposition of KRW 1,384,456,80 (including additional taxes) of corporate tax for the business year 209, the imposition of KRW 858,568,880, corporate tax for the business year 2010, corporate tax for the business year 886,103,320 (including additional taxes) shall be revoked.

1. The part citing the judgment of the first instance

The reasoning of this court is as follows: “The circumstances leading up to the disposition,” “related Acts and subordinate statutes,” and “a fact-finding” are as stated in each corresponding part from 2th 9 to 3th 9th 9, and from 4th 20 to 17th 5th 5th 5th 5th 17th 20 of the judgment of the court of first instance. As such, each of them shall be cited in accordance with Article 8(2) of the Administrative Litigation Act

2. Parts to be newly used;

A. The plaintiff's assertion

1) The assertion on exceptional reasons for reinvestigations

Since the performance bonus paid by the Plaintiff to Nonparty 1 for the business year 2006 and the business year 2007 is separately determined for each business year, it cannot be deemed that it constitutes “the case where there are errors in connection with two or more business years,” which is the exceptional grounds for re-investigation.

2) The assertion on performance bonus

In light of the fact that the performance bonus to Nonparty 1 was paid according to the salary payment standards set by the board of directors reflecting Nonparty 1’s business performance, and that Nonparty 1 is not the controlling shareholder, the total amount of performance bonus should be included in the calculation of losses. However, the corporate tax imposition disposition, which was made in the calculation of losses, based on the premise that

3) argument as to service costs

In the contract with the Plaintiff and B&Sdipo (hereinafter “BSdipo”), the contract amount may be adjusted when additional costs are required or reduced due to price fluctuation, etc., and certain corporate profits have also been guaranteed. In order to perform the Plaintiff’s duty stipulated in the service contract with the B&Sdipo, the Plaintiff compensates for part of the increased labor cost and accumulated losses incurred to B&Sdipo in order to perform the Plaintiff’s duty stipulated in the service contract with the B&Sdipo, and it is reasonable to include them in deductible expenses as it constitutes not funding to a specially related person but economic rationality

B. Determination

1) Determination on the assertion on the exceptional reasons for re-investigation

A) Whether the case constitutes a reinvestigation

(1) Relevant statutes

Article 81-4 (2) of the former Framework Act on National Taxes (amended by Act No. 11604, Jan. 1, 2013) provides that "no tax official shall conduct reinvestigations on the same item of tax and the same taxable period unless any of the following is applicable," and Article 81-4 (2) of the same Act provides that "where there is clear evidence to acknowledge a suspicion of tax evasion; 1. Where it is necessary to conduct an investigation on the other party of tax evasion; 2. Where it is necessary to conduct an investigation on two or more business years; 3. Where an investigation is conducted following a decision on necessary disposition pursuant to Article 65 (1) 3 (including where it is applied mutatis mutandis under Articles 66 (6) and 81); 5. Other cases prescribed by Presidential Decree which are similar to subparagraphs 1 through 4, and Article 81-1 of the same Act provides that "tax investigation shall be conducted by combining and paying tax items related to the taxpayer's business, except as otherwise prescribed by Presidential Decree."

(2) Determination

As examined in the above facts, ① the Plaintiff has already submitted the list of shareholders, the minutes of the board of directors, and the resolution of the general meeting of shareholders from the first investigation to the Defendant after the 2003 business year, ② the Plaintiff’s “documents requesting the tax audit” includes: (a) the minutes of the board of directors from the 2005 business year to the 2008 business year; (b) the statement of Nonparty 2 also complies with them; (c) the corporate tax items were recovered from the first investigation to the 2006 business year and 2007 business year; and (b) the second investigation conducted the partial investigation of the 2006 business year and the entire investigation of the 2007 business year.

B) Whether the case constitutes an exceptional ground for re-audit

(1) The meaning of “cases where errors relating to two or more business years exist”

In light of the fact that a tax investigation should be conducted within such minimum scope as may be necessary for appropriate and fair taxation, and that a reinvestigation of the same tax item and taxable period seriously infringes on taxpayers’ rights and interests, such as taxpayers’ freedom of business, as well as the risk of arbitrary tax investigation by the tax authorities is low, there is a need to be prohibited except in exceptional cases that are obviously contrary to the principle of fair taxation, and that the legislative intent prohibiting re-audit includes not only the protection of taxpayers’ rights and interests, but also the encouragement of the advancement of the tax investigation technology, it is reasonable to interpret the scope of exceptions permitted to re-audit as limited.

From this point of view, the phrase “in cases where errors relating to two or more business years” under Article 81-4(2)3 of the former Framework Act on National Taxes are repeated each business year, and thus, the term “in cases where errors relating to two or more business years exist” refers to the cases where the opportunity to correct errors in a certain business year may be corrected together with the errors in the other business year. However, if any errors are related to all two or more business years, such errors refer to the cases where the two or more business years continue to exist in one cause, as well

(2) Determination

According to the above facts, the Plaintiff’s board of directors decided on November 8, 2005 that “in the event that the net income of the party exists, the performance bonus shall be paid to Nonparty 1 each year within the extent of 10% of the department stores and the hotel rental income, and the time and amount of payment shall be determined by the board of directors each year; ① the board of directors held on March 3, 2006 and the general meeting of shareholders held on March 22, 2006 set the limit of the executive remuneration as 3 billion won; ② the board of directors held on April 20, 206 set the performance bonus for Nonparty 1 at KRW 90 million; ② the board of directors held on March 6, 2007 and the board of directors held on March 16, 2007 set the limit of the executive remuneration as 5 billion won, but the board of directors held on May 15, 2007 set the performance bonus as 19.5 billion won.

As above, although the Plaintiff’s board of directors set the limit of performance bonus to Nonparty 1 on November 8, 2005, it is difficult to view that the resolution of the board of directors alone was made every year on the specific amount of performance bonus to be paid to Nonparty 1 and the payment of performance bonus to Nonparty 1, because it is merely “within 10% of the department store and hotel rental revenue,” and it is difficult to view that the resolution of the board of directors was made every year. ② Performance bonus paid to Nonparty 1 in the business year 2006 and 2007 was determined only by the general meeting of shareholders and the board of directors held each year, and the amount was determined specifically. In light of the above, performance bonus paid to Nonparty 1 in the business year 206 and 2007 should be based on the resolution of the general meeting of shareholders and the board of directors, and so long as the resolution of the general meeting of shareholders and the board of directors was made separately by each year, it is difficult to deem that it was arising from a single cause act

Therefore, it cannot be deemed that the Plaintiff’s payment of performance-based bonus to Nonparty 1 through a separate general meeting of shareholders and a board of directors in the business year 2006 and 2007 constitutes an exceptional reason for re-audit, and thus, it cannot be deemed that the Plaintiff’s payment of performance-based bonus to Nonparty 1 through a separate meeting of shareholders and a board of directors constitutes “cases where there are errors in connection with two or more business years.” The Defendant’s imposition of corporate tax (including additional tax) for the business year 2006 and 207 business years after re-audit

2) Determination on the assertion on performance bonus

Not more than 208, 2009, and 2010 only part of corporate tax for each business year.

In light of the above facts, the plaintiff's general meeting of shareholders and the board of directors only set the limit of executive compensation and did not set the specific amount of performance bonus for executive officers. The board of directors delegated the representative director with individual and specific payment standards or performance evaluation methods of performance bonus without specific grounds for payment or performance evaluation. The representative director decided the performance bonus for non-party 1 without any supporting material for performance evaluation, the plaintiff should be deemed to have paid the performance bonus to non-party 1 without the payment standard, and the non-party 1's performance performance support lack of objective material to support the non-party 1, but the plaintiff is deemed to have paid the performance bonus for non-party 1's performance bonus, unification-related organization and advertisement and publicity expenses based on the majority shareholder's share ratio. In light of the above facts, the plaintiff is deemed to have paid the performance bonus to non-party 1 in order to promote the distribution of profits among the majority shareholders. ③ The performance bonus for non-party 1 was paid only for the year when the net income was generated through the general meeting of shareholders, and the result bonus is not paid to non-party 10%.

Therefore, the imposition of corporate tax, which was made by non-party 1 in the absence of the performance bonus, is legitimate. Therefore, the plaintiff's assertion on this part is without merit.

3) Determination as to the assertion on service costs

As examined in the above facts, as follows, ① contractual service costs under the contract with the B&S SDD are agreed at a fixed amount, and the Plaintiff merely bears the duty to adjust the contract amount in response to the request for the adjustment of the contract amount due to price fluctuation, and does not seem to have any obligation to compensate for the losses of B&S DDD. ② Non-SDD is a corporation entrusted with terminal management between the Plaintiff and the Plaintiff upon receiving investment from the Plaintiff, and it does not seem to be consistent with social norms and commercial practice. In light of the above, it is reasonable to deem that the Plaintiff committed an unfair financial support act under the pretext of paying the service costs for B&SDDD. Accordingly, the Plaintiff’s imposition of corporate tax and value-added tax by non-deductibleing or deducting the service costs paid to B&SDD as a non-deductible is legitimate, and therefore, the Plaintiff’s assertion on this part is without merit.

3. Conclusion

Therefore, among the plaintiff's claims in this case, the defendant's imposition of corporate tax of 368,603,690 won (including additional tax) for the business year 2006, March 2, 2012, and the imposition of corporate tax of 787,229,940 won (including additional tax) for the business year 2007, April 2, 2012, in excess of 225,68,940 won among the imposition of corporate tax of 225,68,940 won (including additional tax) shall be accepted for the reasons, and the remaining claims shall be dismissed for the reasons. The plaintiff's appeal as to the corporate tax (including additional tax) for the business year 2006 and 2007 among the judgment of the court of first instance, which has partially different conclusions, shall be accepted, and the plaintiff's remaining appeal shall be dismissed

Judges’ aid (Presiding Judge) Transfering of permanent equipment

Note 1) Supreme Court Decision 2008Du10461 Decided December 29, 2010

2) Some differences between the equity ratio and performance bonus payment ratio were allowed by mutual understanding between Nonparty 1 and the controlling shareholder.