Cho Jae-2014west 1593 (20 May 2015)

In calculating indirect foreign tax credit, it is legitimate to regard the earned surplus accrued in the business year immediately preceding the year in which dividends are paid by the subsidiary as financial resources.

The preceding provision of the amendment does not provide any provision concerning the time when the profit or surplus, which is the source of the dividend, is generated, and the first in first in first in first in first in first in first in in first in in first in in in first in in in

Article 57 (Foreign Tax Credit)

2015Guhap71822 Revocation of Disposition of Corporate Tax Imposition

AAA, Inc.

BB Director of the Tax Office

June 1, 2017

July 20, 2017

1. The Defendant’s imposition disposition of corporate tax for the business year 2008 against the Plaintiff on November 7, 2013 as KRW 00,000 among the disposition imposing corporate tax for the business year 2010, KRW 000 among the disposition imposing corporate tax for the business year 201, KRW 00 among the disposition imposing corporate tax for the business year 201, and KRW 00 among the disposition imposing corporate tax for the business year 2012, shall be revoked. Of the litigation costs for the business year 2012, KRW 1/3 shall be borne by the Plaintiff and the remainder by the Defendant respectively.

1. Details of the disposition;

A. In around 2005, the Plaintiff established the CCC Limited Corporation in China (hereinafter “China Company”) in the form of a complete subsidiary and sold clothes, raw materials and samples to the said company. The Chinese subsidiary produces and sells women in China.

B. On November 7, 2013, the Defendant issued a correction and notification of KRW 000 of the corporate tax for the business year 2008 on the grounds of the following paragraphs (1) and (2), KRW 2010 on the grounds of (3) below, corporate tax for the business year 2011, KRW 000 on the corporate tax for the business year 2012, and KRW 000 on the corporate tax for the business year 2012. (1) The Plaintiff paid KRW 00 to the GuG, which is the representative director of the Chinese subsidiary in the business year 2008-2012, as labor expenses for those who do not actually work, such payment is unrelated to the inclusion in the gross income. (2) The Plaintiff’s transfer of 30% of the stocks owned by the Plaintiff to the GuG without compensation is denied as a wrongful calculation method, and thus, it is deemed that it is an amount equivalent to the annual income evaluation method of KRW 100 on September 10, 2008.

(3) The Plaintiff calculated an excessive amount of corporate tax for the business year immediately preceding the business year to which the creation of dividend income belongs when it returns the amount of tax credit of KRW 2010 to KRW 2012 to KRW 20,000 (No. 20,000). The Plaintiff filed an appeal with the Tax Tribunal on February 4, 2014 regarding the above disposition of KRW 20,000 (No. 200,000,000,000,000 won and KRW 20,000,000,000 for each of the above disposition of KRW 20,000,000,000,000 for 20,000,000,000 won and KRW 20,00,000,000,000,000,00 won and KRW 20,000,00,000,00.

2. Whether the first disposition in this case is lawful

A. The plaintiff's assertion

1) Since saltS displayed its outstanding business ability as its officers, it was difficult for the Plaintiff to obtain dividend income and royalty income from its Chinese subsidiaries. Accordingly, the Plaintiff paid the instant stocks to saltS in terms of compensation and encouragement for its performance. Therefore, even if the transfer of the instant stocks without compensation is a non-designated donation, as alleged by the Defendant, it is reasonable to assess the value of assets based on the value prepared by its Chinese corporate assessment corporation rather than applying the provisions of Articles 60 through 65 of the Inheritance Tax and Gift Tax Act with respect to the statement of financial position and income statement, and the value of assets based on the value of its assets prepared by its Chinese corporate assessment corporation. Accordingly, it is reasonable to assess the value of the instant stocks at 0% of the net asset value prepared by the Plaintiff in accordance with the respective laws and regulations of the Chinese corporate assessment corporation (hereinafter “the net asset value of each of the instant stocks”).

It is as shown in the attached Form.

(c) Fact of recognition;

1) saltS is a Chinese shareholder and worked as a director and operating officer of the Chinese subsidiary. 2) The transfer contract signed on September 10, 2008 between the Plaintiff and saltS et al. with the Plaintiff, holding 10% shares of 10% of the Chinese subsidiary, is transferred to 6 members of the old ZZ(20%), the old CC(15%), the old VV(10%), and the SS(10%)’s total amount of shares transferred to 30% of the company’s shares to the Plaintiff. The transfer of shares to 5% of the company’s shares to 10% of the company’s net profit and loss to 10% of the company’s shares transferred to 5% of the company’s shares. The transfer of shares to 30% of the company’s shares to 5% of the company’s shares was to be 10% of the company’s net profit and loss to 5% of the company’s shares transferred to 15% of the company’s shares.

5) The Plaintiff was subject to a tax investigation from July 18, 2013 to September 25, 2013. A Chinese subsidiary was requested to conduct an appraisal for the purpose of investigating and confirming the net asset value of a Chinese subsidiary in two places of China’s appraisal institutions around the end of September, 2013, which was the time of the completion of the said tax investigation, and received each of the instant appraisal statements: (a) the net asset value of the Chinese subsidiary was KRW 0 million or KRW 0 million. Each of the instant appraisal statements was prepared by retroactively assessing the net asset value of the Chinese subsidiary as of December 31, 2007, around October 15, 2013.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 6, 7, 12, 13, Eul evidence Nos. 1, 4, 5, 10 through 12 (including each number), and the purport of the whole pleadings

D. Determination

1) Article 24(1) of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same shall apply to the preceding paragraph) provides that donations, other than designated donations, shall not be included in deductible expenses in calculating the amount of income for the pertinent business year. Donations under the above provision refer to the value of property gratuitously donated to a corporation, irrespective of its business operation, to another person (see Supreme Court Decision 2010Du8614, Oct. 28, 2010). Article 19(1) of the former Corporate Tax Act provides that "deductible expenses shall be the amount of deductible expenses incurred from transactions in which the net assets of the relevant corporation are reduced except for the refund of capital or financing, disposal of surplus funds, and deductible expenses under paragraph (1) of the same Article. It is reasonable to view that such losses under paragraph (2) of the same Article constitute losses or losses directly related to the business of the relevant corporation, which are ordinarily recognized as having been disbursed or directly related to the business operation of the relevant corporation, as an ordinary purpose.

① There is no evidence that saltS only resided in China as a Chinese citizen and served as an executive of a Chinese subsidiary, but has not formed a direct labor relationship with the Plaintiff, and that saltS was directly involved in the Plaintiff’s business.

② In addition to the confirmation letter of saltS preparation, there is no objective material to know the business performance and contribution ratio of the SS Chinese subsidiary, and there is no indication of the terms and conditions of, reason for, and rights and obligations of the parties in the share transfer contract. ③ Even if the Plaintiff transferred the shares of the SS to the SS without consideration of the business performance capacity and contribution ratio, etc. in the SS Chinese subsidiary, it is difficult to deem that the Plaintiff had the duty to transfer the shares without compensation, or that it contributed to the increase of the Plaintiff’s dividend income, aside from the possibility of deeming that it is related to the business operation of the SS subsidiary. ④ Direct payment of compensation for the shares or contribution ratio by the corporation to the officers of the subsidiaries, it cannot be deemed that the other corporation engaged in the same kind of business has paid the shares under the same situation.

2. Whether evaluation methods of the stock value of this case are lawful

A) Since the Plaintiff’s assertion that the above-mentioned shares were calculated on the basis of Article 60 and Article 63(1)1(c) of the former Inheritance Tax and Gift Tax Act, Articles 49, 54 through 56, and 58-3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, the above-mentioned net value under Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act was discounted based on the interest rate reflecting the future expected profits at the maturity of three years in Korea, it can be deemed that the stocks of an unlisted corporation in a foreign country should be subject to its application, in principle, because it is difficult to apply the supplementary value discount rate under Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act to the current net value of the non-listed corporation under the premise that the above supplementary value discount rate should be applied to the current market value of the non-listed corporation under the premise that it would be inappropriate for the Korea’s current net value of the non-listed corporation under the premise that it would be inappropriate for the Korea’s future value discount rate (see Supreme Court Decision 2007Du564.

C) Meanwhile, Article 58-3(1) of the former Inheritance Tax and Gift Tax Act provides that where it is inappropriate to apply the provisions of Articles 60 through 65 of the Act to inherited or donated property in a foreign country, the country where the pertinent property is located shall be the appraised value for the purpose of imposing capital gains tax, inheritance tax, gift tax, etc. In the absence of the appraised value under paragraph (1) of the same Article, it shall be based on the appraised value by requesting the head of a tax office, etc. to two or more domestic or foreign appraisal organizations for the purpose of assessing the appraised value under the above provision. First, it is clear that each appraisal report of this case, which serves as the basis for calculating the amount claimed by the Plaintiff as the legitimate value of the shares, is not the appraised value for the purpose of imposing capital gains tax, inheritance tax, or gift tax, but it is not the appraised value by requesting the head of a tax office or the Commissioner of a regional tax office or the competent Regional Tax Office with two or more appraisal agencies or more in a foreign country. In addition, since each appraisal report of this case is made for 10 or 20/3 market value of the above shares.

Therefore, the part that the Defendant should not include the appraisal amount of the stocks of this case transferred without compensation in the deductible expenses is reasonable, but it is unlawful to evaluate the value of the stocks of this case by reflecting the net profit and loss value in accordance with the supplementary evaluation method stipulated in Article 54(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act. However, the determination whether the disposal of the stocks of this case exceeds a reasonable tax amount is lawful is based on whether it exceeds the reasonable tax amount, and the parties concerned can submit arguments and materials supporting the objective tax base and tax amount until the closing of argument at the trial court. If the legitimate tax amount to be imposed lawfully is calculated based on such materials, only the portion exceeding the reasonable tax amount shall be revoked, but if not, the entire taxation disposition shall be revoked (see Supreme Court Decision 94Nu13527, Apr. 28, 1995). In the case of the first disposition of this case, the materials submitted until the closing of argument at issue cannot be calculated lawfully by the Plaintiff. Thus, this court is bound to revoke the entire amount that the Plaintiff seeks revocation.

3. Whether the second disposition in this case is lawful

A. The plaintiff's assertion

Since the Plaintiff made a large amount of facility investment expenses, etc. at the beginning, the Plaintiff made dividends after 2010, and there was no provision regarding the time when the profit or surplus was reverted, which would be a source of dividend, under the Corporate Tax Act, which was in force at the time. The newly established provision that “only Article 94(8) of the Enforcement Decree of the Corporate Tax Act amended by Presidential Decree No. 25194, Feb. 21, 2014, the dividend income shall be deemed to have been distributed or distributed first in accordance with the order of the occurrence of profit or surplus.” However, the dividend received from a Chinese subsidiary in 2010 or 2012, which was prior to the establishment of the said provision, was made by the Plaintiff from the Chinese subsidiary in 2010 or 2012, and it was unlawful to apply the said newly established provision retroactively to the instant case until it was distributed clearly by specifying the target business year in which the profit or surplus was attributed.

It is as shown in the attached Form.

(c) Fact of recognition;

1) The Chinese subsidiary specified the profits or surplus accrued during the business year in which the dividend resolution was adopted against shareholders as set out below.

2) From 2005 to 2013, the sales amount and net income (unit amount) of Chinese subsidiaries are as follows:

[Ground of recognition] Each entry in Gap evidence Nos. 1, 5, 8, 11, Eul evidence Nos. 1 and 6 (including each number), and the purport of the whole pleadings

D. Determination

1) Article 57(4) of the former Corporate Tax Act (amended by Act No. 11607, Jan. 1, 201; Act No. 11128, Dec. 31, 2011; Act No. 10423, Dec. 30, 2010; hereinafter the same shall apply) provides that where the amount of income of a domestic corporation for each business year of a foreign corporation includes dividends or surplus funds distributed from a foreign subsidiary, the amount calculated as prescribed by Presidential Decree corresponding to the amount of foreign corporate tax imposed on the income of the foreign subsidiary shall be deemed as the amount of foreign corporate tax deducted or included in the calculation of deductible expenses. Article 57(2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2014; hereinafter the same shall apply) provides that the portion concerning dividends received from the foreign subsidiary was partially amended by Presidential Decree No. 2514, Feb. 25, 2014>

2) Comprehensively taking account of the following circumstances revealed in addition to the purport of the entire pleadings, the first in first in first in first in first in, first in, first in, first in, was established under the Enforcement Decree of the said Act, has a creative meaning, and cannot be applied retroactively to dividends in the business year from 2010 to 2012 of the Chinese subsidiary company that had already been established prior to the said establishment.

① Article 57(4) of the former Corporate Tax Act provides that “the corresponding amount corresponding to the dividend income” shall be deducted from the amount of foreign corporate tax imposed on the income of a foreign company, and accordingly, Article 94(8)1 and 2 of the former Enforcement Decree of the Corporate Tax Act provides the formula for calculating the amount of foreign law corporate tax to be deducted on the basis of “the pertinent business year.” Considering that the legislative intent is to prevent double taxation on the same income, “the pertinent business year” shall be deemed not to be the year in which the dividend was paid, but shall be deemed to mean the business year in which the dividend was paid, and accordingly, the amount corresponding to the foreign corporation tax paid in the pertinent business

② However, in cases where a foreign subsidiary pays dividends under the accumulation of profits or surplus over several years, the determination of which business year includes “business year in which the source of dividends occurred” is not absolute or preemptively reasonable, but there are various methods, such as first-in, first-in, second-in, and last-out, average method, etc. However, in order to resolve a difference in the amount of foreign tax to be deducted depending on which profit or surplus accrued in any year is distributed as source, one of them is the problem of the legislator’s decision-making group. Therefore, until the first-in, first-out, first-in, first-out, second-out, and second-out, second-out, second-out, and second-out, second-out, second-out, second-out, second-out, and second-out, second-out, second-out, second-out, and second-out, second-out, second-out, and second-out, second-out, second-out, second-out, and second-out, second-out, second-out, and second-out.

③ Even if the first in the first in the first in the first in the first in the first in the second in the second in the former in the former in the Corporate Tax Act, prior to being stipulated in the Enforcement Decree of the Corporate Tax Act, the tax authority had established a rule that “if a domestic corporation arbitrarily selects the order of the occurrence of profits or surplus derived from dividends from an overseas subsidiary, it would be at risk of tax criticism, and thus, the first in the first in the first in the first in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the middle in the year.

Therefore, this part of the Plaintiff’s assertion is well-grounded. As such, the disposition imposing corporate tax for the business year 2010, which constitutes the Disposition No. 2 of this case, was imposed in the amount of KRW 126,681,941.

As 000 won, the amount of corporate tax imposed for the business year 2012 should be revoked as 00 won.

4. Conclusion

Therefore, the plaintiff's claim shall be accepted on the grounds of its reasoning, and the burden of litigation costs shall be determined as per Disposition by applying Article 8 (2) of the Administrative Litigation Act and Article 99 of the Civil Procedure Act.