Switzerland Co., Ltd. (Law Firm Barun, Attorneys Regular Savings-in-law, Counsel for the plaintiff-appellant)

Head of Pyeongtaek Tax Office

July 24, 2013

Suwon District Court Decision 2012Guhap6835 Decided November 7, 2012

1. Revocation of a judgment of the first instance;

2. The plaintiff's claim is dismissed.

3. All costs of the lawsuit shall be borne by the Plaintiff.

1. Purport of claim

On June 13, 2011, the Defendant’s notification of change in income amount of KRW 3,386,00,000, which the income earner was the Nonparty 1 (non-party to the judgment of the Supreme Court) against the Plaintiff on June 13, 2004 is revoked.

2. Purport of appeal

The same shall apply to the order.

1. The part citing the judgment of the court of first instance

Of the reasoning of the judgment of this court, the pertinent part is cited pursuant to Article 8(2) of the Administrative Litigation Act and the main text of Article 420 of the Civil Procedure Act, inasmuch as the pertinent part is identical to the relevant part of the judgment of the first instance.

2. Determination

(1) Whether the exclusion period has expired

(A) Laws and relevant legal principles

1) The disposal of income as stipulated under Article 67 of the former Corporate Tax Act (amended by Act No. 8831 of Dec. 31, 2007; hereinafter the same) is a procedure for ex post facto confirmation of the income that has already been reverted to a specific taxable year by specifying who belongs to the relevant person and the type of income if the amount was leaked out out of the company, in filing a return, determination, or correction of the corporate tax base. The amount of income is merely deemed to have been paid to the person to whom the income is actually attributed, but it is merely deemed to have been paid to the person to whom the income tax was actually paid, regardless of whether the income was actually paid to the person to whom the income is actually attributed, and thus, it cannot be deemed that the period for exclusion of taxation is unlawful since the change in the amount of income was made to the person to whom the income tax was paid at the time when the change was made, and thus, it cannot be deemed that the period for exclusion of taxation is more than the period for exclusion of taxation as above.

2) According to Article 26-2(1) of the former Framework Act on National Taxes, “where a taxpayer evades national taxes by fraud or other improper means,” a national tax may be imposed for ten years from the date on which the national tax is assessable (Article 12-3(1)1); and “where a taxpayer fails to file a tax base return within the statutory due date of return,” a national tax may be imposed for seven years from the date on which the national tax is assessable (Article 26-2(4) of the former Framework Act on National Taxes; Article 12-3(1)1 of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 19893, Feb. 28, 2007); Article 26-2(1)3 of the former Enforcement Decree of the Framework Act on National Taxes (amended by Act No. 19893, Oct. 15, 201; hereinafter the same shall apply).

3) Meanwhile, in cases where the tax authority deemed that the amount of gross income that was released from the company was reverted to an officer or employee and disposed of as a bonus, regardless of whether a notice on change in the amount of income was served on the corporation, if a disposition of income is made with respect to the person to whom the income accrued, regardless of whether a notice on change in the amount of income was served on the corporation, it constitutes "amount disposed as a bonus under the Corporate Tax Act" under Article 20 (1) 1 (c) of the former Income Tax Act and thus, the amount of income is subject to taxation, and the amount of income is the receipt date of the labor during the pertinent business year in which the person to whom the income accrued was imposed. Thus, the liability to pay global income tax on the person to whom the income accrued accrues is established at the time of the termination of the taxable period to which the relevant income accrued under Article 21 (1)

(B) The exclusion period for imposition of global income tax for 2004

According to the above facts, Nonparty 1: (a) made a false double sales contract to a seller, paid excessive sales proceeds, and raised funds by collecting the difference between the actual sales proceeds to a seller; and (b) embezzled funds using funds for stock transaction, etc.; (c) thus, it is difficult to deem that Nonparty 1, who anticipated that the instant amount should be disposed of in the future, should have been disposed of by the Defendant; and (d) thereby, it is difficult to deem that Nonparty 1 embezzled the above act of embezzlement to evade income tax on the bonus to be reverted to himself/herself. Accordingly, it cannot be deemed that Nonparty 1’s act of embezzlement under Article 26-2(1)1 of the former Framework Act on National Taxes, which is related to income tax from disposal of income, constitutes “where a taxpayer evades national taxes by fraud or other unlawful acts.”

However, inasmuch as it is deemed that the income tax liability of an income earner subject to disposition of income as seen earlier is retroactively established at the time when the pertinent year ends, the obligation to report global income tax should be deemed to have been imposed until May 31 of the following year with respect to such income tax (However, it does not mean the case where the tax base return was submitted only by the deadline for filing a tax return according to the language and text thereof, and “the tax base return that was included in the amount of embezzlement” is not “the case where Nonparty 1 did not submit the tax base return that was included in the amount of embezzlement.” However, in this case, the fact that Nonparty 1 did not submit the tax base return for global income tax in 2004 that was reverted to the income of this case within the statutory period for filing a tax return (the fact that there is no dispute, the purport of all pleadings, and the purport of all pleadings), it is reasonable to deem that the period for exclusion of global income tax for the year 204 is seven years pursuant to Article 26-2 (1) 2 of the former Framework Act.

(2) Whether Article 106 (1) 1 (b) of the former Enforcement Decree of the Corporate Tax Act constitutes “Article 106(1)

(A) According to Article 67 of the former Corporate Tax Act and Article 106 of the Enforcement Decree of the same Act, where it is clear that the amount included in the calculation of earnings has been leaked out of the company in determining or correcting the corporate tax base, the person to whom the income belongs shall be deemed to be a shareholder, investor, employee (excluding a shareholder, investor, or employee who is an executive officer or employee), if the person to whom the income accrues is a shareholder, investor, employee, or employee; if the person to whom the income accrues is a corporation or an individual, the person to whom the income accrues; if the person to whom the income accrues is a corporation or an individual operating the business, it shall be deemed to be a "other outflow from the company"; and if the person to whom the income accrues is a person other than the above person, the person to whom the income accrues shall be deemed to be a "other income," and the interpretation of the tax law shall not be allowed by interpretation or analogical interpretation without reasonable grounds (see, e.g., Supreme Court Decision 200Du437

(B) Under the premise that Nonparty 1 constitutes an executive officer as a bonus under Article 106(1)1 (b) of the former Enforcement Decree of the Corporate Tax Act, the Defendant notified the instant change in the income amount. Article 106(1)1 (b) of the former Enforcement Decree of the Corporate Tax Act stipulates that where it is clear that the amount included in the corporation’s gross income was leaked out of the company, and the person to whom the amount was reverted is an executive officer, the said amount should be disposed of as a bonus for the person to whom the income accrued. In full view of the following circumstances in light of the aforementioned legal principles, the “executive” cannot be deemed as a “executive” as an executive officer registered in the corporate register, and it is reasonable to view

① Under Article 43(6) of the former Enforcement Decree of the Corporate Tax Act, with respect to the scope of officers subject to disposition of profits in the calculation of bonuses, etc., an executive officer under paragraphs (1) through (5) (hereinafter “executive officer”) shall be a person performing duties under any of the following subparagraphs. Under one of the following subparagraphs, “all members of the board of directors, such as the chairperson, president, vice president, president, representative director, managing director, managing director, executive director, etc. of a corporation, and a liquidator (Article 1), auditor (Article 3), and other persons performing duties equivalent to those under subparagraphs 1 through 3 (Article 4).” In this context, “other persons performing duties equivalent to those under subparagraphs 1 through 3” under subparagraph 4 is not registered in the corporate register, but can only include officers performing duties equivalent to those under subparagraphs 1 through 3, but it cannot be interpreted that the scope of officers under Article 43(6) of the former Enforcement Decree of the Corporate Tax Act (hereinafter “the former Enforcement Decree”) is the same as those under Article 43(5).

In light of the form and content of “executive” under the former Enforcement Decree of the Corporate Tax Act, and the regulatory structure thereof, in light of the principle of strict interpretation of tax laws, etc., the meaning of executive officers coming from not more than Article 43(6) of the same Act should be interpreted in the same manner as the “executive officer” under the same provision pursuant to the law, unless otherwise prescribed by the same provision. Accordingly, the so-called “executive officer” under Article 106(1)1(b) of the former Corporate Tax Act, which provides for bonus disposition from the disposal of income, includes “executive officer” under Article 106(1)1(b) of the former Corporate Tax Act, which includes “other executive officers engaged in duties similar to subparagraphs 1 through 3.”

② The proviso of Article 106(1)1 of the former Enforcement Decree of the Corporate Tax Act, separate from “executive officers” under Article 106(1)1, provides for the meaning and scope of the representative separately from “executive officers.” In such a case, where the attribution of the amount of outflow from the company is unclear, it shall be deemed that it belongs to the representative. In general, where an executive officer, who is not a minority shareholder, and a person with a special relationship, owns 30/100 or more of the total number of outstanding stocks of the relevant corporation or total amount of investment in the relevant corporation and actually controls the operation of the corporation, such executive officer shall be deemed the representative. However, this provision does not provide that the representative shall be deemed as a bonus for the representative without any relationship with the substance, and it does not require a strict interpretation of Article 106(1)1 of the former Enforcement Decree of the Corporate Tax Act as to a certain fact that can be recognized as an act in order to prevent unfair acts under the tax law. Thus, the representative of the corporation subject to disposition as a bonus should be interpreted strictly in accordance with the text.

(C) In the instant case, it is recognized that Nonparty 1 did not have been registered as an executive officer of the Plaintiff on the corporate register at the time of embezzlement of the key amount of the instant case as seen earlier, but was the actual representative in charge of the Plaintiff’s financial management and enforcement affairs. Thus, Nonparty 1 can be deemed as the so-called “actual executive” under Article 43(6)4 of the former Enforcement Decree of the Corporate Tax Act in 2004, which reverted to the income accrued from such embezzlement. The Plaintiff’s assertion otherwise cannot

(D) Nonparty 1 constitutes “executive” under Article 106(1)1(b) of the former Enforcement Decree of the Corporate Tax Act. Accordingly, Nonparty 1’s notice of change in the income amount of this case, which deemed as a bonus disposition, is lawful.

3. Conclusion

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

Judges Choi Jong-ho (Presiding Judge) Kim Tae-ho