Cho-2018-China-318 (2018.0515)

If the relevant remuneration is merely an external act of taking the form of remuneration to distribute profits reserved to the corporation, it shall not be included in the loss.

If the relevant remuneration is merely an external acquisition of the form of remuneration to distribute profits reserved to the corporation, it shall not be included in the loss because the bonus subject to non-deductible expenses is the same as the substance of the bonus subject to non-deductible expenses as a disposition of profits.

Article 43 (Non-Inclusion of Bonuses in Deductible Expenses)

2018Guhap67061 Revocation of Disposition of Corporate Tax Imposition

○ Construction Corporation

○ Head of tax office

October 4, 2018

October 18, 2018

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s disposition of imposing corporate tax of KRW 253,230,610 (including additional tax) against the Plaintiff on September 1, 2017 shall be revoked.

1. Details of the disposition;

A. From September 21, 2015 to December 21, 2015, the Plaintiff paid KRW 60 million to the Gangwon-gu, the representative director of the Plaintiff, and KRW 45 million to the Gangwon-gu, the director of the company, as each special bonus. While converting the executive’s salary into the annual salary system, the Plaintiff paid KRW 1,342,648,080 to the Gangwon-gu, the interim settled amount of retirement pay calculated based on the amount of remuneration that includes the said special bonus, and KRW 446,507,124 to the Gangwon-gu, the strong-gu, the director of the company.

B. From June 1, 2016 to July 30, 2016, the director of the Central Regional Tax Office of China conducted a corporate integration investigation with the Plaintiff, and notified the Defendant of the taxation data that excludes KRW 528,00,000,000 from deductible expenses, the sum of KRW 50,000,000,000 and KRW 40,000,000,000,000,000 from the above special bonus paid by the Plaintiff (hereinafter referred to as “instant bonus”) without justifiable grounds, on the ground that the excessive amount was paid without justifiable grounds, and excluded the amount from deductible expenses. Of the above interim amount of the retirement allowance, the amount of the said interim bonus exceeds the sum of KRW 1,261,15,204,00,000 from deductible expenses.

C. Accordingly, on September 1, 2017, the Defendant issued a correction and notification of KRW 253,230,610 (including additional tax of KRW 78,292,416) to the Plaintiff for the business year 2015 (hereinafter “instant disposition”).

D. On November 30, 2017, the Plaintiff dissatisfied with the instant disposition, filed an appeal with the Tax Tribunal, and the Tax Tribunal dismissed the said appeal on May 15, 2018.

[Reasons for Recognition] Facts without dispute, Gap evidence 1, 2, Eul evidence 1, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

1) The instant bonus is legally paid through a resolution of the general meeting of shareholders in accordance with the Plaintiff’s articles of incorporation and remuneration regulations, and thus, it should be recognized as losses.

2) The reason why the Plaintiff could have achieved a significant increase in sales in 2015 lies in the role of Gangwon-gu and Gangwon-gu, a general manager of construction order and field management, and the ○○-gu, a general manager of construction site management. Above all, since the company was operated for about 24 years from the establishment of the company and the ○○-gu, an officer only on the registry, has achieved these results, the Plaintiff paid the instant bonus with cumulative compensation.

3) Therefore, the instant disposition, based on the premise that the instant bonus is not included in the calculation of losses, should be revoked as it is unlawful.

B. Facts of recognition

1) The Plaintiff is a company established on May 22, 1992 and engaged in the construction business, etc. with its head office located in Suwon-si 40-ro 134, Suwon-si, Suwon-si.

2) At the time of the instant disposition, Gangwon-gu is a shareholder with 14,545 shares (36.36%) of the Plaintiff as the Plaintiff’s representative director, and Gangnam-gu is a shareholder with 5,333 percent of the Plaintiff’s shares (13.33% of the Plaintiff’s shares as a joint representative director on December 12, 2016) as the Plaintiff’s director (the share ratio reaches 24,726 shares, if the shares of Gangwon-gu and Gangwon-gu are combined with shares of Gangwon-do, a person with a special relationship (the shares of 24,726 shares).

3) On September 21, 2015, the Plaintiff paid an annual bonus of KRW 10 million to the Plaintiff’s executives and employees (at that time, the Plaintiff’s instant bonus of KRW 3,00,000,000, total of KRW 20,000,000 to the 111 staff members of the headquarters, including the lecture and the lecture, and KRW 1,000,000,000, total of KRW 20,000,000, and KRW 5,000,000,000, and KRW 1,000,000,000,000,000 and KRW 2,5,000,000,000,000,000,000 and KRW 2,5,000,000,000,000,000,000,00).

4) According to the Plaintiff’s articles of incorporation, remuneration for directors is determined by a resolution of the general meeting of shareholders, and the payment of retirement allowances for directors is stipulated by the rules on the payment of retirement allowances for directors (Article 37).

5) On October 1, 2015, the Plaintiff: (a) held a temporary general meeting of shareholders to approve the interim settlement agenda of retirement allowances; (b) enacted a provision on the payment of compensation and retirement allowances for executives; (c) according to this, bonus may be separately determined and executed by adding basic amount and various allowances (Article 11); (d) special bonus may be paid by a resolution of the board of directors according to the company’s performance and contribution to the performance of the executives (Article 13); (e) the payment of retirement allowances, including special compensation (special compensation) may be determined at the general meeting of shareholders, taking into account the company’s management situation, payment ability, and contribution to the company, etc. to an officer who has made a special contribution during his/her term of office (Article 19); (d) the Addenda shall retroactively apply to the continuous service period

6) On October 23, 2015, the Plaintiff again held a temporary general meeting of shareholders and approved the agenda of the annual salary system for executive officers and the class of classical ○ and classical ○○ to pay retirement special consolation benefits in addition to retirement allowances.

7) Meanwhile, according to the Plaintiff’s profit and loss statement, operating income was -22,387,632 won in the business year 2013, and sales amounting to KRW 25,865,226,288 in the business year 2014, and operating income was -42,661,693 won in the business year 27,431,545,551 won in the business year 2015, and operating income was 791,381,69,693 won in the business year 2015.

[Reasons for Recognition] Facts without dispute, Gap evidence 3 through 6, Eul evidence 2, Eul evidence 3-4 and 5, the purport of the whole pleadings

C. Relevant statutes

It is as shown in the attached Form.

D. Determination

1) Articles 19(1) and 20 subparag. 1 of the former Corporate Tax Act (amended by Act No. 1522, Dec. 19, 2017; hereinafter the same) and Article 43(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 28640, Feb. 13, 2018; hereinafter the same) stipulate that bonuses paid by disposing of profits shall not be included in deductible expenses as a matter of principle. Article 26 of the former Corporate Tax Act provides that "the amount deemed excessive or unreasonable as prescribed by Presidential Decree among the following losses shall not be included in deductible expenses in calculating the amount of income of a domestic corporation for each business year." Article 43(2) of the Enforcement Decree of the Corporate Tax Act on delegation provides that "where the amount paid exceeds the amount determined by articles of incorporation, general meeting of shareholders, general meeting of shareholders or resolution of the board of directors, such excess amount shall not be included in deductible expenses."

2) As a matter of principle, remuneration paid by a corporation in consideration of the performance of duties to an executive officer shall be included in the calculation of losses. However, in light of the language of the above provisions and the legislative intent of Article 26 of the former Corporate Tax Act and Article 43 of the former Enforcement Decree of the Corporate Tax Act to prevent unfair reduction of corporate income, etc., even if the remuneration was paid by a corporation to an executive officer who is a controlling shareholder (including its specially related executive officer), the remuneration shall not be included in the calculation of losses pursuant to Article 43 of the former Enforcement Decree of the Corporate Tax Act, considering the following: (a) the proportion and scale of the corporate operating income in order to prevent unfair reduction of corporate income; (b) the significant gap between the remuneration of other executive officers within the pertinent corporation or the same industry; (c) the possibility of periodic and continuous payment; (d) the increase or decrease of remuneration; (d) the relationship between the increase or decrease in corporate income; (e) the payment of dividends to other shareholders; and (e) the subjective intent of the corporation to unfairly reduce corporate income.

In addition, in light of difficulties in proof or the concept of fairness, if such circumstances are proved to a considerable extent, the entire amount of remuneration should be deemed as subject to non-deductible expenses, and the fact that the above remuneration includes part of the cost of performing duties and the said part is subject to inclusion in deductible expenses need to be proven by a taxpayer who is easy to submit specific data on the calculation process of remuneration or its composition (see, e.g., Supreme Court Decision 2015Du60884, Sept. 21, 2017).

3) In full view of the following circumstances acknowledged by the evidence as stated in subparagraph 3-1 of the above facts and the purport of the entire pleadings, it is reasonable to view that the instant bonus paid by the Plaintiff to Gangwon-young and Gangwon-do was merely in the form of bonus paid according to the standards for payment of wages determined by the resolution of the articles of incorporation and the general meeting of shareholders, even though the bonus paid by the Plaintiff to Gangwon-gu and Gangwon-do is in the nature of disposal of profits rather than the normal cost of performing duties.

Therefore, the defendant's disposition of this case which excluded the bonus from deductible expenses is legitimate, and all of the plaintiff's assertion against this is without merit.

① The instant bonus has an amount equivalent to 1.37% of the Plaintiff’s operating income in the business year of 2015 (=90,000,000 won/791,381,693 x 100%) and there is no person who received special bonus such as the instant bonus, other than lectures and lectures.

② Although the Plaintiff’s articles of incorporation, regulations on the payment of remuneration for executives and retirement allowances provide for the provisions on the remuneration for directors and retirement allowances, the above Articles of incorporation and regulations do not stipulate specific standards for the methods of evaluating performance, methods of payment, timing of payment, financial resources for payment, etc. In addition, the subject, timing and amount of payment of the instant bonus cannot be determined at all.

③ At the Plaintiff’s temporary general meeting of shareholders, only approval for the payment of special compensation itself was granted, and there was no specific approval for the payment method, amount, etc., and even part of the Plaintiff’s account book is included in the instant bonus. In addition, even according to the Plaintiff’s assertion, it is unclear whether the instant bonus pursuant to the special bonus provision under Article 13 of the Regulations on the Payment of Officers’ Remuneration and Retirement Allowance (in this case, the board of directors’ resolution is required, or the Plaintiff did not submit materials proving that the resolution of the board of directors was completed on September 23, 2015) pursuant to the special compensation provision under Article 19 of the Act on the Payment of Officers’ Remuneration and Retirement Allowance (in this case, it is unclear whether the approval of the temporary general meeting of shareholders was obtained on October 23, 2015).

④ The Plaintiff’s representative director (or director), and the Plaintiff’s major shareholder (or director), have absolute influence on the resolution of the above general meeting of shareholders. In full view of this, the decision of payment following the above resolution is merely based on the form supporting the withdrawal of the Plaintiff’s funds.

⑤ The Plaintiff asserts that the Plaintiff has contributed to the increase in sales in 2015 and accumulated compensation for the past 25 years as he/she was employed in Gangwon-gu, etc., but it is also difficult to calculate the amount of compensation for his/her meritorious services, such as Gangwon-gu, etc., whose basic remuneration is exceeded due to the submission of data on the details of calculation, composition, etc. of the bonus in this case. If the instant bonus was paid on the ground of past contribution, it is difficult to deem it as losses that will accrue in the business year 201

④ On July 21, 2017, 2017, as the representative director of the Plaintiff, submitted a written confirmation to the director of the Central Tax Office of the mid-term Regional Tax Office that “A part of the instant bonus was modified as a tin bonus payment, and paid an excessive amount as a tin bonus, and on December 21, 2015, he/she paid a special bonus only to the ○○○ and the strong ○○.”

3. Conclusion

Thus, the plaintiff's claim of this case is dismissed as it is without merit.

Relevant statutes

▣ 구 법인세법(2017. 12. 19. 법률 제15222호로 개정되기 전의 것)

Article 19 (Scope of Losses)

(1) Deductible expenses shall be the amount of losses incurred by transactions which reduce the net assets of a corporation, excluding return of capital or financing, disposition of surplus funds, and what is provided for in this Act.

(2) Losses referred to in paragraph (1) shall be losses or expenses incurred in connection with the business of a corporation which are generally accepted as ordinary or directly related to profit, except as otherwise expressly prescribed by this Act and other Acts.

(3) Losses distributed under Article 100-18 (1) of the Restriction of Special Taxation Act shall be deemed deductible expenses referred to in paragraph (1).

(4) Matters necessary for the scope and types of losses under the provisions of paragraphs (1) through (3) shall be prescribed by Presidential Decree.

Article 20 (Non-Inclusion of Losses from Capital Transactions in Calculation of Losses)

None of the following losses shall be included in deductible expenses for the purpose of calculating the amount of income of a domestic corporation for each business year:

1. The amount computed by counting (referring to counting as losses when settlement of accounts is fixed; hereinafter the same shall apply) the appropriation of surplus as losses: Provided, That the same shall not apply to piece rates prescribed by Presidential Decree;

2. Deleted;

3. Stock discount;

Article 26 (Non-Inclusion of Excessive Expenses in Calculation of Losses)

None of the following losses deemed excessive or unjust, as prescribed by Presidential Decree, shall be included in deductible expenses for the purpose of calculating the amount of income of a domestic corporation for each business year:

1. Personnel expenses;

2. Welfare expenses;

3. Travel expenses, education and training expenses;

4. Losses incurred or disbursed by a corporation in the course of jointly operating or managing the same organization, business, etc. as a person other than the corporation;

5. Expenses prescribed by Presidential Decree, other than those referred to in subparagraphs 1 through 4, deemed to have little direct connection to the business of a corporation.

▣ 구 법인세법 시행령(2018. 2. 13. 대통령령 제28640호로 개정되기 전의 것)

Article 43 (Non-Inclusion of Bonuses in Calculation of Losses)

(1) Bonuses paid by a corporation to officers or employees in the disposition of profits (excluding piece rates falling under the provisions of any subparagraph of Article 20 (1)) shall not be included in the calculation of losses. In this case, remuneration paid to members who invest through work and labor in unlimited partnerships or limited partnerships shall be deemed as bonuses from the disposition of profits.

(2) Where a corporation pays bonuses to executives in excess of the amount paid according to the standards for payment of benefits determined by the articles of incorporation, the general meeting of shareholders, the general meeting of partners or the resolution of the board of directors, such excess amount shall

(3) Where the remuneration paid by a corporation to an officer or employee who is a controlling stockholder, etc. (including persons in a special relationship; hereafter the same shall apply in this paragraph) is in excess of the amount paid to officers or employees other than the controlling stockholders, etc. in the same position without justifiable grounds, the amount in excess shall not

(4) Remuneration paid to executives of a non-permanent corporation shall be included in the calculation of losses, except in cases falling under Article 52 of the Act.

(5) Dissolution bonuses or retirement bonuses paid to executives or employees of a corporation due to its dissolution shall be deemed as losses in the final business year.

(6) and (6).

(7) The term "controlling stockholder, etc." in paragraph (3) means a stockholder, etc. (hereinafter referred to as the "controlling stockholder, etc.") who, holding 1/100 or more of the total number of outstanding stocks of or total amount of investment in a corporation, have the largest stocks or investment shares after summing up the stocks or investment shares owned by the stockholder,

(8) A person in a special relationship under paragraphs (3) and (7) means a person who is in a relationship falling under any of the following subparagraphs with the relevant stockholder, etc.:

1. A person with any of the following relationships, if the relevant stockholder, etc. is an individual:

(a) Relatives (referring to a person falling under Article 1-2 (1) of the Enforcement Decree of the Framework Act on National Taxes; hereinafter the same shall apply);

(b) Corporations with a relationship under Article 87 (1) 1; and

(c) A corporation in which the relevant stockholder, etc. and persons falling under items (a) and (b) invest 30/100 or more of total number of stocks issued

(d) Non-profit corporations in which the relevant stockholder, etc. and his/her relatives occupy the majority of the directors or contribute 30/100 or more of contributions (limited to contributions for establishment) and one of them is the founder;

(e) A corporation which invests 30/100 or more of the total number of stocks issued or total amount of money invested by the corporation falling under items (c)

2. A person in a relationship falling under any of the subparagraphs (excluding subparagraph 3) of Article 87 (1) if the relevant stockholder, etc. is a corporation.