Cho Jae-2016- Daejeon-3806 ( November 27, 2017)

The claim of this case, which was retired without compensation after conversion into equity according to the plaintiff's rehabilitation plan, constitutes "a claim confirmed to be impossible to recover according to the decision to grant authorization."

The claim of this case, which was retired without compensation after conversion into equity according to the Plaintiff’s rehabilitation plan, constitutes “a claim confirmed as impossible to be recovered according to the decision to grant authorization for the rehabilitation plan,” and cannot be said to have been forfeited because rehabilitation procedures

Article 17-2 (Deduction of Bad Debt Tax Amount) of the former Value-Added Tax Act

2017Guhap107574 Revocation of Disposition of Imposition of Value-Added Tax

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○ Head of tax office

October 19, 2018

November 7, 2018

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

Division of Value-Added Tax ○○○○○ for the first quarter of March 14, 2016 by the Defendant against the Plaintiff on March 14, 2016

The excess disposition (including additional duties) shall be revoked.

1. Details of the disposition;

A. The plaintiff's status

The plaintiff is a corporation established on April 28, 1954 and engaged in comprehensive construction, housing construction sales, etc. in ○○○○.

B. Conversion into equity and capital free of charge according to the Plaintiff’s rehabilitation plan

1) On October 11, 2012, the Plaintiff obtained a rehabilitation plan approval according to the rehabilitation plan on February 22, 2013, following a decision to commence rehabilitation procedures at the Seoul Central Court pursuant to the Debtor Rehabilitation and Bankruptcy Act, and the share structure of the Plaintiff around December 31, 2012 is as follows.

Table 1 Omitted

2) The contents pertaining to the consolidation of shares and issuance of new shares through debt-equity swap among the contents subject to the decision to authorize the rehabilitation plan are as follows.

Table 2. Authorization of the rehabilitation plan for the main contents

(c) Obligations (28 pages) to persons specially related to rehabilitation claims;

(2) Obligations of specially related persons of rehabilitation claims for commercial transactions

(A) The conversion of principal and 7% prior to the commencement into equity and 23% in cash, but the change of shareholders' rights and the issuance of new shares (100 pages)

1. Reduction of capital by means of the consolidation of stocks (the primary consolidation of stocks);

(a) Consolidation of stocks;

Shares for specially related persons, such as 37,619,247 shares issued prior to the authorization of the rehabilitation plan shall be retired without compensation, and shares for other shareholders shall be combined with shares of 5,000 won per share with face value of 5,00 won per share.

(c) Effective date of the consolidation of stocks;

The effect of decrease in capital following the consolidation of shares takes place on the authorization date of the rehabilitation plan.

(b)

3. Issuance of new stocks through conversion into investment (102 pages).

(a) The administrator shall, with the permission of the rehabilitation corporation, prevent any rehabilitation creditor from paying the share price, and shall substitute for the repayment of the relevant rehabilitation claim on the date when new shares are issued and issued as follows:

(b)

(b) Lending debts of rehabilitation claims and financial institutions, lending debts of persons specially related to rehabilitation claims, liabilities for rehabilitation claims and commercial transactions, liabilities for commercial transactions of persons specially related to rehabilitation claims, obligations for executives and employees,

(a) Class of shares: Registered common shares; and

(b) Par value per share: 5,000 won;

(c) Par value per share: 5,000 won;

(d) The number of shares to be issued: 109,944,496 shares; and

(e) The amount of capital increased due to the issuance of new stocks: 549,72 million won.

(f) The amount of debts that are reduced due to the issuance of new stocks: 549,726 million won;

(h) The effective date of issuance of new shares: The effective date of capital reduction by means of the consolidation of shares pursuant to Section 2 of Chapter 9 shall take effect on the next business day following the effective date of capital reduction by the consolidation of shares pursuant to the "Section 1. of Chapter 9", and the

(b)

4. Reduction of capital due to the consolidation of stocks after conversion of investment (the second consolidation of stocks);

(a) Method of recombined stocks;

The consolidation of existing shares under Section 2.1. of Chapter 9 and the consolidation of 10 shares with the face value of 5,000 won with the face value of 5,000 won and 100 won with the face value of 5,000 won with the shares in order to maintain the scale of the company's capital after a partial conversion of the amount of claims for rehabilitation claims into equity under Section 2.3. of Chapter 9: Provided, That the obligations for lending to a person with a special relationship and the obligations for commercial transactions with a special relationship (referring to the obligations for leasing to a person with a special relationship and the obligations for commercial transactions with a special relationship in the classification of rehabilitation claims) are all retired without compensation.

(b) The effective date of the capital reduction;

The reduction of capital following the consolidation of shares takes effect on the date five business days after the date of entry into force of the occurrence of new shares by conversion of investment in Chapter 9, Section 2, 3.

3) On February 25, 2013, according to the rehabilitation plan, the Plaintiff converted the amount of debt ○○○○○○○ (hereinafter “instant claim”) to Company A, a commercial creditor, into equity investment as shown in the table 3 as follows. On March 6, 2013, the Plaintiff retired 18,39,226 shares (the date five business days elapsed from the date of entry into force of the shares converted into equity) of the shares converted into equity investment without compensation.

(d) Circumstances in which the bad debt tax amount deduction against A and the imposition disposition of value-added tax is imposed on the plaintiff;

1) A. A. A. submitted to the head of the competent tax office a request for correction stating that the difference between the book value of the bonds converted into investment and the market value of the stocks issued after the conversion into investment should be deducted from the output tax amount of value-added tax for the first period of January 2013, 2013, considering that a virtual claim for correction is legitimate, the head of the competent tax office rendered a decision of refund of value-added tax 00 won at the A. A’s head office, and notified the Defendant of the taxation data.

2) On March 14, 2016, the Defendant: (a) deducted the pertinent input tax amount deducted by the Plaintiff on the ground that the said amount was deducted from the output tax amount; and (b) imposed a disposition of KRW 00,000 on the Plaintiff on March 14, 2016 (hereinafter “instant disposition”).

3) On October 4, 2017, the Plaintiff is dissatisfied with the Plaintiff’s objection and filed an objection on June 8, 2016 with the Tax Tribunal.

The Tax Tribunal dismissed the plaintiff's claim on November 27, 2016.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 3, 5, Eul evidence Nos. 1 and 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The conversion of investment into equity and stock retirement are separate transactions, and losses incurred in the course of capital reduction, which is capital transactions, are not subject to bad debt tax deduction. In addition, the acquisition value of new shares acquired by conversion into equity investment, pursuant to Article 72(2)4-2 of the Enforcement Decree of the Corporate Tax Act, shall be deemed to be the book value of the bonds converted into equity investment. As such, A does not constitute a ground for bad debt tax deduction as it constitutes the repayment of the bonds upon the acquisition of the stocks converted into equity investment. Therefore, A does not have any ground for bad debt tax deduction to A, and the Plaintiff cannot be subject to a bad debt tax

2) Classification of rehabilitation claims and public-interest claims shall be based on the time when the tax liability is established. The time when the taxable period of value-added tax expires pursuant to Article 21 subparag. 7 of the Framework Act on National Taxes. The Plaintiff is forfeited due to the Plaintiff’s failure to report as rehabilitation claims, since A was supplied goods and services by its head office and branch office from January 1, 2009 to February 2, 2012, prior to the commencement date of rehabilitation procedures, the liability for taxation was established prior to the commencement date of rehabilitation procedures, and the bad debt tax credit system is merely a collection procedure and does not affect the establishment of the tax liability.

B. Relevant statutes

It is as shown in the attached Form.

C. Whether the instant disposition is lawful

1) Whether grounds for bad debt tax credit have occurred

A) The main sentence of Article 17-2(1) of the former Value-Added Tax Act (amended by Act No. 11608, Jan. 1, 2013; hereinafter the same) provides for goods or services subject to the imposition of value-added tax.

Article 63-2 (1) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 24359, Feb. 15, 2013; hereinafter the same shall apply) provides that "where all or part of credit sales or other sales claims (referring to those that include value-added tax) are bad debt due to the bankruptcy or compulsory execution of the person who receives the supply or other causes prescribed by Presidential Decree, an amount obtained by multiplying the bad debt by 10/110 may be deducted from the output tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive," and "the main sentence of Article 17-2 (1) of the Act (amended by Presidential Decree No. 24359, Feb. 15, 2013; hereinafter the same shall apply)" refers to the grounds recognized as bad debt pursuant to Article 55 (2) of the Enforcement Decree of the Income Tax Act and Article 19-2 (1) 5 of the Enforcement Decree of the Corporate Tax Act.

In addition, Article 17-2 (3) of the former Value-Added Tax Act provides that "where an entrepreneur supplied with goods or services has the whole or part of the bad debt tax amount deducted as an input tax amount pursuant to Article 17, and the entrepreneur becomes final and conclusive before the closure of business, the amount equivalent to the bad debt tax amount shall be deducted from the input tax amount in the taxable period in which the bad debt becomes final and conclusive: Provided, That where the entrepreneur has not deducted the bad debt tax amount, the head of the tax office having jurisdiction over the person who

Article 72(2)4-2 of the Enforcement Decree of the Corporate Tax Act provides that with respect to the acquisition value of assets under Article 41 of the Corporate Tax Act, stocks acquired through a debt-to-equity swap shall be the market price at the time of acquisition; however, in cases where a corporation, which received a decision to authorize the rehabilitation plan including the contents of conversion of liabilities into investments under the Debtor Rehabilitation Act, conducts a debt-to-equity swap, the book value of the assets acquired through a debt-to-equity swap shall be the acquisition value of the assets."B) and the following circumstances revealed by the above facts, it is reasonable to view that the claim against the Plaintiff by the Plaintiff against the Plaintiff, which was converted into investments pursuant to the Plaintiff’s rehabilitation plan, constitutes “a claim confirmed as impossible to be recovered according to the decision to authorize the rehabilitation plan” under Article 19-2(

(1) In corporate rehabilitation procedures, the conversion of investment into investment has the same effect as the debt exemption in that there is no outflow of funds for debt repayment from the standpoint of the debtor, and it has the advantage that the debt exemption profit can be deferred without immediate inclusion in the income from the debt exemption, and from the standpoint of the creditor, at least it is possible for the creditor to liquidate into money the stocks into which the debt is converted into investment without being exempted, and in addition, the creditors may participate in the management through the general meeting of shareholders after the completion of rehabilitation procedures as the shareholders (hereinafter referred to as "equity swap into investment" in comparison with the conversion into investment conducted under the rehabilitation plan in this case).

(2) However, unlike ordinary debt-equity swap, the Plaintiff’s rehabilitation plan is different from ordinary debt-equity swap, and as seen earlier, partially “with respect to the method of changing the rights of the rehabilitation claim’s commercial obligation and its repayment

On the date when the shares newly issued by a company take effect, the rehabilitation claim shall be substituted for the repayment of the rehabilitation claim, and the entire shares issued by a person with a special relationship and a person with a special relationship shall be reduced free of charge. In fact, after a part of the rehabilitation claim of AA against A according to the authorization decision, the rehabilitation claim of A had been partially converted into equity, the shares newly issued by A, which were newly issued by A, were all discharged as capital free of charge. Then, A did not obtain any actual satisfaction as the claim of A, which was issued by A, was retired through a capital reduction without compensation. In this case, unlike the ordinary debt-equity swap, it would not be different from "the exemption of the obligation" only in the form of a debt-equity swap.

(3) It is difficult to interpret Article 72(2)4-2 of the Enforcement Decree of the Corporate Tax Act as to the burden of value-added tax, in particular, to exclude a creditor from the deduction of the bad debt amount of the output tax, even in the case of “the exemption of the actual obligation, not the ordinary debt-equity swap” as in this case. In other words, there may be some room to deem that the creditor would hold shares and thus not fall under the cause of bad debt as alleged by the Plaintiff as a result of the application of the above Enforcement Decree of the Corporate Tax Act. However, at least in this case where a creditor is expected to retire through a debt-equity swap and a capital reduction without compensation from the rehabilitation plan to the approval plan for rehabilitation plan, it cannot be deemed as holding new shares issued through a debt-equity swap. Therefore, the acquisition value of shares to be retired without compensation cannot be deemed as

(4) Furthermore, as long as the Plaintiff’s rehabilitation plan plans to reduce capital without compensation and retire shares issued through a conversion of investment unlike ordinary conversion of investment, it merely takes the form of a conversion of investment to resolve the obligor’s taxation problem, it is reasonable to view that the legal effect of the parties’ intent in examining its legal effect is for the single purpose of “the exemption of liabilities with no compensation,” and otherwise, it cannot be viewed as separate from the “issuance of new shares following the conversion of investment” and “free retirement of new shares.”

(5) In the instant case, as alleged by the Plaintiff, if it is deemed that A was to have recovered sales claims through the shares acquired by A’s conversion into equity, A bears the burden of the value-added tax not collected in the Plaintiff’s transaction, in addition to the losses incurred by A’s free reduction of capital and retirement of the shares. On the other hand, the Plaintiff is not merely entitled to receive the profit of exemption from the obligation through the conversion into equity and free reduction of capital, but also has no possibility of collecting the value-added tax. The Plaintiff’s failure to bear the value-added tax would be deducted from the input tax amount, thereby causing a serious imbalance in the equity of tax burden. This is contrary to the purport of the system

2) Whether a taxation claim against the plaintiff has forfeited or not

A) Article 17-2(3) of the former Value-Added Tax Act provides that, in cases where an entrepreneur in receipt of the supply of goods or services deducts all or part of bad debt tax amount as an input tax amount under Article 17, and where bad debt of a supplier is finalized before the entrepreneur in receipt of the supply business closure, the relevant bad debt tax amount shall be subtracted from the input tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive: Provided, That in cases where the relevant entrepreneur does not deduct it, the head of the competent tax office having jurisdiction over the person who receives the supply as prescribed by the Presidential Decree shall correct it. Thus, when the bad debt of the supplier becomes final and conclusive before the entrepreneur in receipt of the supply business closure, the entrepreneur’s liability to pay for the bad debt tax amount arises only when the bad debt becomes final and conclusive and the corresponding taxation claim exists (see Supreme Court Decision 2005Da3687, Oct. 12, 206).

B) In light of the aforementioned legal principles, the Plaintiff submitted to the head of the competent tax office a written claim for rectification that the difference between the book value of the claim converted into investment and the market value of the shares issued after the conversion into investment pursuant to the Plaintiff’s rehabilitation plan shall be deducted from the output tax amount of value-added tax at the end of January 2013, 2013, on the basis of the difference between the book value of the claim converted into investment and the market value of the shares issued after the conversion into investment, and the head of the competent tax office deemed the claim for rectification by A to be legitimate, and thus, the fact that A rendered a decision to refund the value-added tax KRW 00 and A to the head office of the competent tax office is as seen above. Therefore, the tax claim

Therefore, since a taxation claim cannot be seen as forfeited because it did not report it as a rehabilitation claim in the rehabilitation procedure, the plaintiff's assertion on this part is without merit.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.