[1] The meaning of "ordinary expenses generally accepted" under Article 19 (2) of the Corporate Tax Act and the method of determining whether such expenses constitute such expenses

[2] The standard for determining whether a corporation’s expenses incurred for its business constitute “entertainment expenses” or “sale incidental expenses” under the Corporate Tax Act

[3] In a case where a company that imported and sold tobacco subsidized the sales support personnel and vehicle purchase cost for the purpose of developing new markets and promoting sales with an agency that discontinued its business due to its poor business operation, the case holding that since it constitutes a "sale incidental expense" paid to the other party business operator, it should be deemed as entertainment expenses and thus the disposition of non-taxation as excessive amount of entertainment expenses

[1] In principle, Article 19(2) of the Corporate Tax Act provides that “the cost of loss or expenses incurred in connection with the business of the corporation shall be generally accepted as normal or directly related to profit.” The term “generally accepted cost” refers to the cost that is deemed to have been disbursed under the same situation by other corporations operating the same kind of business as the taxpayer. The determination of whether it constitutes such cost shall be made objectively by comprehensively taking into account the details, purpose, form, amount, effect, etc. of the disbursement, and barring special circumstances, the cost spent in violation of social order shall be excluded.

[2] If the other party is a business-related person and the purpose of expenditure is to promote smooth progress in transactional relations by promoting friendship between business-related persons through entertainment and other acts, such expenses are deemed entertainment expenses under Article 25(5) of the Corporate Tax Act (amended by Act No. 6293 of Dec. 29, 2000). However, if the disbursement process, nature, and amount are recognized as normally required in relation to the sale of goods or products in light of sound social norms or commercial practices, if it is acknowledged as normally required expenses in relation to the sale of goods or products in light of sound common sense or commercial practices, such expenses constitute sales incidental expenses recognized as losses from Article 19(1) of the Corporate Tax Act and Article 19 subparag. 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009).

[3] In a case where a company that imported and sold tobacco subsidized the sales support personnel and vehicle purchase cost for the purpose of developing a new market and promoting sales, the case holding that since it constitutes a “sale incidental expense” paid to the other party company, it is deemed as entertainment expenses and thus the disposition of non-taxation as excessive amount of entertainment expenses is unlawful

[1] Article 19 (2) of the Corporate Tax Act / [2] Articles 19 (1) and 25 (5) of the Corporate Tax Act, Article 19 subparagraph 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009) / [3] Articles 19 (1) and (2) and 25 (5) of the Corporate Tax Act, Article 19 subparagraph 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009), Article 25-4 of the Tobacco Business Act

[2] Supreme Court Decision 2005Du8924 Decided October 25, 2007 (Gong2007Ha, 1860), Supreme Court Decision 2006Du1098 Decided July 10, 2008, Supreme Court Decision 2007Du10389 Decided July 9, 2009 (Gong2009Ha, 1347)

Plaintiff Co., Ltd. (Attorney Jeong Byung-chul et al., Counsel for the plaintiff-appellant)

Head of the tax office;

Seoul High Court Decision 2006Nu29012 decided May 17, 2007

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

The grounds of appeal are examined.

In principle, Article 19(2) of the Corporate Tax Act provides that “the cost of loss or expenses incurred or incurred in connection with the business of the corporation shall be generally accepted as normal or directly related to profit.” Here, “generally accepted cost” refers to the cost deemed to have been disbursed under the same situation with respect to other corporations engaged in the same kind of business as the person liable for tax payment. Whether it constitutes such cost shall be determined objectively by comprehensively taking into account the process, purpose, form, amount, effect, etc. of the disbursement, and barring any special circumstance, the cost spent in violation of social order shall be excluded.

Meanwhile, if the other party is a business-related person and the purpose of expenditure is to promote smooth progress in transactional relations by promoting friendship with business-related persons through entertainment, etc. among the expenses paid by a corporation for business, such expenses are deemed entertainment expenses under Article 25(5) of the Corporate Tax Act (amended by Act No. 6293 of Dec. 29, 200). However, if the disbursement process, nature, and amount are recognized as normally required in relation to the sale of goods or products in light of sound social norms or commercial practices, then such expenses constitute sales incidental expenses recognized as losses from Article 19(1) of the Corporate Tax Act and Article 19 subparag. 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009) (see Supreme Court Decisions 2005Du8294979 of Oct. 25, 2007; 2009Du838979, Jul. 9, 2007).

The court below, after compiling the evidence, found the facts as stated in its decision, and found the following facts: (1) since the existing agents, which the plaintiff had been affected by a serious preference of consumers for tobacco imported and sold in the south area including Busan and Daegu, have suspended their business; (2) the plaintiff requested non-party 1, 2, and 3, the agents in Seoul and Incheon area, to additionally assign the business in the south area, and agreed to provide support such as personnel expenses for operating staff, vehicle purchase expenses, and maintenance expenses to promote new markets in order to develop and sell new markets; and (3) increased subsidies to other agencies outside the Southern area in around 1999 due to the business deterioration caused by the foreign exchange crisis in 197, the court below determined that the portion of the entertainment expenses paid to the business entity in excess of the amount of entertainment expenses paid to the business entity in excess of the amount of entertainment expenses paid to the business entity in excess of the amount of entertainment expenses paid to the business entity in consideration of the legislative and social order in light of the legislative intent of Article 25 of the Tobacco Business Act.

In light of the above legal principles and records, the above judgment below is just and there is no error in the misapprehension of legal principles as to the requirements for losses and sales incidental expenses under Article 19 (2) of the Corporate Tax Act.

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)