[1] In a case where a special relationship exists between a corporation and its shareholders under Article 52(1) of the Corporate Tax Act and Article 87(1)2 of the Enforcement Decree of the Corporate Tax Act, whether the special relationship between the corporation and its shareholders is also extinguished on the ground that there was a decision to commence a company reorganization procedure or a decision to declare bankruptcy against either of them (negative)

[2] Whether the interest paid in borrowings equivalent to the provisional payments paid by a business officer is subject to non-deductible expenses after a decision on commencing a company reorganization procedure or a decision on declaration of bankruptcy has been made to the debtor as a related party (affirmative)

[3] Whether the amount equivalent to the interest on the loan claims held by the creditor corporation after a decision on the commencement of company reorganization procedure or a decision on declaration of bankruptcy is subject to the inclusion in the calculation of earnings (affirmative)

[4] In order to apply each provision of Article 45 subparagraph 9-2 and Article 51 (7) of the Enforcement Decree of the Income Tax Act, whether the pertinent loan claims should be confirmed as "deductible expenses" under Article 5 (2) 1 of the Enforcement Decree of the Income Tax Act before the final return of tax base or the determination or correction of tax base and tax amount (affirmative), and whether Article 51 (7) of the Enforcement Decree of the Income Tax Act can be applied to whether the pertinent loan claims are included in the amount of interest accrued, which is not premised on the actual possession of interest claims (negative)

[1] In a case where a special relationship exists between a corporation and its shareholders under Article 52(1) of the Corporate Tax Act and Article 87(1)2 of the Enforcement Decree of the Corporate Tax Act, the special relationship between the corporation and its shareholders shall not be deemed extinguished, on the ground that a decision to commence a company reorganization procedure or a decision to declare bankruptcy was rendered on any one of them, and the relationship between the corporation

[2] The legislative purpose of Article 28 (1) 4 (b) of the Corporate Tax Act is to prevent the deterioration of the financial structure of an enterprise through corporate expansion dependent on other capital and induce the sound economic activities of an enterprise through the productive management of corporate funds by providing loans to a related party, in cases where a corporation holding loans has paid provisional payments, etc. to a related party without business relations, the interest paid on the loans to be excluded from deductible expenses. In addition, in light of the fact that Article 28 (1) 4 (b) of the Corporate Tax Act applies to the non-deductible of interest paid by a related party, regardless of whether the corporation has received the interest paid at an appropriate interest rate, etc., even if it was unable to exercise its rights without corporate restructuring due to the commencement of corporate reorganization procedures, etc. for the debtor, the non-deductible of interest paid by a related party, which is still subject to non-deductible of bad debts until a claim equivalent to the interest paid on loans cannot be confirmed as non-deductible of losses is finalized.

[3] Even if a corporation has lent money to a specially related person without compensation and then the decision to commence a company reorganization procedure is made with respect to the specially related person, there is no change in the situation that the corporation distributes profits from the lending without compensation to the specially related person, and the interest rate recognized under Article 52 (1) 6 of the Corporate Tax Act and Articles 88 (1) 6 and 89 (3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19891 of Feb. 28, 2007) shall be deemed to have been paid even if the corporation did not actually receive interest from the specially related person. Accordingly, in calculating the recognized interest rate, there is no need to consider the existence of the interest claim in the calculation of the profits. In full view of the above, the amount equivalent to the interest on the loan claim held by the creditor, even if the company's company reorganization procedure is commenced with respect to the specially related person, shall be subject to the inclusion in the gross income

[4] In full view of the language and purport of the provisions of Articles 45 subparag. 9-2, 51(7), and 55(2)1 of the Enforcement Decree of the Income Tax Act, and Article 70(1)1 of the Enforcement Decree of the Corporate Tax Act, in order to apply each provision of Articles 45 subparag. 9-2, and 51(7) of the Enforcement Decree of the Corporate Tax Act, the pertinent loan claims shall be confirmed as “bonds not collectible due to debtor’s bankruptcy, etc.” under Article 55(2) subparag. 1 of the Enforcement Decree of the Income Tax Act, i.e., the relevant loan claims before the final return of tax base or the determination and correction of tax base and tax amount, and there is no room for applying Article 51(7) of the Enforcement Decree of the Income Tax Act

[1] Article 52 (1) of the Corporate Tax Act, Article 87 (1) 2 of the Enforcement Decree of the Corporate Tax Act / [2] Article 28 (1) 4 (b) of the Corporate Tax Act / [3] Article 52 (1) of the Corporate Tax Act, Articles 8 (1) 6 and 89 (3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19891 of Feb. 28, 2007) / [4] Article 45 (9-2, 51 (7), and 55 (2) 1 of the Enforcement Decree of the Income Tax Act, Article 70 (1) 1 of the Enforcement Decree of the Corporate Tax Act

[1] Supreme Court Decision 93Nu20177 Decided April 15, 1994 / [2] Supreme Court Decision 2005Du9415 Decided September 20, 2007 (Gong2007Ha, 1705) Supreme Court Decision 2006Du1647 Decided September 20, 207

Seoul High Court Decision 2006Na14888 decided May 1, 2006

Head of the tax office;

Seoul High Court Decision 2006Nu30944 decided July 11, 2007

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined.

1. As to the extinction of special relation

In a case where a special relationship exists between a corporation and its shareholders under Article 52(1) of the Corporate Tax Act and Article 87(1)2 of the Enforcement Decree of the Corporate Tax Act, the special relationship between the corporation and its shareholders cannot be deemed extinguished on the ground that there was a decision to commence a company reorganization procedure or a decision to declare bankruptcy (hereinafter “decision to commence a company reorganization procedure, etc.”) with respect to either of them, and the relationship between the corporation and its shareholders was not immediately extinguished (see Supreme Court Decision 93Nu20177, Apr. 15, 1994).

In the same purport, the decision of the court below that the special relationship between the non-party company and the above subsidiaries is not extinguished even if the non-party company and the above subsidiaries were ordered to commence the company reorganization procedure against the non-party company's subsidiaries, the reorganization company of this case (hereinafter "non-party company"), is just, and there is no error in the misapprehension of legal principles as to the scope of related parties under Article 52

2. As to the non-deductible of the interest paid

Article 28 (1) 4 (b) of the Corporate Tax Act provides that an amount calculated under conditions prescribed by Presidential Decree among interest on loans (limited to interest on loans equivalent to the value of the relevant assets among the interests on loans) shall not be included in deductible expenses for the purpose of calculating the income amount for each business year. The legislative purpose is to prevent the aggravation of the financial structure of an enterprise due to the unreasonable expansion of enterprises dependent on capital by restricting abnormal acts of lending loans to specially related parties, such as affiliates, without using loans for production purposes, and to induce the sound economic activities of an enterprise through the production management of corporate funds (see Supreme Court Decision 2006Du1647, Sept. 20, 2007, etc.).

In addition, even if a corporation provides a person with a special relationship with a provisional payment irrelevant to its business and the decision to commence a company reorganization procedure with respect to the person with a special relationship, there is no change in circumstances such as that the corporation is not using the loan in a productive part before and after the decision to commence the company reorganization procedure. In light of the fact that the interest payment system is applied regardless of whether the person has received interest at an appropriate interest rate (see Supreme Court Decision 2005Du9415, Sept. 20, 2007).

In the same purport, the judgment of the court below that the interest on loans, etc. corresponding to the loans, etc. against the subsidiaries of the non-party company should be excluded from deductible expenses in calculating the income amount of the non-party company for each corresponding business year after the decision on commencing the company reorganization procedure for the non-party company against the non-party company of this case was made is just and there is no error in the misapprehension of legal principles as to the non-deductible

3. As to the inclusion of recognized interest in the calculation of earnings

A. Article 52(1) of the Corporate Tax Act, and Articles 88(1)6 and 89(3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19891, Feb. 28, 2007) provide that in cases where a corporation’s free lending of money to a person with a special relationship is deemed to reduce the tax burden on the corporation’s income unjustly, the tax authority shall regard the lending of money to the person with a special relationship as the object of unfair calculation and calculation, and shall calculate the interest rate recognized as the object of unfair

In full view of the fact that even if a corporation has made a decision to commence a company reorganization procedure with respect to a specially related person after lending money to the specially related person without compensation, there is no change in the situation that the relevant corporation distributes profits due to gratuitous loan to the specially related person through the previous and following years, and the recognized interest rate under each of the above provisions is deemed to have been paid by the relevant corporation even though the relevant corporation did not actually receive interest on the amount equivalent thereto from the specially related person, and there is no need to consider whether the interest claim exists in calculating the recognized interest rate, and there is no need to consider whether it is impossible to recover under the premise that the interest claim exists in calculating the interest rate.

In the same purport, the judgment of the court below that the amount equivalent to the interest on loans, etc. to the subsidiaries of the non-party company should be included in the gross income in calculating the income amount of the non-party company's business year after the decision on commencing the company reorganization procedure for the non-party company's subsidiaries of this case was made is just and there is no

B. Article 70(1)1 of the Enforcement Decree of the Corporate Tax Act provides that the business year of accrual of earnings for the interest of a corporation shall be the business year to which the date of receipt under Article 45(1) of the Enforcement Decree of the Income Tax Act belongs. In addition, Article 45(9-2 of the Enforcement Decree of the Income Tax Act provides that the date of receipt of interest income from profits for non-business loans shall be the date of payment of interest pursuant to an agreement in principle. In calculating the total amount of profits for non-business loans, Article 51(7) provides that in cases of calculating the total amount of profits, the relevant non-business loan amount shall be the bonds which cannot be recovered due to the reasons such as a final return of tax base and the debtor's bankruptcy under Article 5(2)1 before the final return of tax base and the amount of tax are determined and corrected and shall be calculated by preferentially subtracting the principal from the recovered amount if the recovered amount

In full view of the language and purport of the above provisions, in order to apply each provision of Article 45 subparagraph 9-2 and Article 51 (7) of the Enforcement Decree of the Income Tax Act, the loan claims should be confirmed as irrecoverable bonds due to the debtor's bankruptcy under Article 55 (2) 1 of the Enforcement Decree of the Income Tax Act before the final return of the tax base or the determination and correction of the tax base and the tax amount, and there is no room for application of Article 51 (7) of the Enforcement Decree of the Income Tax Act to the interest holders who are not premised on

According to the facts duly established by the court below, the non-party company's subsidiaries were declared bankrupt between August 27, 2002 and May 30, 2003 (three subsidiaries among four subsidiaries were declared bankrupt after the commencement decision of company reorganization procedure). Accordingly, it can be known that the non-party company's loans, etc. held by the non-party company against its subsidiaries were not confirmed as bad debts until the final return of tax base for the business year 2002 and the business year 2003. Furthermore, since the non-party company did not actually hold interest bonds, etc. upon the loan claims against its subsidiaries, in calculating the income amount for the business year 2002 and 2003 business year of this case, Article 51 (7) of the Enforcement Decree of the Income Tax Act cannot be applied to the inclusion of the non-party company's dividends in the calculation of the income amount for the business year 2002 and 203

Therefore, even if the court below erred by failing to determine the plaintiff's assertion that the recognition interest on the loan claim of this case cannot be included in the gross income under Article 51 (7) of the Enforcement Decree of the Income Tax Act, such errors by the court below are not affected by the judgment, and thus, it cannot be said that the judgment of the court below is erroneous in

4. Conclusion

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Shin Young-chul (Presiding Justice)