Yhemmex Co., Ltd. (Law Firm Rate, Attorney Kim Jae-in, Counsel for defendant-appellant)

Head of Central Tax Office

September 27, 2011

Seoul Administrative Court Decision 2010Guhap32402 decided April 29, 2011

1.The judgment of the first instance shall be modified as follows:

A. The Defendant’s disposition of imposing corporate tax of KRW 526,954,630 for the business year 2002 against the Plaintiff on March 15, 2008 exceeds KRW 230,032, and the disposition of imposing corporate tax of KRW 1,187,090,740 for the business year 2008 is revoked in excess of KRW 5,913,221 among the disposition of imposing corporate tax of KRW 1,91,70 for the business year 2,591,702,340 for the business year 2004, exceeding KRW 17,693,51 among the disposition of imposing corporate tax of KRW 1,379,00,00 for the business year 205, exceeding KRW 9,11,998, corporate tax of KRW 798,698,360 for the business year 206, and exceeding KRW 37,537,510 for each disposition.

B. The plaintiff's remaining claims are dismissed.

2. Of the total litigation costs, 5% is borne by the Plaintiff, and the remainder is borne by the Defendant, respectively.

1. Purport of claim

The Defendant’s imposition of KRW 526,954,630 of corporate tax for the business year 2002 against the Plaintiff on March 15, 2008 and the imposition of KRW 1,187,090,740 of corporate tax for the business year 2003 against the Plaintiff on May 3, 2008, the imposition of KRW 2,591,702,340 of corporate tax for the business year 2004, the imposition of KRW 1,379,00,810 of corporate tax for the business year 205, and the imposition of KRW 798,968,360 of corporate tax for the business year 206, respectively, shall be revoked.

2. Purport of appeal

A. Plaintiff: The judgment of the first instance court is modified as stated in the purport of the claim.

B. Defendant: The part against the Defendant in the judgment of the first instance is revoked, and the Plaintiff’s claim corresponding to that part is dismissed.

1. Details of the disposition;

A. On June 25, 2002, the South Maritime Chemical Co., Ltd. (hereinafter “Seoul Maritime Chemical Co., Ltd.”) passed a resolution with the board of directors dividing the precise chemical division and having a corporation run the business separately. Accordingly, on September 15, 2002, the Plaintiff was established with the purpose of manufacturing and selling precise chemical products, etc. and received respectively succession of the assets and liabilities of the precise chemical division from South Maritime Chemical Co., Ltd. as of September 14, 2002, from the date preceding the date of division (hereinafter “instant division”).

B. On March 31, 2003, the Plaintiff reported each of the methods of calculating the depreciation and lifespan to the Defendant (hereinafter “report on the lifespan of this case”). The scope of the lifespan stated in the report on the lifespan of this case, the reported lifespan and the reported depreciation methods are the same as those reported to the Defendant prior to the remaining chemical.

C. When the Plaintiff filed a return on the tax base and tax amount of corporate tax on each income for the business year from March 2003 to March 2007 with the Defendant from March 2007, the acquisition value of depreciable assets was based on the initial acquisition value of the remaining chemical, and the depreciation amount was calculated on the basis of the remaining durable years remaining after it was depreciated from the Southern chemical, and the depreciation amount was appropriated as deductible expenses for each business year.

D. However, in calculating the tax base and amount of corporate tax on each income of the plaintiff for the business year of 2002 through 2006, the defendant calculated the acquisition value of depreciable assets on the basis of the amount obtained by subtracting the accumulated depreciation amounts from the initial acquisition value of South tidal chemistry for the business year of 2002 through the calculation of the depreciation scope based on the total depreciation period stated in the report of this case without deducting the depreciation period from the remaining lifespan for the business year of 1,190,404,531, among the depreciation costs appropriated for the losses of the plaintiff for the business year of 2002, the depreciation amount of 4,876,821,156, 204, and 4,677, 346, 294, 205, 207, 309, 305, 207, 309, 206, 309, 207, 2005, 306, 294.6, 207

E. The Plaintiff appealed and filed an appeal with the Tax Tribunal, but was dismissed on May 24, 2010.

[Reasons for Recognition] Facts without dispute, Gap evidence 1-1-6, Gap evidence 2-1-5, Gap evidence 3-1-5, Gap evidence 4-1-2, and the purport of the whole pleadings.

2. Whether the disposition is lawful;

A. The plaintiff's assertion

(a) The acquisition value of assets acquired by division;

In light of the language interpretation of relevant provisions such as the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 17826, Dec. 30, 2002; hereinafter the same), the provisions of the Corporate Tax Act, etc. on the legal nature of human division, the provisions of the Corporate Tax Act, etc. on the legal nature of personal division, and the principle of taxation equity through comparison of the fixed amount method and the fixed rate method, the acquisition value of assets acquired by division refers to the initial acquisition value that is not deducted from the accumulated amount of depreciation, and thus

A) Article 26(2) of the former Enforcement Decree of the Corporate Tax Act provides that the acquisition value of the relevant depreciable assets shall be “acquisition value under Article 72” and Article 72 of the Enforcement Decree of the same Act provides that the acquisition value of the assets acquired by investment in kind, merger, or division shall be “the value or the value of succession appropriated in the account book”. According to the relevant statutes, the acquisition value of depreciable assets acquired by division shall not be the value calculated by adding or deducting the matters of tax adjustment from the book value in which the book value succeeded from

B) The instant division constitutes a so-called “illegal personal division,” which is received by the existing shareholders of the South Sea chemical, a divided corporation, according to the holding ratio of the Plaintiff’s stocks, and the laws and regulations related to the Corporate Tax Act, etc. at the time, unlike physical division, in the case of proportional personal division as a result of handling the same human division as capital transaction, notwithstanding that the division evaluation does not occur, each of the instant dispositions in which the Plaintiff succeeded to the instant division does not regard the acquisition value of the divided corporation as the initial acquisition value of the divided corporation as the acquisition value of the divided corporation’s assets is illegal disposition contrary to the relevant laws and regulations

C) Article 26(2)2 of the former Enforcement Decree of the Corporate Tax Act provides that “The scope of depreciation amount for each business year calculated by multiplying the balance obtained by deducting the amount already included in deductible expenses from the acquisition value of the relevant depreciable assets as depreciation costs” by the depreciation rate based on the lifespan of the relevant assets shall be the depreciation method to be diminished every year. Therefore, if the remaining naval chemical appropriates depreciation costs after calculating the depreciation scope by the fixed rate method, not by the fixed rate method, the Defendant shall regard the acquisition value of the remaining naval chemical as the acquisition value of the depreciable asset originally transferred by the Plaintiff after division, and calculate the depreciation scope. However, in calculating the depreciation scope by the fixed rate method, each of the instant dispositions of taxation in which the acquisition value is interpreted as the amount obtained by deducting the accumulated depreciation amount from the initial acquisition value, is unlawful disposition contrary to the systematic interpretation of the Tax Act or the principle of equity of taxation.

D) Article 29-2(2) of the Enforcement Decree of the Corporate Tax Act amended by Presidential Decree No. 22577, Dec. 30, 2010 newly established a provision that applies the same depreciation limit before and after the merger, division, etc., in cases where an asset is succeeded due to qualified merger, qualified division, etc. through the amendment of Article 29-2(2) of the Enforcement Decree of the Corporate Tax Act. The provision of Article 29-2(2) of the Enforcement Decree of the Corporate Tax Act is merely a provision that confirms that, in the case of human division, a corporation newly established through division may calculate the scope of depreciation by using the method of depreciation, reported durable years, acquisition value, undeveloped balance, etc. of a divided corporation, and thus, it should be applied

2) The meaning of the Plaintiff’s report on lifespan of this case

The report on the instant durable years submitted by the Plaintiff to the Defendant on March 31, 2003 is not reported by the Plaintiff to extend the durable years to apply the new durable years, unlike the South tidal chemical, but is reported to apply the remaining durable years during the reported durable years. However, each of the dispositions of this case, which the Plaintiff misleads the Plaintiff that the Plaintiff reported the application of the new durable years, unlike the South Maritime chemical, is illegal disposition contrary to the principle of substantial taxation.

3) Additional tax portion

Even if each of the dispositions of this case is lawful, there is a conflict of opinion due to the meaning of tax interpretation because there is no clear definition provision on "the amount of succession calculated in the book" under Article 72 (1) 3 of the former Enforcement Decree of the Corporate Tax Act, and the defendant also accepted the plaintiff's return without revising the original business year, and did not provide the plaintiff with an opportunity to correct it at all at once by revising the entire corporate tax for five business years. The defendant also received a reply from the Ministry of Strategy and Finance on April 8, 2008, and issued each of the dispositions of this case on the basis of the questioning of the Ministry of Strategy and Finance on April 8, 2008. The total amount of depreciation costs related to each of the dispositions of this case is identical. However, even if the plaintiff filed a return of the tax base and amount of corporate tax on each of the business years from 202 to 2006, the part of the disposition of this case is unlawful, since there is no specific guidelines on the depreciation method in the corporate division.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

1) Fixed assets, such as buildings, machinery, vehicles, and fixtures, such as buildings, machinery, vehicles, and fixtures, are deteriorated as time has elapsed, and their value will be reduced, and their emergence would be inappropriate as a result of the appearance of new products. It is depreciation of a system that copes with profits and expenses by allocating physical and economic depreciations of such fixed assets as losses for the period during which such services are provided in accordance with a cost allocation method. In other words, depreciation is a cost allocation procedure that addresses the cost of acquisition of fixed assets used within a specific period in accordance with the principle of profit and expense response in order to accurately calculate the profit and loss of the period.

The depreciation costs are calculated by determining the basic value of assets, lifespan, depreciation rate, and residual value of the depreciable assets. The lifespan used for the business activities of the depreciable assets is estimated in consideration of physical and economic causes that reduce the economic benefits of the depreciable assets. In order to achieve the exclusion of the identity of taxable income and the equity in taxation, the relevant tax law stipulates that the corporation may arbitrarily determine the lifespan and appropriate the depreciation costs by prescribing the lifespan by the type of structure, asset, or business type in order to achieve the equity in the calculation of taxable income: Provided, That even if the lifespan is stipulated in the law, the corporation may adopt the standard lifespan system so that it can reflect the special circumstances of the corporation, and apply the reported lifespan by the corporation within the scope of 25% increased or decreased by the standard lifespan (Article 28(1)2 of the former Enforcement Decree of the Corporate Tax Act). As such, the reported lifespan or standard lifespan applied by asset or business type is continuously applied in subsequent business years (Article 28(4) of the former Enforcement Decree of the Corporate Tax Act).

As seen above, the statutory lifespan of fixed assets by type of assets or business seems to have arisen from the inherent nature of the depreciation system to accurately calculate profits and losses by coping with the revenue generated from the use of the assets as seen earlier. In light of the inherent nature of the depreciation system to cope with profits and losses by allocating physical and economic depreciation of fixed assets as losses for the period of use in accordance with the cost allocation method, statutory lifespan is reasonable to be determined based on new assets. Thus, if a corporation acquires used assets or succeeds to the assets of a merged corporation or a corporation established by division within the scope of 25% of its standard lifespan, it is impossible to newly reported lifespan within the scope of 10 years on the premise that the new durable years were generated from the acquisition of new assets (in cases of depreciable assets under Article 28(1)2 of the former Enforcement Decree of the Corporate Tax Act, the new durable years are to be applied only to the new durable years before the acquisition of the assets by the merged corporation or a corporation established by division. Therefore, if the new durable years were to be applied to the successor of the newly reported durable years without reporting the remaining durable years by the acquisition of the assets, it can be interpreted within the scope of new durable years.

Meanwhile, Article 29-2 of the Enforcement Decree of the Corporate Tax Act amended by Presidential Decree No. 17033, Dec. 29, 2000 provides that where a domestic corporation succeeds to assets through a merger or division, or acquires used assets from another corporation, etc., the period equivalent to 50/100 of the standard lifespan and the period of lifespan calculated by submitting a report on change of lifespan to the head of the district tax office having jurisdiction over the place of tax payment within the scope of the standard lifespan and the period of lifespan reported by submitting a report on change of lifespan to the head of the district tax office having jurisdiction over the place of tax payment may be regarded as the lifespan. However, this provision provides that where a corporation succeeds to or acquires used assets through a merger or division, etc., so that the corporation may choose the reported lifespan within the scope of 50/100 of the standard lifespan and the revised lifespan may be considered as the lifespan, so that the corporation may choose the reported lifespan within the scope of the standard lifespan and that the physical gap between the cost and the lifespan applied to new assets may not be concluded.

In light of the above legal principles, in preparing and submitting the report on the lifespan of this case, the plaintiff entered the same period (4 to 30 years) as the previous reported durable years (the remaining durable years after deducting the period in which the remaining durable years was previously reported from the previous durable years). Accordingly, each of the dispositions of this case on the premise that the plaintiff should newly apply the whole durable years reported by the plaintiff, without further examination of the remaining arguments of the plaintiff, is unlawful (the acquisition value of the depreciable assets of this case is the acquisition value of the remaining durable chemical as the acquisition value included in the book, but generally, the book value is understood as adding capital and asset appraisal to the acquisition value and deducting depreciation and appraisal losses, etc., and in case of succession or acquisition of assets due to merger, division, etc. as seen above, the acquisition value of the remaining durable years after deducting the newly reported durable years from the total acquisition value of the remaining durable years after deducting the newly reported durable years from the total acquisition value).

2) However, comprehensively taking account of the overall purport of the arguments in the statement No. 1-4, No. 2-5, No. 2-5, No. 3-5, No. 4-4, and No. 5-4 of the evidence No. 202 among the dispositions of this case, the part of the disposition of this case on imposition of additional tax of this case is legitimate since it is acknowledged that there is no relation between the additional tax of this case for the business year 2002, No. 230,032, additional tax of 5,913,221, additional tax of 204, additional tax of 17,693,51, additional tax of 205, additional tax of 9,11,98, additional tax of 205, additional tax of 5,637,418, additional tax of this case for the business year 206.

3. Conclusion

Therefore, the part exceeding 230,032 won out of the disposition of imposition of corporate tax of 526,954,630 won against the plaintiff on March 15, 2008, and the part exceeding 5,913,221 won out of the disposition of imposition of corporate tax of 1,187,090,740 won against the plaintiff on May 3, 2008, and the part exceeding 17,693,51 won out of the disposition of imposition of corporate tax of 2,591,70,702,340 won in the business year of 2004, and the part exceeding 17,693,510 won out of the disposition of imposition of corporate tax of 1,379,00,000,810 won in the business year of 205, the part exceeding 9,111,98,968,360, etc. of corporate tax of 206.

[Attachment Form 5]

Judges Kim Chang-suk (Presiding Justice)