[1] The meaning of the denial of wrongful calculation under Article 52 of the Corporate Tax Act and the standard of determining whether economic rationality exists

[2] Whether the weighted average loan interest rate or the overdraft interest rate under Article 89(3) of the Enforcement Decree of the Corporate Tax Act “in the case of borrowing money at an interest rate higher than the market price”, one of the types of wrongful calculation, should be deemed as the market price which serves as the standard for applying the avoidance of wrongful calculation under Article 52(2) of the Corporate Tax Act (affirmative in principle)

[1] The rejection of unfair calculation under Article 52 of the Corporate Tax Act is a legal fiction that the taxation authority denies or reduces the tax burden by abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act without using a reasonable method by a person with a special relationship. It is limited to cases where a person with a special relationship is deemed to have neglected the economic rationality by calculating an unnatural and unreasonable act from the viewpoint of an economic person. Determination of the existence of an economic rationality is based on whether the transaction is abnormal in view of sound social norms or commercial practices, but also on the basis of the special circumstances at the time of the transaction, such as the transaction price between the non-special relationship and the special circumstances at the time of the transaction.

[2] Article 89(3) of the Enforcement Decree of the Corporate Tax Act, which provides for the market price under Article 52(2) of the Corporate Tax Act, which is the basis for the denial of wrongful calculation, provides that “in the case of borrowing money at an interest rate higher than the market price,” one of the types of wrongful calculation, “the average loan interest rate or the current loan interest rate shall be the market price.” Thus, barring any special circumstance, the interest rate under the above provision shall be deemed the market price.

[1] Article 52 of the Corporate Tax Act, Article 88(1) of the Enforcement Decree of the Corporate Tax Act / [2] Article 52(2) of the Corporate Tax Act, Article 89(3) of the Enforcement Decree of the

[1] [2] Supreme Court Decision 2016Du40375 Decided July 26, 2018 (Gong2018Ha, 1881) / [1] Supreme Court Decision 2002Du11479 Decided February 13, 2004 (Gong2004Sang, 288), Supreme Court Decision 2008Du15541 Decided October 28, 2010 (Gong2010Ha, 2188), Supreme Court Decision 2013Du1035 Decided September 27, 2013 (Gong2013Ha, 206), Supreme Court Decision 2017Du6387 (Gong2018; Supreme Court Decision 2018Du78485 Decided March 15, 2018, Supreme Court Decision 2017Du78485 Decided March 28, 2018 (Gong2018Du78485, Jul. 28, 2015, 2018)

literature Development Co., Ltd. (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

The director of the Southern Incheon District Office

Seoul High Court Decision 2015Nu57576 decided April 19, 2016

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

The grounds of appeal are examined.

1. The rejection of unfair act and calculation under Article 52 of the Corporate Tax Act is a legal fiction that the taxation authority denies or mitigates the tax burden by abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act without using a reasonable method by a person with a special relationship. It is limited to cases where it is deemed that the person with a right to taxation has neglected the economic rationality by calculating the negative and unreasonable acts from the viewpoint of an economic person. Determination of the existence of economic rationality is based on whether the transaction is abnormal in view of sound social norms or commercial practices, and the special circumstances at the time of the transaction should also be considered (see, e.g., Supreme Court Decisions 2002Du1479, Feb. 13, 2004; 2012Du1488, Oct. 18, 2010).

Meanwhile, Article 89(3) of the Enforcement Decree of the Corporate Tax Act, which provides for the market price under Article 52(2) of the Corporate Tax Act, which serves as the basis for the denial of wrongful calculation, provides that “in the case of borrowing money at an interest rate higher than the market price,” one of the types of wrongful calculation, shall be the market price. Therefore, barring any special circumstance, the interest rate prescribed in the above provision shall be deemed the market price (see Supreme Court Decision 2016Du40375, Jul. 26, 2018).

2. A. The lower court acknowledged the facts as indicated in its reasoning after comprehensively taking account of the adopted evidence, and, considering the following circumstances, determined that the instant disposition, which deemed the object of wrongful calculation, was lawful, on the ground that the Plaintiff’s borrowing of money from the Military Mutual-Aid Association, a shareholder around December 3, 1999 to 13.06% per annum, at the time of payment of each interest during the period from 2009 to 2012, would be abnormal in the lack of economic rationality in light of sound social norms and commercial practices, because the interest rate at the time of the Plaintiff’s borrowing of money from the Military Mutual-Aid Association to 13.06% per annum.

(1) In the event of a long-term maturity of the borrowed amount as in the instant borrowing, barring any special circumstance, such as where it is deemed reasonable to maintain a high interest rate, the determination as to whether the borrowed amount constitutes an unfair act as at the time of the first borrowing of the borrowed amount, as well as at the time of

(2) During the contract period of the instant loan, the market interest rate or the current loan interest rate prescribed by Ordinance of the Ministry of Strategy and Finance was alternatively lowered. From 2009 to 2012, the highest market interest rate was higher than 5.81% per annum, and the market interest rate was continuously lowered, and the current loan interest rate was higher than the general market interest rate, and even considering that the contract period of the instant loan was the long-term period, the market interest rate of the instant loan does not exceed 8.5% per annum from 2009 to 2011, and 6.9% per annum per annum of the current loan interest rate in 2012.

(3) Although the loan agreement of this case prohibits the borrower from bearing monetary liabilities to a third party without the prior consent of the lending institution, it merely appears to be a provision that prevents the plaintiff from deteriorating the financial situation of the lending institution, and it does not seem to prohibit the borrower from bearing the monetary liabilities at a low interest rate to reduce the expenses.

(4) It does not seem that there is any limitation to prohibit the early repayment by the Plaintiff under the instant loan agreement, and it is difficult to deem that the Plaintiff was unable to borrow funds from another financial business entity at a low interest rate and repay them early, or lower the interest rate against the Military Mutual Aid Association on the grounds thereof.

B. Examining the aforementioned legal principles and records, the lower court’s aforementioned determination is justifiable and did not err by misapprehending the legal doctrine on the establishment of the denial of wrongful calculation, contrary to what is alleged in the grounds of appeal.

3. 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 on the bench.

Justices Park Sang-ok (Presiding Justice)