Business of Housing Construction and Sales Business

In case of housing construction and sales business, the starting date of business shall be the time of commencing the sale of each house of this case, on which the supply of goods prescribed in Article 6 subparagraph 3 of the Enforcement Decree of the Value-Added Tax

Article 27 (Calculation of Necessary Expenses of Business Income)

2018Guhap69852 Revocation of Disposition of Imposing global income tax, etc.

Ma-○

○ Head of tax office

March 21, 2019

April 4, 2019

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s imposition of KRW 000 of global income tax (including additional tax) and KRW 000 of global income tax (including additional tax) for the year 2014 for the Plaintiff on August 7, 2017 shall be revoked, respectively.

1. Details of the disposition;

A. The Plaintiff newly constructed and sold 16 household apartment houses (2 Dong, 97.3 square meters in total floor area of buildings, hereinafter referred to as “the first house”) and 8 household apartment houses (97.9 square meters in total floor area of buildings, hereinafter referred to as “the second house”) in ○○-si, ○○○-si (hereinafter referred to as “the second house”). In the case of the second new house sale, the Plaintiff registered the business jointly with the New AA and KimB.

B. The Plaintiff calculated estimated income amount as shown below by applying the simple expense rate under Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26982, Feb. 17, 2016; hereinafter the same shall apply) on the ground that the sales of by-products, such as scrap metal, acquired during the new construction in the immediately preceding year in which the sales revenue amount of each of the instant houses was generated (in the case of the instant second house, 00 won is calculated and reported by calculating 33% of the estimated income amount as it was jointly registered by three persons) and the former Restriction of Special Taxation Act (amended by Act No. 13560, Dec. 15, 2015; hereinafter the same shall apply) by applying the special tax reduction and exemption for small and medium enterprises under Article 7 of the former Enforcement Decree of the Income Tax Act.

C. After conducting a consolidated investigation with the Plaintiff, the Seoul Regional Tax Office: (a) deemed that each business was commenced in 2014 and 2015, which was the time of new construction and sale of each of the instant housing, rather than the year of selling by-products; and (b) notified the Defendant of the resolution on the determination of the tax amount based on standard expense by excluding the simple expense rate applied by the Plaintiff at the time of global income tax return; and (c) on the ground that the reduction and exemption of the special tax amount for small and medium enterprises should be denied. On August 7, 2017, the Defendant issued a correction and notification (including additional tax) of the global income tax for 2014 and the global income tax for 00 won for the year of 2015 (including additional tax) (hereinafter referred to as “each of the instant dispositions”).

D. The Plaintiff dissatisfied with each of the instant dispositions and filed an appeal on March 8, 2018 on November 2, 2017, but the Tax Tribunal dismissed the decision on June 19, 2018.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 6, 8, Eul evidence Nos. 1 through 3 (if any, including a number; hereinafter the same shall apply), the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiff's assertion

1) The commencement date of the new construction sales business of a building shall be deemed to have accrued from the sales of scrap metals acquired from the removal of the existing building. The Plaintiff, in the process of the removal of the existing building, sold the scrap metals, etc. (sales revenue: KRW 000,000, KRW 36,000, and less than 36,000,000, shall be deemed to have commenced the business, and thus, the simple expense rate under Article 143(4)(b) of the former Enforcement Decree of the Income Tax Act shall be applied.

2) Since the Plaintiff directly constructed each of the instant houses, it is deemed that the Plaintiff engaged in construction business and thus, the reduction or exemption pursuant to Article 7 of the former Restriction of Special Taxation Act (Special Tax Reduction or Exemption for Small or Medium Enterprises)

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Whether simple expense rate can be applied or not

A) Relevant legal principles

Under the principle of no taxation without law, tax laws shall be interpreted as the text of the law, and shall not be extensively interpreted or analogically interpreted without reasonable grounds, barring any special circumstance. However, even according to the language and text of the tax laws itself, if their meaning is unclear, or if it appears that they are contrary to or conflicting with other laws and regulations, the court must ex officio state the true meaning of the language and text at issue through harmonious interpretation among the laws and regulations. In such cases, a judge can make a combined interpretation of the laws and regulations that consider legislative intent and purpose to the extent that it does not undermine the legal stability and predictability pursued of the principle of no taxation without law (see, e.g., Supreme Court en banc Decision 2011Du551, Apr. 16, 2015)

Article 1-2(1)5 of the former Income Tax Act (amended by Act No. 15225, Dec. 19, 2017; hereinafter the same) provides for the definition of "business operator" under Article 1-2(1)5 of the Income Tax Act; Article 19(1) of the Income Tax Act provides that Article 8 of the Value-Added Tax Act on the method of filing a new application for business registration and applying for alteration of business registration shall apply mutatis mutandis to a business operator who registers his/her business pursuant to the former Income Tax Act; and Article 168(3) of the Value-Added Tax Act does not provide for the provision that explicitly determines the commencement date of business as prescribed in Article 6 of the Enforcement Decree of the Value-Added Tax Act or the provision that provides for such provision to the extent that it does not undermine legal stability and predictability, it shall be examined when the starting date of business of the former Income Tax Act shall be deemed the business income through the combined interpretation of laws and regulations that consider the legislative purport

B) Commencement date of business under the former Income Tax Act

In full view of the language, structure, and purpose of relevant statutes, such as the former Income Tax Act and the Value-Added Tax Act, it is reasonable to view that the starting date of business in the business income under the Income Tax Act is also based on the time stipulated in each subparagraph of Article 6 of the Enforcement Decree of the Value-Added Tax Act, which sets the starting date

① Considering that Article 19(1) of the former Income Tax Act defines “income generated from various types of business, such as agriculture, forestry, fishery, mining, manufacturing, construction, etc.,” as business income, Article 1-2(1)5 of the same Act defines a resident as a business entity, the business under the former Income Tax Act should be deemed as premised on the actual occurrence of income. Therefore, the commencement date of the business cannot be advanced until the preparation of the business, which is the time of providing goods or services directly causing income, begins.

② As a result, it is difficult to objectively specify the starting point of the preparation act in terms of the aspects that the scope is set by the enterpriser’s subjective intent or necessity, as well as considerable irregular and broadness. If the starting point of the preparation of the project is earlier than the starting point of the acquisition point of land or the starting point of the building at the time of the commencement of the preparation of the project, the revenue amount of the immediately preceding taxable period, which is the premise for the application of the simple expense rate under Article 143(4)2 of the Enforcement Decree of the Income Tax Act, depending on the time of the preparation act, may vary depending on the time of the preparation act, and thus, the entrepreneur’s voluntary selection of the date according to his own convenience may interfere with the national legitimate exercise of the right to

③ According to Articles 1-2(1)5 and 19 of the former Income Tax Act, a resident with income arising from continuous and repeated activities under his/her own account and responsibility for profit-making purposes is an entrepreneur. Article 2(3) of the Value-Added Tax Act provides that a person who independently supplies goods or services for business purposes is an entrepreneur and becomes a person liable to pay value-added tax, regardless of the existence of profit-making purposes. Here, “person who independently supplies goods or services for business purposes” is a person who supplies goods or services with continuous and repeated intent by meeting the business form to create added value (see Supreme Court Decision 98Du16705, Sept. 17, 199). Thus, the meaning of a business entity under the former Income Tax Act, except for the existence of profit-making purposes.

(4) The former Income Tax Act imposes an obligation on the head of a tax office having jurisdiction over a new entrepreneur under Article 168 (1) to make a business registration under the former Income Tax Act, and imposes an obligation on the person who has made a business registration under Article 168 (2) of the same Act to make a business registration under the former Income Tax Act, which stipulates that the business operator shall be deemed to have made a business registration under the former Income Tax Act, and imposes an obligation to prepare an invoice or receipt as prescribed by Presidential Decree and to issue the goods or services upon the person who has received the goods or services if the business operator supplied the goods or services.

⑤ Article 8(1) of the Value-Added Tax Act, which provides that Article 168(3) of the former Income Tax Act shall apply mutatis mutandis to the registration of business, uses the term "the starting date of business" in relation to the registration of business, and Article 5(2) of the Value-Added Tax Act uses the term "the starting date of business" in relation to the first taxable period for a new business operator. Article 6 of the Enforcement Decree of the Value-Added Tax Act provides that "the starting date of business under Article 5(2) of the Value-Added Tax Act shall be

C) Determination on the instant case

According to the following circumstances revealed by comprehensively taking account of the contents of the relevant statutes, the evidence and the purport of the entire pleadings, the date of commencing the business of the Housing Construction and Sales Business Act, which the plaintiffs conducted, shall be deemed the time of commencing the sale of each house of this case by starting the supply of goods as stipulated in Article 6 subparagraph 3 of the Enforcement Decree

① Article 143(4)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22580, Dec. 30, 2010); Article 143(4)2 of the same Enforcement Decree provides that, “an entrepreneur newly commencing a business during the pertinent taxable period, other than a newly commencing one, shall apply simple expense rates to “an entrepreneur whose total amount of revenue during the immediately preceding taxable period (including an increased amount of revenue due to determination or revision) falls short of the standard amount.” Thereafter, Article 143(4)1 of the former Enforcement Decree of the Income Tax Act amended by Presidential Decree No. 22580, Dec. 30, 2010; Article 143(4)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22580, Dec. 30, 2010; Presidential Decree No. 22100, Feb. 13, 2012>

In addition, Article 143 (4) of the Enforcement Decree of the Income Tax Act, which applies to the portion of income in the taxable period that begins after February 13, 2018, is amended by Presidential Decree No. 28637, which applies to the portion of income in the taxable period that begins after January 1, 2019, provides that if the total amount of income in the immediately preceding taxable period falls short of the standard amount, if the income in the taxable period concerned falls short of the standard amount of double-entry bookkeeping, the standard expense rate shall be excluded from the application of simple expense expense ratio.

In light of the amendment history of Article 143 (4) of the Enforcement Decree of the Income Tax Act, the simple expense rate system is a system that intends to minimize the tax payment costs of small small-scale business operators who lack the capacity to keep records of the principal expenses required by the standard expense rate system, and the legislators seem to have gradually reduced the scope of business operators subject to the simple expense rate application. Furthermore, according to the text of the supplementary provision, the legislators seem to understand the "construction commencement", "construction business, construction business, and commencement of real estate development and supply business" as separate concepts.

Therefore, considering these legislative intent, in the case of housing construction and sales business that operates a business for a long period exceeding a certain scale due to its characteristics, it is necessary to grasp the business commencement at an objective and practical time of the supply of housing subject to sale rather than the commencement date that can be determined by the business operator's intent

② The commencement of a business of the Housing Construction and Sales Business shall be substantially determined at the time when the preparation for a business is completed and the preparation for the original business is conducted or is able to be conducted (see, e.g., Supreme Court Decision 94Nu15905, Dec. 8, 1995). The initial housing construction and sales business is included in real estate sales business given its nature (see, e.g., Supreme Court Decision 2008Du21768, Jul. 22, 2010). The purpose of the business is to sell a house, and it is difficult to view that the fact that a house has been completed

③ Whether a business income falls under business income under the Income Tax Act ought to be determined according to social norms, taking into account whether business activities are continuously and repeatedly conducted in light of the business profit purpose, the scale, frequency, mode, etc. of the business (see, e.g., Supreme Court Decision 91Nu6559, Nov. 26, 1991). However, there is no evidence suggesting that the Plaintiffs had objectively expressed their intent to engage in the housing construction and sales business for the purpose of profit prior to commencing the sale of each of the instant houses. The fact that the Plaintiffs commenced or completed each of the instant houses for profit-making purposes alone is difficult to deem that activities are continuously and repeatedly conducted for profit-making purposes to have satisfied the objective substance of the housing construction and sales business.

2) Whether the application of the simple expense reduction and exemption of the special tax amount by small and medium enterprises is possible

The special tax reduction system for small and medium enterprises under Article 7 (1) of the former Restriction of Special Taxation Act is to support the improvement of financial structure and the investment in facilities of small and medium enterprises so that the small and medium enterprises can be smoothly implemented by reducing or exempting income tax and corporate tax for the protection and fostering of domestic small and medium enterprises with weak competitiveness. In light of the fact that the special tax exemption system is based on the premise that the amount of tax reduced or exempted should be used for the prescribed purpose of the same Act, a national who operates a small and medium enterprise is required to operate the relevant business at least at the end of the taxable period subject to the application of reduction or exemption (see Supreme Court Decision 2005Du685, Jan. 13, 2006).

As to the instant case, the Plaintiff’s new construction and sales business of the instant second house was closed on May 20, 2014, and on June 10, 2015, the Plaintiff’s new construction and sales business of the instant second house was as seen earlier. Therefore, the Plaintiff is not subject to special tax reduction and exemption under the foregoing provision, on the grounds that the Plaintiff is not subject to special tax reduction and exemption, since it was already closed prior to December 31, 2014, each of which was the end of the taxable period for global income tax for which the Plaintiff applied for tax reduction and exemption under Article 7(1) of the former Restriction of Special Taxation Act, and that is the end of the taxable period for global income tax for which the year 2015 belongs.

3) Therefore, the Plaintiff’s assertion that each of the dispositions of this case is unlawful is not accepted.

(c)

3. Conclusion

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