When determining whether a bad debt is a provisional payment related to a related party who is not entitled to include in deductible expenses pursuant to Articles 34(3)2 and 28(1)4(b) of the former Corporate Tax Act, and the main text of Article 53(1) of the former Enforcement Decree of the Corporate Tax Act (= at the time of occurrence of a cause for loss)

The legislative purpose of Article 34(3)2 and Article 28(1)4(b) of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008; hereinafter “former Corporate Tax Act”), Article 53(1) main text of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 20720 of Feb. 29, 2008), etc. (hereinafter “Article 34(3)2 of the former Enforcement Decree of Corporate Tax Act”) is to limit the maintenance of abnormal loans to specially related persons by non-inclusioning bad debts in cases where it is impossible to collect claims due to a cause for bad debts, and to encourage a company to engage in healthy economic activities through production and management of corporate funds, and to determine whether to include bad debts in deductible expenses before the occurrence of bad debts regardless of the business with a specially related person is no longer necessary to determine whether it is a bad debts debt-free business under Article 34(3)2 of the former Corporate Tax Act.

Article 28(1)4(b), Article 34(2)4(b), and Article 34(3)2(3) of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008); Article 53(1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 20720, Feb. 29, 2008);

Korea Pharmaceutical Co., Ltd. (Law Firm LLC, Attorneys Im-soo et al., Counsel for the plaintiff-appellant)

Head of Suwon Tax Office

Seoul High Court Decision 2010Nu43466 decided February 3, 2012

The part of the lower judgment against the Plaintiff regarding the disposition of imposing corporate tax for the business year 2007 is reversed, and that part of the case is remanded to the Seoul High Court. The remaining appeals are dismissed.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. Article 34(2) of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same) provides that among bonds held by a domestic corporation, the amount of bonds which cannot be recovered due to the debtor's bankruptcy or any other specific cause (hereinafter "deductible expenses") shall be included in deductible expenses in calculating the income amount for the pertinent business year. However, Articles 34(3)2 and 28(1)4(b) of the former Corporate Tax Act and Article 53(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20720, Feb. 29, 2008; hereinafter the same) (hereinafter "Article 34(3)2, etc. of the former Corporate Tax Act") shall not be included in deductible expenses with respect to the amount of loans provided by the corporation to a specially related person without connection with the corporation's business (hereinafter "unrelated business expenses").

B. The lower court rejected the Plaintiff’s assertion that the part of the disposition imposing corporate tax for the business year 2007 was unlawful on the ground that, as long as the Korea DDR Co., Ltd. (hereinafter “Korea DDR”) was the Plaintiff’s specially related party at the time of lending, the Plaintiff’s loan to the Korea DDR constitutes a provisional payment related to the specially related party under the above provision, even if the Plaintiff and the Korea DDR’s special relation were extinguished after the said provisional payment, the bad debt cannot be included in deductible expenses.

C. However, we cannot agree with the judgment of the court below for the following reasons.

The legislative purport of Article 34(3)2 of the former Corporate Tax Act, etc., is to limit the maintenance of abnormal funding relationship with the specially related parties by offering provisional payments and making efforts to recover them regardless of their business affairs, and to induce the sound economic activities of the companies through the production and management of corporate funds in cases where the special relationship is extinguished before the cause of bad debt occurs after providing provisional payments to the specially related parties regardless of their business affairs. In full view of the fact that there is no need to impose tax regulation on provisional payments by an office of business affairs, and thus, whether it is a provisional payments related to the specially related parties for which the bad debt cannot be included in deductible expenses pursuant to Article 34(3)2 of the former Corporate Tax Act should be determined as of the time when the cause of bad debt occurs.

Therefore, the lower court should have determined the legitimacy of the Plaintiff’s assertion by further examining the point of time when the cause of bad debt occurred with respect to the Plaintiff’s claim for loans to KoreaDS, the time when the special relationship between the Plaintiff and KoreaDS became extinct, and determining whether the Plaintiff’s assertion exists at the time when the cause of bad debt

D. Nevertheless, the lower court determined otherwise on the grounds stated in its reasoning that the Plaintiff’s loans to KoreaDS constitute a provisional payment unrelated to the business of a specially related person and thus, the bad debt cannot be included in deductible expenses. In so determining, the lower court erred by misapprehending the legal doctrine on the base point of time for determining whether the loans constitute a provisional payment irrelevant to the business of a specially related person under Article 34(3)2 of the former Corporate Tax Act, etc., and failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal assigning

2. Regarding ground of appeal No. 2

A. Article 19(1) of the former Corporate Tax Act provides that “deductible expenses shall be the amount of losses incurred by transactions which reduce the net assets of the corporation except as otherwise provided in this Act, such as refund of capital or financing, disposal of surplus funds, and those provided in this Act.”

B. The lower court rejected the Plaintiff’s allegation that the part of the disposition imposing corporate tax was unlawful on the grounds that: (a) on April 13, 2004, the Plaintiff’s acquisition and holding of the entire shares of the Dozcocos (hereinafter “Dozcos”) of the Dozcos (hereinafter “State”), a merged corporation, which held the stocks of the merged corporation before the merger and held all of the stocks of the merged corporation; and (b) on May 29, 2006, the Plaintiff’s acquisition and holding of the entire shares of the Dozcos (hereinafter “Dozcos”) should be deemed to have been caused by capital transactions included in the merger profit and loss; and (c) on the ground that on May 29, 2006, the Plaintiff’s acquisition and retirement of all the shares by 14,915,814,160 won of the net asset value of the DoMC’s 22,409,326,540 won of the value of the stocks extinguished.

C. Examining the above provisions and relevant legal principles and records, the judgment of the court below is just, and contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the nature of profit and loss from the retirement of stocks of the extinguished corporation held at

3. Regarding ground of appeal No. 3

A. Article 24(1)2(a) of the former Enforcement Decree of the Corporate Tax Act provides that “business rights” under Article 24(1)2(a) of the former Enforcement Decree shall be deemed as depreciable assets pursuant to the delegation by Article 23(2) of the former Corporate Tax Act. Article 24(4) of the same Act provides that “In the case of a merger among business rights under Article 24(1)2(a) of the former Enforcement Decree, the business rights appropriated by the merged corporation shall be deemed as depreciable assets only where the merged corporation evaluated and succeeded to the assets of the merged corporation, and paid compensation due to the trade name

Meanwhile, the main text of Article 80(2) of the former Corporate Tax Act provides, “In calculating the total cost of merger, where a merged corporation acquires stocks of a merged corporation (hereinafter “combined stocks”) within two years prior to the date of the registration of the merger, and such combined stocks, etc. are not delivered to the merged corporation’s stocks, etc., the total cost of the merger shall be the amount calculated by adding the acquisition value of the relevant combined stocks, etc.”

B. The court below rejected the plaintiff's assertion that the disposition of imposing corporate tax for the business year 2006 and 2007 was unlawful, on the ground that the part of the disposition of imposing corporate tax for the business year 2006 and 2007 was unlawful, on the ground that the plaintiff's assertion that the plaintiff succeeded to the assets of (State) DMF as the merged corporation at the time of the merger, and that the depreciation costs cannot be deemed as depreciable assets, unless there is any evidence to support that the plaintiff succeeded to the assets of (State) DMF as the merged corporation at the time of the merger.

C. In light of the fact-finding and determination of the court below is just, and there is no error in the misapprehension of legal principles as to the scope of depreciable assets among the goodwill appropriated by the merged corporation, or in the misapprehension of the principle of free evaluation of evidence in violation of logical and empirical rules, as otherwise alleged in the grounds of appeal, such fact-finding and determination of the court below are justified, since the goodwill appropriated by the merged corporation cannot be deemed as depreciable assets under Article 24(1)2(a) and (4) of the former Enforcement Decree of the Corporate Tax Act, since the acquisition value of the merged corporation does not include the liquidation income of the merged corporation as the acquisition value of the merged corporation as it does not include the acquisition value of the merged corporation in the calculation of the liquidation income of the merged corporation.

4. Conclusion

Therefore, the part of the judgment below against the plaintiff regarding the disposition of imposition of corporate tax for the business year 2007 shall be reversed, and that part of the case shall be remanded to the court below for a new trial and determination, and the remaining appeal shall be dismissed. It is so decided as per Disposition by the assent of all participating Justices

Justices Kim Yong-deok (Presiding Justice)