Busan High Court Decision 200Na1448 decided May 1, 200

The director of the tax office

July 4, 2014

Seoul Administrative Court Decision 2013Guhap54069 decided November 5, 2013

1. Revocation of the first instance judgment.

2. The plaintiff's claim is dismissed.

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

1. Purport of claim

The Defendant’s disposition of imposing corporate tax of KRW 17,315,936,360 (including additional tax of KRW 3,531,557,791) for the business year 2009 against the Plaintiff on August 2, 2012 is revoked.

2. Purport of appeal

The same shall apply to the order.

1. Details of the disposition;

가. 원고는 부동산개발 및 공급업, 토목건축공사업, 주택 및 상가건설업 등을 영위하던 법인으로, 1997년부터 2004년까지 순차적으로 서울 강서구 (주소 생략) 대 6,693.1㎡ 외 407필지의 토지 총 1,937,509㎡(이하 ‘이 사건 토지’라 한다)를 취득하여 보유하다가, 2009. 12. 30. 지주회사 전환을 함에 있어 주택건설사업과 해외사업 부문 등을 물적분할하여 주식회사 부영주택(이하 ‘부영주택’이라 한다)을 설립한 후, 이 사건 토지를 회사분할을 원인으로 부영주택에게 이전하였다.

B. On the basis of the acquisition date of the instant land, the Plaintiff transferred the instant land within five years from the acquisition date, which is the grace period for the use of business under the proviso of Article 49(1)1(a) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22951, Jun. 3, 2011; hereinafter the same) (hereinafter “suspension period”), as real estate for business purposes, and filed a corporate tax return for the business year 2009, deeming the instant land as non-business real estate after five years have elapsed since the grace period was expired, and until the land was transferred to the

C. However, in the business audit of the Seoul Regional Tax Office, the Board of Audit and Inspection pointed out that the entire land of this case should be deemed non-business real estate for the entire period from the date of acquisition of the land of this case until the date of transfer of the land of this case to the date of transfer due to physical division. Under the above cadastral record, the Seoul Regional Tax Office notified the Defendant of the taxation data to the effect that the Defendant should deduct the interest related to the acquisition fund of this case from deductible expenses during the grace period (five years from the acquisition date). Accordingly, the Defendant re-calculated the corporate tax amount of the Plaintiff’s 2009 business year to which the date of the physical division belongs and notified the Plaintiff of corporate tax of KRW 17,315,936,360 (including additional tax of KRW 3,531,557,791) (hereinafter “instant disposition”).

D. On October 30, 2012, the Plaintiff dissatisfied with the instant disposition, filed an appeal with the Tax Tribunal on October 30, 2012, but the said claim was dismissed on February 26, 2013.

【Ground of recognition】 The fact that there has been no dispute, Gap's 1 through 3, Eul's 1, the purport of the whole pleadings and arguments

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

For the following reasons, the main text of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act, which provides for the period of deeming the relevant real estate as non-business real estate, does not apply the provision on non-business real estate inclusion in deductible expenses related to the acquisition fund, deeming the period after the grace period has elapsed and the date of transfer as non-business real estate after the lapse of the grace period, and applying the provision on exclusion in deductible expenses related to the acquisition fund, deeming the period from the acquisition date to the date of transfer to the date of transfer as non-business real estate and applying the provision on exclusion in deductible expenses related to the acquisition

(1) The transfer of assets due to a qualified spin-off does not constitute “transfer” under the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act.

Article 26(9)1 (proviso) of the Enforcement Rule of the Corporate Tax Act provides, “If the relevant real estate is not used for business continuously after its acquisition, the term “transfer” in the “period from the date of acquisition to the date of transfer” refers to the act of commercial transfer unrelated to the business of the relevant corporation, and it cannot be applied in the case of qualified spin-off meeting all the requirements under each subparagraph of Article 46(1) and Article 47(1) of the Corporate Tax Act at the time of the spin-off as seen in the instant case. In the case of qualified spin-off, the corporation established by division succeeds not only the rights and obligations of the divided corporation but also the accounting matters, such as the disposal of the carried-over or the loss of the disposal of assets

(2) The instant transfer itself constitutes a case where the Plaintiff directly used the Plaintiff’s business.

Unlike the general corporation, the transfer of real estate acquired and held as inventory assets by the same corporation as the plaintiff, which is a main business, should be deemed to have been used directly for the business.

The meaning of Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act that “where real estate for sale is transferred within the grace period, it shall be deemed that the relevant real estate is used directly for the business.” Article 49(1)1(b) of the Enforcement Decree of the Corporate Tax Act provides that “The real estate that is transferred without directly using it for the business of the relevant corporation during the grace period: Provided, That this shall not apply to a corporation operating real estate sales business prescribed by Ordinance of the Ministry of Strategy and Finance: Provided, That this shall not apply to transfer after the grace period. Therefore, since there is no separate provision regarding transfer after the grace period, its determination is based on the general principle, Article 49(1)1(a) of the Enforcement Rule of the Corporate Tax Act, which is the general definition of “corporate business” and Article 26(2) of the Enforcement Rule of the Corporate Tax Act, which is the general definition of “corporate business”, and so long as the corporation that mainly runs real estate sales business, such as the Plaintiff, transfers

(3) Ultimately, in the instant case where the Plaintiff transferred the instant land after the grace period expired, it cannot be deemed that “where the Plaintiff continuously transfers the instant land without using it for business purposes after acquiring the relevant real estate,” as prescribed by the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act. Therefore, the period during which the interest paid on the instant land acquisition fund is deemed not related to business, i.e., the period during which the interest paid on the instant land is deemed not to have been related

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

(1) Relevant legal principles

Article 28(1)4 (a) and Article 27 subparag. 1 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) stipulate that a corporation shall not include the interest paid on borrowings from holding real estate for non-business purposes in the calculation of deductible expenses, and delegate the scope of non-business real estate to the Presidential Decree. Following delegation, Article 49 of the former Enforcement Decree of the Corporate Tax Act sets out the scope of non-business real estate, and delegates matters necessary for determining whether a non-business real estate is non-business real estate. Accordingly, Article 26 of the Enforcement Rule of the Corporate Tax Act provides for detailed matters necessary for the determination of whether a company is non-business real estate. The legislative purport of such provision is to prevent the deterioration of its financial structure due to an unreasonable expansion dependent on other person’s capital, to induce a company to engage in healthy economic activities through the productive expansion of corporate assets and non-productive business type, and to promote efficient use of real estate as prescribed in Article 20 subparag. 148 of the former Enforcement Rule of the Corporate Tax Act.

(2) Determination on the assertion that a transfer does not constitute “transfer” under the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act

In full view of the following circumstances, the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act does not include the transfer of real estate due to a qualified physical division in the concept of “transfer” under Article 26(9)1 of the Enforcement Rule if the real estate concerned is not used for business continuously after the acquisition thereof.

① Article 47(1) of the Corporate Tax Act provides that “where a divided corporation acquires stocks, etc. of a corporation established through a spin-off and satisfies the requirements under each subparagraph of Article 46(2), the amount equivalent to the transfer marginal profit accruing from a spin-off may be included in deductible expenses when calculating the income amount for the business year in which the date of the registration of the spin-off falls, as prescribed by Presidential Decree.” This provision assumes that the transfer of assets due to a spin-off constitutes “transfer” under the Corporate Tax Act. In addition, Article 47(5)25 of the Enforcement Rule of the Corporate Tax Act provides that “The transfer of real estate ownership due to a corporate merger or a split-off shall be construed as “transfer”, and the transfer of real estate ownership due to a qualified spin-off shall not be excluded from the concept “transfer”. In light of the contents of the corporate tax law, inasmuch as the concept of transfer of real estate due to a qualified spin-off is not explicitly excluded from the concept of transfer of ownership due to a spin-off under the proviso to Article 26(9)1) of the Corporate Tax Act.

② Even in cases of the transfer of assets due to qualified spin-off, such transfer constitutes a transfer under tax law because it constitutes a case where the assets are actually transferred for price. Moreover, as the ownership of the instant land was transferred from the Plaintiff to a quasi-permanent house, the Plaintiff cannot use the instant land any longer, and thus, the Plaintiff became final and conclusive as the Plaintiff became unable to use the instant land due to trade, etc., does not change from the case of transfer due to trade, etc.

③ Meanwhile, according to the Plaintiff’s evidence Nos. 4-1 and 2, the secondary house that acquired the instant land from the Plaintiff is deemed to have acquired the ownership transfer of the instant land as a new real estate and filed a corporate tax by excluding the amount equivalent to the interest paid by applying the grace period again from the date of physical division from the date of physical division. As the Plaintiff’s assertion, if the ownership transfer of the instant land does not fall under the transfer of the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act, the secondary house cannot assert a new grace period. As such, recognition of the Plaintiff and the secondary house is inconsistent with the Plaintiff’s assertion that the ownership transfer of the instant land is excluded from the exclusion of the deductible expenses for the acquisition fund during the respective grace period. Accordingly, as the Defendant’s disposition is premised on the instant disposition, deeming the ownership transfer of the instant land as a transfer under the proviso of Article 26(9)1 of the Enforcement Rule of the Corporate Tax Act to be excluded from the deductible expenses amount equivalent to the interest paid related to the acquisition fund retroactively from the physical division date.

(3) Determination as to the assertion that the transfer itself constitutes a case where the transfer itself directly used the Plaintiff’s business

Comprehensively taking account of the above legal principles ① through ⑤ the circumstances as seen earlier, it is difficult to deem that the Plaintiff’s transfer of the instant land to the subordinate house due to the qualified spin-off constitutes a direct use of the Plaintiff’s business.

(1) Article 49 of the former Enforcement Decree of the Corporate Tax Act provides for the scope of “property deemed not directly related to the business” that does not include the interest paid, etc. related to acquisition in deductible expenses pursuant to delegation under Article 27 subparag. 1 of the former Corporate Tax Act. According to Article 49(1)1 and Article 49(1)1 of the former Enforcement Decree of the Corporate Tax Act, “property prescribed by the Presidential Decree as not directly used for the business of a corporation shall be excluded: Provided, That real estate not directly used for the business of a corporation before the grace period expires shall be excluded.” In addition, Article 26(1)2 of the former Enforcement Rule of the Corporate Tax Act provides that “Real estate acquired by a corporation that directly acquires and sells real estate for sale and purchase (including graveyard sale) and a building construction business (limited to a self-managed construction business) within five years from the date of its acquisition shall be deemed a grace period for the acquisition and sale of real estate for the purpose of real estate for which a corporation directly acquires and sells real estate for sale and sale shall be deemed a grace period under Article 26(2).

② Viewing as above is consistent with the legislative intent of the provision on non-inclusion of interest paid in relation to loans for non-business use to induce the sound economic activities of companies by suppressing the speculative investment in real estate and non-productive business from the financial assets of large enterprises. In cases where a corporation that mainly runs real estate sales business acquires and owns real estate and transfers it, it is not easy to distinguish between transfer and transfer after acquisition of real estate for the purpose of speculative investment in real estate. As such, it is difficult to distinguish between transfer and acquisition after acquisition of real estate after acquisition of real estate for the purpose of speculative investment in real estate. Therefore, it is possible to consider the business characteristics of a corporation whose main business is real estate sales business and include interest paid in relation to the acquisition in deductible expenses only when it is directly used for the business and transfers it within the grace period.

③ The provision that a corporation that runs the real estate sales business shall be deemed to have been directly used for its business when it transfers the real estate for sale during the grace period was newly established at the time of wholly amending the Corporate Tax Act in 199. At that time, if it is not directly used for its business to impose the grace period, it shall be deemed to be non-business real estate from the date of acquisition without exception. In March 28, 2001, Article 26(9) of the Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Finance and Economy No. 183 of March 28, 2001, which was newly established under Article 26(9) of the Enforcement Rule of the Corporate Tax Act, and thus, if it is directly used for its business after the grace period expires, the period overlapping with the grace period shall not be deemed to be non-business real estate. However,

④ The Plaintiff asserts that Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act provides that “The meaning of Article 26(3)2 of the Corporate Tax Act is not directly used for the corporation’s business during a grace period, and that “the real estate transferred without being used for the corporation’s business during a grace period: Provided, That this does not apply to a corporation operating real estate sales business as its main business as prescribed by Ordinance of the Ministry of Strategy and Finance.” However, Article 49(1)1(b) of the Enforcement Rule of the Corporate Tax Act provides that “The real estate transferred by a corporation operating real estate sales business as its main business is excluded from the real estate transferred during the grace period.” Thus, it cannot be deemed that the provision explicitly provides that “the real estate directly used for the business of the corporation operating real estate sales business, such as Article 26(3)2 of the Enforcement Rule of the Corporate Tax Act, is used for the purpose of Article 49(1)1(b) of the Enforcement Rule of the Corporate Tax Act.” In addition, Article 26(3) of the Enforcement Rule provides that “Article 49(1)1(b)”.

⑤ In addition, according to the Plaintiff’s entry of the Plaintiff’s entire certificate of registration No. 7, the Plaintiff’s business related to real estate sales includes “civil construction business, housing and commercial building construction business, real estate lease and brokerage business, real estate development and supply business,” etc. In light of the record, it is difficult to view that the Plaintiff’s transfer of the instant land to a subordinate house due to physical division was made as part of the Plaintiff’s business.

(4) Therefore, the Plaintiff’s assertion is without merit, and the Defendant’s instant disposition that deemed the period from the time the Plaintiff acquired the instant land to the date of physical division pursuant to the proviso of Article 26(9)1 of the former Enforcement Rule of the Corporate Tax Act, to be a period of possession irrelevant to

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and the judgment of the court of first instance is unfair as it concludes otherwise, and the plaintiff's claim is dismissed and it is so decided as per Disposition.

[Attachment]

Judges Cho Jong-tae (Presiding Judge)