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

[2] The meaning of Article 88(1)9 of the former Enforcement Decree of the Corporate Tax Act stipulating the type of wrongful calculation

[3] Whether a transaction between the relevant corporation and a related party constitutes a transaction made through a person other than a related party under Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (affirmative)

[4] The case affirming the judgment below holding that in case where Gap corporation and Eul, etc. were directors of Eul corporation and Eul corporation, they sold approximately 1/3 of the shares issued by Byung corporation and Byung corporation, which were owned by Eul corporation, in a single contract, and divided them according to the ratio of the number of shares transferred by each party upon receiving the above money, and the tax authority made a disposition to increase Gap corporation's corporate tax for the pertinent business year by adding profits distributed by Eul corporation to Eul et al., the part of the shares issued by Eul corporation and Eul corporation's directors is more than the Korean stock exchange class of the shares transferred by Eul corporation and Article 52 of the former Corporate Tax Act, and Article 88 (1) 9 of the former Enforcement Decree of the Corporate Tax Act, the calculation and calculation should be denied

[1] The method of denying wrongful calculation under Article 52 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010) is a system where a corporation’s act of wrongful calculation is deemed to have avoided or reduced tax burden by abusing various forms of transaction listed in each subparagraph of Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010) without using a reasonable method from a person with a special relationship. This system is applicable only to cases where, in light of an economic person’s position, the person with the authority to impose tax deems that the transaction was unjustly avoided or reduced tax burden by abusing the forms of transaction listed in each subparagraph of Article 8(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010). The determination of economic rationality should be made by considering the various circumstances of the transaction with a special relationship at the time of the transaction.

[2] Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010) provides an individual and specific type of act under subparagraphs 1 through 7, 7-2, 8, and 8-2 with regard to cases where it is deemed that the tax burden has been unfairly reduced, and Article 8(1) provides an individual and specific type of act under subparagraphs 1 through 9, "other acts or calculations corresponding to subparagraphs 1 through 7, 7-2, 8, and 8-2, and other cases where it is deemed that the profits of the corporation have been distributed," and the meaning of subparagraph 9 refers to cases where the profits have been distributed to the specially related person in addition to those acts under subparagraphs 1 through 7, 7-2, 8, and 8-2.

[3] According to Article 52 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010); Article 88(2) main text of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010); Article 88(1) of the former Enforcement Decree of the Corporate Tax Act applies to transactions between the pertinent corporation and its related party. This includes transactions conducted through a person other than the related party.

[4] In a case where Gap corporation and Eul, etc. were directors of Eul corporation and Eul corporation, Gap corporation, sold approximately 1/3 of the shares issued by Byung corporation and Byung corporation's shares issued by Byung corporation, which were owned by Eul and Eul, in a single contract, and divided them according to the ratio of the number of shares transferred by each party after receiving the above money. The tax authority added profits distributed Gap corporation to Eul et al., and issued a disposition to increase Gap corporation's corporate tax for the pertinent business year, the case affirming the judgment below that Eul et al. distributed part of the above amount of management rights to Eul's shares transferred to Eul et al., on the ground that there is no economic and reasonable reason to receive distribution of the part corresponding to the management rights premium, and the part exceeding the closing price of Eul corporation's shares transferred to Eul et al., and the above act is subject to unfair calculation under Article 52 of the former Corporate Tax Act and Article 58 of the former Enforcement Decree of the Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010).

[1] Article 52 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 88 (1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22184, Jun. 8, 2010); Article 88 (2) of the former Enforcement Decree of the Corporate Tax Act / [2] Article 88 (1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22184, Jun. 8, 2010); Article 52 of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 88 (1) and (2) of the former Enforcement Decree of the Corporate Tax Act (Amended by Act No. 22184, Jun. 8, 2010); Article 28 (1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 222184, Dec. 30, 20108)

[1] Supreme Court Decision 2008Du15541 Decided October 28, 2010 (Gong2010Ha, 2188), Supreme Court Decision 2015Du39842 Decided July 20, 2018 (Gong2018Ha, 1787), Supreme Court Decision 2016Du40375 Decided July 26, 2018 (Gong2018Ha, 181), Supreme Court Decision 2016Du39573 Decided October 25, 2018 (Gong2018Ha, 2279), Supreme Court Decision 2017Du47519 (Gong2019, 2013Ha, 2016) / [3] Supreme Court Decision 2010Du16565 Decided December 26, 2016]

S Location Korea Co., Ltd. (Law Firm Tae & Tae, Attorney Park Ho-soo, Counsel for the plaintiff-appellant)

Head of Namincheon Tax Office and one other

Seoul High Court Decision 2015Nu66068 decided September 2, 2016

All appeals are dismissed. The costs of appeal are assessed against the Plaintiff.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 52 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that the rejection of unfair act and calculation under Article 52 of the former Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same) is a system where a corporation’s act and calculation of unfair act and calculation of unfair acts with a specially related person is deemed to have avoided or reduced tax burden by abusing various types of transactions listed in each subparagraph of Article 8(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same) without using a reasonable method by a person with a special relationship, the person with a taxation authority is deemed to have denied it and deemed to have accrued income objectively and reasonably in accordance with the method prescribed by statutes. The determination of whether an economic rationality exists should be made based on the special circumstances of the transaction between the parties with a special relationship.

Under subparagraphs 1 through 7, 7-2, 8, and 8-2 of Article 88 of the Enforcement Decree of the above Act, where it is deemed that the tax burden has been reduced unfairly, the types of acts individually and specifically shall be defined, and under subparagraph 9 of the above Article, the general types of acts shall be defined as "other acts or calculation corresponding to those under subparagraphs 1 through 7, 7-2, 8, and 8-2 and other cases where it is deemed that the profits of the corporation have been distributed in addition to those under subparagraphs 1 through 7, 7-2, 8, and 8-2" Thus, the meaning of subparagraph 9 refers to cases where the profits have been distributed to the specially related persons in addition to those under subparagraphs 1 through 7, 7-2, 8, and 8-2 (see Supreme Court Decision 2006Du125, Nov. 10, 206, etc.).

Meanwhile, according to Article 52 of the former Corporate Tax Act and Article 88(2) of the former Enforcement Decree of the Corporate Tax Act, Article 88(1) of the former Enforcement Decree applies to a transaction between the relevant corporation and a related party. This includes a transaction made through a person other than a related party.

2. Based on its reasoning, the lower court determined that: (a) Nonparty 1, Nonparty 2, and Nonparty 3 (hereinafter “the directors of the Plaintiff Company”), the directors of the Plaintiff Company, distributed part of the management rights of the Plaintiff Company’s stocks issued with Daehan Co., Ltd. (hereinafter “D”) and Daehan’s stocks owned by the Plaintiff Company; and (b) sold approximately KRW 11.1 billion to Nonparty 4 and paid the above money to each of the directors; and (c) there were no economic and reasonable grounds to share the part corresponding to the management rights of the above money; and (d) there were no economic and reasonable grounds to allocate the part corresponding to the management rights of the Plaintiff Company’s stocks; and (e) part of the management rights of the Plaintiff Company’s stocks that the Plaintiff Company should receive from the directors of the Plaintiff Company; and (e) the aforementioned act is subject to unfair calculation under Article 52 of the former Corporate Tax Act and Article 88(1)9 of the Enforcement Decree of the former Corporate Tax Act.

In light of the aforementioned legal principles and records, the lower court did not err in its judgment by misapprehending the legal doctrine regarding market price, economic rationality, transaction, etc. as stated in the provision on the denial of unfair act under the Corporate Tax Act or by omitting judgment.

3. Therefore, all appeals are 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 Kwon Soon-il (Presiding Justice)