2017-C-4322 ( October 30, 2018),

Whether marginal profits from the exercise of stock options through the issuance of new stocks are deductible expenses.

Since the difference between the market price and the price of exercise due to the exercise of stock option (hereinafter referred to as "gains from the exercise of stock option") does not constitute the assets of the relevant corporation, it shall not be included in the loss because it does not cause the decrease of net assets as much as the exercise marginal profit when exercising stock option

Article 19 of the Corporate Tax Act

Seoul Administrative Court 2018Guhap57636

AA Corporation

BB Director of the Tax Office

October 26, 2018

December 07, 2018

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The defendant's rejection disposition of each request for correction of corporate tax of 00 won (including additional tax) and corporate tax of 00 won (including additional tax) for the business year 2011 against the plaintiff in 2017 shall be revoked.

1. Details of the disposition;

A. The Plaintiff granted its executives and employees a stock option (hereinafter “stock option”) to purchase new shares issued by the Plaintiff at a predetermined price (as stated in the table below). Some of the executives and employees of the Plaintiff exercised a stock option in 201 and 2012, and the Plaintiff did not include the amount equivalent to gains from the exercise (the amount deducted from the market value of new shares at the time of the exercise) as listed in the table below at the time of filing a corporate tax return for each business year.

B. The Plaintiff: (a) deemed that the amount equivalent to the above event marginal profit falls under deductible expenses under the Corporate Tax Act; and (b) requested the Defendant to refund the reduced corporate tax amount after inclusion in deductible expenses; (c) but was rejected (hereinafter “instant disposition”).

C. The Plaintiff appealed and filed an appeal with the Tax Tribunal, but was dismissed.

2. Whether the instant disposition is lawful

A. The issues of the instant case

Whether the amount equivalent to the marginal profit from the exercise of stock options in the issuance of new stocks falls under the deductible expenses of the granting corporation for 2011 and 2012 as personnel expenses.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Article 19(1) and (2) of the former Corporate Tax Act (amended by Act No. 1522, Dec. 19, 2017; hereinafter the same) provides that "the amount of losses incurred from the transactions that reduce the net assets of the pertinent corporation, excluding the refund of capital or financing, disposal of surplus funds, and other transactions prescribed in this Act," "the amount of losses incurred from the transactions that reduce the net assets of the relevant corporation" as "the losses or expenses that are generally recognized as ordinary or directly related to the business of the corporation, except as otherwise provided for in the Act and other Acts." Article 19(3) of the former Enforcement Decree of the Corporate Tax Act provides that matters necessary for the scope and classification of losses shall be prescribed by Presidential Decree, and Article 19 subparag. 3 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 24575, Jun. 11, 2013; hereinafter the

On the other hand, Article 340-2 of the Commercial Act provides that the company may grant the right to acquire new shares (1) or the right to purchase its own shares (2) at a predetermined price (3) in accordance with the resolution of the general meeting of shareholders under Article 434 of the Commercial Act, to executives and employees of the company who will, or will be able to contribute to the establishment, management, technological innovation, etc. of the company (3) in accordance with the articles of incorporation. However, if the exercising price of the stock option is lower than the actual price of the stock, the company may pay the difference in cash or transfer its own shares equivalent to the difference (3).

2) In light of the contents and purport of the aforementioned provisions, the amount equivalent to marginal profits from the exercise of stock options for the following reasons cannot be deemed as deductible expenses of the granting corporation for the business year 2011, 2012. Therefore, the instant disposition is lawful.

A) At the time of exercising the stock option, capital increase as much as the exercising price of the stock option and there is no decline in net assets. On the other hand, in the case of the stock option that is the type of treasury stock issuance and compensation-type, there is a decrease in net assets as much as the difference between treasury stocks and the compensation difference (Supreme Court Decision 2012Du3491 Decided November 17, 2015, the parent company compensates for the difference between treasury stocks and its executives and employees in cash of the subsidiary company, and thus, there is a decrease in net assets equivalent to the preservation expenses. In addition, Supreme Court en banc Decision 2007Do4949 Decided May 29, 2009, Supreme Court Decision 2007Do499 Decided May 29, 2009, the company may be deemed as having suffered losses in the crime of occupational breach of trust as the difference between the fair issuing price under the Company Act and the actual issue price in the case of the issuance of new stocks by a third party, not the purpose of inclusion in deductible expenses.

In this regard, the Plaintiff asserts to the effect that, in the case of a stock option in the form of new stocks issued to a third party, the net assets are reduced as much as the difference is compared with the case where the new stocks are issued to the third party, or that the difference is the same as the case of a stock option in the form of difference compensation type, as in the case of a stock option after the new stocks are issued to the executives and employees, the difference should be recognized as losses to the same extent as in the case of a stock option in the form of difference compensation type. However, the granting of a stock option differs from the case of a stock option in the form of transaction, legal and economic effect, and as long as the Plaintiff granted a stock option in order to recognize such difference and achieve a certain economic purpose, it is necessary to accept the difference as it is, as it is in principle, that the Plaintiff, who is a taxpayer, is favorable to the Plaintiff, to reverse the result by comparing or applying the case of a third party-party stock option, which is entirely different from the case of

B) Article 20(3) of the former Income Tax Act (amended by Act No. 14389, Dec. 20, 2016); Article 38(1)17 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 24356, Feb. 15, 2013) imposes tax on a newly issued stock option, deeming the gains from exercising the stock option as the earned income of its executives and employees; and even if the Plaintiff withheld and paid the income tax as much as the gains from exercising the stock option by its executives and employees, it is only in accordance with the Income Tax Act and subordinate statutes of the said Act, which calls for the listed principle of taxation, and thus, the Plaintiff cannot be deemed as deductible expenses, on the ground that the recognition of the earned income only and the corresponding corporation’s expenses were denied.

C) Article 19 subparag. 19-2(a)2 of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 28640, Feb. 13, 2018) newly established a provision that adds “the difference between the actual purchase price and the market price of the new stocks from the stock option to the deductible expenses.” However, according to Article 2 of the Addenda, the said new provision provides that the said new provision shall apply from the business year beginning after January 1, 2018, the said new provision shall not be applied retroactively to this case. The said new provision seems to be specifically provided for the purpose of tax policy for the purpose of attracting outstanding human resources of venture businesses, etc., and for the balance with other forms of stock options (the same item (i) together), it cannot be deemed that it is merely a provision that confirms that the gains from the exercise of the new stock option are deductible expenses.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit, and it is so decided as per Disposition.

(c)