Medical Corporation Eul Hospital (Law Firm Squa, Attorneys Mok-ok et al., Counsel for the defendant-appellant)

The director of the tax office

August 30, 2017

1. On December 1, 2015, the part exceeding KRW 41,147,843 of the disposition of imposition of corporate tax (including additional tax) imposed by the Defendant on the Plaintiff on the December 1, 2012 and the part exceeding KRW 289,371,660 of the disposition of imposition of KRW 41,147,843 of the business year 2012 and the part exceeding KRW 428,763,970 of the business year 2013 (including additional tax) shall be revoked.

2. The plaintiff's remaining claims are dismissed.

3. One-half of the costs of lawsuit shall be borne by the Plaintiff, and the remainder by the Defendant, respectively.

In the disposition of revocation of the corporate tax of paragraph (1) of this Article, the part concerning the business year 2012 and the part concerning the disposition of imposition of the corporate tax of KRW 428,763,970 (including additional taxes; hereinafter the same shall apply) imposed on the Plaintiff on December 1, 2015 in excess of KRW 15,324,456 among the disposition of imposition of corporate tax of KRW 428,763,970 for the business year of 2013 and KRW 10,854,796 among the disposition of imposition of KRW 407,50

1. Details of the disposition;

A. The plaintiff's status, etc.

The Plaintiff is a non-profit medical corporation, the purpose of which is to operate a medical institution. The Plaintiff reported and paid corporate tax for each business year of 2012, 2013, and 2014.

B. Details of the relevant statutes

(a) Limit on inclusion of reserve funds for proper purpose business in deductible expenses;

Article 29(1) and (8) of the former Corporate Tax Act (amended by Act No. 1355, Dec. 15, 2015; hereinafter the same shall apply) provides that where the Plaintiff and a non-profit corporation identical to the Plaintiff appropriates the reserve fund for proper purpose business to deductible expenses in each fiscal year for the proper purpose business of the corporation or designated donations (hereinafter referred to as "fixed purpose business, etc.") in order to use the reserve fund for proper purpose business for deductible expenses, such inclusion shall be included in deductible expenses, and each subparagraph provides that the limit of inclusion in deductible expenses shall be calculated by multiplying the amount calculated by multiplying the amount of income generated from profit-making business by 50 (2/100) (Article 1(4)) by the amount of income generated from profit-making business by the statutory donations under Article 56(3)4 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 26981, Feb. 12, 2016; hereinafter the same shall apply) shall be included in deductible expenses (referring to the statutory donations under Article 1(3) of the former Corporate Tax Act).

The maximum amount of inclusion in deductible expenses for reserve funds for proper purpose business included in the main sentence = The amount described in each subparagraph of Article 29 (1) 1 through 3 of the Act + (income generated from profit-making business ¡¿ 50/100) = Income generated from profit-making business (referring to income before including the reserve funds for proper purpose business and statutory donations in deductible expenses) - Interest income, dividend income, etc. - Losses carried forward

(b) Limit of inclusion of statutory donations in deductible expenses;

Article 24(2) of the former Corporate Tax Act provides that the maximum amount of inclusion of the statutory donations in deductible expenses shall be “the amount calculated by multiplying 50/10 by the amount obtained by subtracting the losses under subparagraph 1 of Article 13 from the income amount for the relevant business year (excluding the gains or losses from transfer under Articles 4, 46, and 46-5, and the amount before including the statutory donations and the designated donations in deductible expenses; hereinafter “income amount based on the calculation of deductible expenses”).” Accordingly, the method of calculating the maximum amount of inclusion in deductible expenses of the statutory donations is as follows:

The maximum amount of inclusion of the statutory donations included in the main sentence in deductible expenses = (income amount based on calculation of deductible expenses - carried forward) ¡¿ 50/100* Income amount based on calculation of deductible expenses for donations: The amount of income before the statutory donations and designated donations are included in deductible expenses, excluding transfer gains or losses under Articles 44, 46 and 46-5.

C. The Plaintiff’s declaration of corporate tax for each business year of 2012, 2013, and 2014

The Plaintiff, while reporting and paying corporate tax for each business year of 2012, 2013, and 2014, interpreted the relevant laws and regulations related to the inclusion limit of reserve funds for essential business and statutory donations in deductible expenses as follows:

1) The statutory donations that are deducted when calculating income accrued from profit-making business in relation to the calculation of the limit of inclusion in the reserve fund for essential business purposes refers to the statutory donations to be included in the deductible expenses under the proviso of Article 24(2)

2) In relation to the calculation of the limit of inclusion of statutory donations in deductible expenses, the term “income amount based on the calculation of the relevant statutory donations” refers to the amount of income before the statutory donations and designated donations are included in deductible expenses under the language and text of Articles 24(2) proviso and 24(1)1 of the former Corporate Tax Act. However, in light of the nature of the reserve fund for essential business purposes as well as the designated donations, the reserve fund for essential business purposes shall be deemed to mean the amount of income

D. Defendant’s taxation disposition

On December 1, 2015, the Defendant issued a correction and imposition of corporate tax of 450,814,070 won for the business year 2012, corporate tax of 428,763,970 won for the business year 2013, and corporate tax of 407,501,670 for the business year 2014 (hereinafter “instant disposition”).

1) The statutory donations that are deducted when calculating income accrued from profit-making business in relation to the calculation of the limit of inclusion in the reserve fund for essential business purposes refers to the amount disbursed by the taxpayer as the statutory donations.

2) The term “income amount for the pertinent business year” under the proviso of Article 24(2) of the former Corporate Tax Act shall be deemed to mean the income amount before the statutory donations and designated donations are included in deductible expenses in accordance with the language and text thereof.

E. The Plaintiff appealed to the instant disposition and filed an appeal with the Tax Tribunal, but the Tax Tribunal dismissed the Plaintiff’s appeal on September 22, 2016.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 4, Eul evidence Nos. 1 through 3 (including each number), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) Although the interpretation of the Plaintiff, such as Paragraph 1-C, is legitimate, the Defendant took the instant disposition on a different premise, and thus, the part of the instant disposition, which differs from the Plaintiff’s legitimate interpretation and view, is unlawful.

2) Even if the Plaintiff’s interpretation is not acceptable, the Plaintiff’s erroneous understanding of the scope of duty of return and tax payment due to conflicting opinions in tax law interpretation regarding the calculation of the limit of inclusion in deductible expenses for reserve funds for proper purpose business, and there is a justifiable ground for the Plaintiff’s failure to fully perform his/her duty of return and tax payment. As such, part of the instant disposition

B. Relevant statutes

Attached Form is as shown in the attached Form.

C. Determination

1) Whether the statutory donation deducted in calculating the amount of income generated from profit-making business in relation to the calculation of the limit of inclusion in deductible expenses for reserve funds for essential business purposes refers to "limit of inclusion in deductible expenses

A) Definition of restriction on inclusion of donations in deductible expenses

Income for the business year, which is the basis of calculating the corporate tax base, is the amount obtained by deducting the total amount of deductible expenses from the total amount of gross income (see Article 14(1) of the former Corporate Tax Act). In addition, for deductible expenses to be deducted from the gross income, it should be generally accepted as ordinary or directly related to profit (see Article 19(2) of the former Corporate Tax Act).

However, in principle, donation refers to the free grant of assets that is unrelated to the business or profit of the corporation, and thus does not fall under deductible expenses in principle. However, given that a corporation as a social existence makes contributions to a certain degree inevitable and that such contributions need to be encouraged in society, the former Corporate Tax Act recognizes a certain amount of contributions as deductible expenses so as not to cause damage to investors, creditors, etc. against the nature of the profit-making corporation, and sets a different limit of inclusion in deductible expenses by dividing it into designated donations and statutory donations according to the degree of the public interest of such donations. Specifically, statutory donations include an amount calculated by multiplying 50/100 of the amount of income calculated based on the calculation of deductible expenses, and designated donations include an amount calculated by multiplying 10/100 of the amount of income calculated based on the calculation of deductible expenses.

B) Legislative intent of the reserve fund for essential business

(i)The characteristics of the nonprofit and the basis for taxation of nonprofit corporations;

Since a non-profit corporation does not distribute any income to its members through a profit-making business and uses it for the public interest purpose, it is desirable that it will not impose corporate tax on the income of the non-profit corporation. However, if the non-profit corporation runs a profit-making business, it will compete with other profit-making corporations, so it is necessary to impose tax on the income of the non-profit corporation in order to observe the fairness of competition. From this perspective, Article 3(1) of the former Corporate Tax Act provides that the business year income of the non-profit corporation shall be subject to corporate tax. In addition, Article 113(1) of the former Corporate Tax Act provides that "where the non-profit corporation runs a profit-making business, it shall keep separate accounts that falls under the assets, liabilities, and profits and losses of the non-profit corporation and falls under the business other than the profit-making business." This shall be understood to the effect that the income from the profit-making business subject to taxation is accurately measured."

D. Necessity of non-taxation for non-profit corporations

However, if the non-taxation on a non-profit corporation does not harm the fairness of competition, it is not necessary to maintain the corporate tax taxation on a non-profit corporation as it is as it is for a profit-making corporation. Accordingly, Article 29(1) of the former Corporate Tax Act provides that the non-profit corporation shall include the reserve fund for its proper business in the deductible expenses within a certain amount in the deductible expenses if it appropriates the reserve fund for its proper business purposes or designated donations (hereinafter “non-profit corporation”) for each business year.

According to the above provisions, the former Corporate Tax Act provides that the same amount for the proper purpose business and the amount for the disbursement of designated donations shall be assessed to be included in the expenses for the proper purpose business as well as the proper purpose business, so that the amount for the proper purpose business and the amount for the disbursement of the designated donations may be exempted from taxation. In full view of the characteristics of the designated donations, it can be seen that the designated donations refer to the amount paid to a certain non-profit corporation as the proper purpose business expenses in cases where the designated donations are disbursed for the proper purpose business expenses by the non-profit corporation, etc. that received donations. In light of the above, the amount paid by the non-profit corporation for its own proper purpose business activities and the amount paid to other non-profit corporations for their proper purpose business activities cannot be found to be any difference in the degree of their public nature. Thus, the former Corporate Tax Act provides that the amount for the proper purpose business of non-profit corporation and the amount for the disbursement of the designated donations shall be exempted from taxation by appropriating

Such reserve funds for proper purpose business is understood to be effective in the deferment of taxation by allowing them to be included in deductible expenses in advance even before they are expended for proper purpose business (see Supreme Court Decision 2016Du59249, Mar. 9, 2017, etc.). However, Article 29(2) of the former Corporate Tax Act provides that “where a nonprofit corporation appropriates the amount appropriated as deductible expenses pursuant to paragraph (1) to its proper purpose business, etc., the amount shall be offset first in order from the reserve funds for proper purpose business appropriated. In such cases, where the balance of the reserve funds for proper purpose business as of the end of the immediately preceding business year exceeds the balance of the reserve funds for proper purpose business, the amount shall be deemed disbursed from the reserve funds for proper purpose business to be appropriated as deductible expenses within a certain amount.” Thus, even if there is no reserve funds for proper purpose business already established, a nonprofit corporation operating profit-making business shall appropriate the amount disbursed from the reserve funds for proper purpose business for proper purpose business not related to the original purpose business as deductible expenses, and shall be included in deductible expenses within the scope of 10/10%.

In full view of these facts, the reserve fund for proper purpose business has the effect of exempting a certain portion of corporate tax on income for profit-making business, which is derived from income generated from profit-making business, as well as of deferred taxation including expenses to be paid in the current deductible expenses, and in the case of profit-making business, the reserve fund for proper purpose business has the effect of expanding the maximum amount of inclusion in deductible expenses up to 50/100 of the income of profit-making business, etc., which recognizes 10/100 of the income amount calculated as the maximum

However, with respect to statutory donations which are calculated significantly in large amount and in excess of the limit of inclusion in deductible expenses, profit-making corporations and non-profit corporations are subject to the same regulation (50/100 of the standard income amount for calculation of deductible expenses

C) Understanding the formula of maximum inclusion of reserve funds for essential business in deductible expenses

As seen earlier, the former Corporate Tax Act does not recognize the inclusion of reserve funds for essential business in deductible expenses without limitation, but sets a certain limit of inclusion in deductible expenses. This should be deemed to include the legislators’ intent to accomplish the business income of non-profit corporations within a certain scope that is subject to corporate tax in principle. Moreover, it is the most reasonable to determine the limit of inclusion in deductible expenses of reserve funds for essential business purposes in deductible expenses according

The limit of inclusion of reserve funds for essential business under the former Corporate Tax Act in deductible expenses shall be calculated by including 50/100 of the income amount generated from profit-making business (the income amount before including the reserve funds for essential business and the statutory donations in deductible expenses) minus the statutory donations. Accordingly, the limit of inclusion of reserve funds for essential business in deductible expenses shall include the amount calculated by the ratio of income generated from profit-making business to the specific ratio of income generated from profit-making business, and the amount of income generated from profit-making business which is the basis thereof shall be deducted when calculating the income generated from the profit-making business. As such, the amount of deduction of the statutory donations shall be made to increase the limit of inclusion of reserve funds for essential business in deductible expenses as much as the ratio of the increased portion of the amount of income, but it shall be deemed that the purpose is to prevent double benefits by preventing double benefits from considering the portion.

Therefore, it is reasonable to interpret that the statutory donations that should be deducted from the income accrued from the profit-making business under the premise of calculating the limit of inclusion in deductible expenses for the reserve fund for essential business purposes refers to the statutory donations included in the deductible expenses. If it is interpreted that the taxpayer refers to the total amount of the statutory donations paid by the taxpayer as the statutory donations, as alleged by the defendant, the taxpayer would suffer the same disadvantage in calculating the limit of the reserve fund for essential business purposes in addition to the disadvantages that the taxpayer would be denied the inclusion of the statutory donations in deductible expenses for the portion exceeding the limit of inclusion in deductible expenses, which would result in the same disadvantage in calculating the limit of the reserve fund for essential business purposes. Accordingly, the part

2) Whether the standard income amount for calculating contributions, which is the premise of calculating the maximum amount of inclusion in the statutory donations in deductible expenses, means not only the statutory donations, designated donations, but also the reserve fund for proper purpose business purposes in deductible expenses.

A) The limit of inclusion of statutory donations in deductible expenses under the former Corporate Tax Act shall be calculated by the amount equivalent to 50/100 of the remaining amount excluding a loss carried forward from the amount of income in the business year. The amount of income in the business year shall be calculated by the income amount before the statutory donations and designated donations are included in deductible expenses. This appears to the purport of recognizing the statutory donations as deductible expenses in proportion to the statutory donations based on the actual amount of income not taking into account the statutory donations and designated donations. Accordingly, the amount of income before including the statutory donations and designated donations in deductible expenses, i.e., the amount of income before the inclusion of the statutory donations and designated donations in deductible expenses, should be added to the amount of income in the business year in order to calculate the standard amount of income for calculating the deductible expenses. This is because the statutory donations and designated donations have already been reflected in deductible expenses, which can be further calculated by offsetting the statutory donations and designated donations before the inclusion in deductible expenses. In addition, as a result of the foregoing formula, it does not affect the limit of inclusion of the statutory donations and designated donations in deductible expenses.

However, the purpose of inclusion of reserve fund for special purpose business in deductible expenses under the former Corporate Tax Act is to allow non-profit corporations to include up to 50/100 of their income, etc., unlike for profit-making corporations. In full view of the legislative intent of the above formula that intends to specify the limit of inclusion of statutory donations in deductible expenses regardless of the amount of designated donations, the inclusion of reserve fund for special purpose business in deductible expenses should be calculated regardless of the amount of designated donations in deductible expenses, as long as the limit of inclusion of statutory donations should be calculated regardless of the amount of inclusion of statutory donations in deductible expenses, regardless of the amount of inclusion of designated donations in deductible expenses, regardless of the amount of inclusion of designated donations in deductible expenses. For this purpose, in calculating the standard of inclusion of statutory donations in deductible expenses for the calculation of the limit of inclusion of statutory donations in deductible expenses, it seems more reasonable to include the amount of income in deductible expenses of the business year as well as designated donations in deductible expenses as

B) However, in light of the principle of no taxation without law, the interpretation of tax laws and regulations shall be strictly interpreted according to the text of the law, barring special circumstances, and it shall not be extensively interpreted or analogically interpreted without reasonable grounds (see, e.g., Supreme Court en banc Decision 2000Du7131, Mar. 15, 2001). As seen earlier, donations are of the nature not to be included in deductible expenses as unrelated to the original business or profit, or they are specifically provided for the former Corporate Tax Act to include certain donations in deductible expenses on the grounds of legislative policy, and thus, determination of the limit of inclusion in deductible expenses also depends on the legislative intent of the legislative intent. Therefore, the interpretation of the law on the limit of inclusion in deductible expenses of statutory donations shall be faithfully interpreted, barring special circumstances, such as where the legislative defect is recognized.

In this case, it is clear that Article 24(2) and (1) of the former Corporate Tax Act provides that the amount of income calculated on the basis of the calculation of donations shall be calculated by adding the statutory donations and the deductible expenses for designated donations to the statutory donations and the deductible expenses for the business income already excluded from deductible expenses in the language and text of the same, barring any special circumstance. Thus, it cannot be interpreted that the amount of income calculated on the basis of the calculation of donations should be added to the reserve fund for proper purpose business, in addition

C) As to this, the Plaintiff asserts that the limit of statutory donations varies depending on the establishment and scale of the reserve fund for essential business of a nonprofit corporation, and that where a nonprofit corporation that has established the reserve fund for essential business receives designated donations only from the reserve fund for essential business purposes, its expenditure would be appropriated only from the reserve fund for essential business purposes, so the standard fund for calculating the deductible expenses for donations cannot be included in the deductible

On the other hand, the former Corporate Tax Act does not specify the establishment of the reserve fund for its proper purpose business as the taxpayer's obligation and entrusts the taxpayer's choice. Therefore, the taxpayer can decide whether to set the reserve fund for its proper purpose business based on the principle and interest of the establishment of the reserve fund for its proper purpose business. Thus, it cannot be said that the limit of inclusion of the legal reserve fund for its proper purpose business differs depending on its scale or whether to set the reserve fund

In addition, the legislators’ intent that it is unnecessary to allow taxpayers who have selected the establishment of the reserve fund for proper purpose business to appropriate designated donations only from the reserve fund for proper purpose business instead of granting benefits such as deferred taxation, recognition of expenses for proper purpose business in deductible expenses, and expansion of the limit of deductible expenses of designated donations, thereby making it difficult to include the designated donations in the income amount for calculating the deductible expenses for donations. Even though the limit of deductible expenses for donations is somewhat reduced, instead of granting more benefits to non-profit corporations for the implementation of proper purpose business and activities for designated donations, instead of granting more benefits to non-profit corporations for the implementation of proper purpose business and for designated donations, it cannot be deemed that such legislators’ intent is obviously unreasonable.

The plaintiff's assertion on this part is without merit.

3) Sub-decisions

Ultimately, the part of the instant disposition, which was based on the premise different from the determination mentioned in paragraph (c)(1) of the same Article, is unlawful. In addition, on the same premise as the above determination, where the amount of legitimate corrected and imposed tax for the business year of 2013, the amount exceeding KRW 289,371,660 for the pertinent disposition exceeds KRW 289,371,660 for the business year of 2013, should be revoked.

On the other hand, under the foregoing premise, the amount of corporate tax imposed for the business year 2012 exceeds KRW 40,371,130, since there is no dispute between the parties concerned, the portion exceeding KRW 40,371,130 among the disposition in the instant case is unlawful. However, the Plaintiff seeks revocation only for the portion exceeding KRW 41,147,843 in the business year portion of corporate tax 2012, and thus, it is revoked only for the portion exceeding KRW 41,147,843 in the disposition in the instant case for which the Plaintiff seeks revocation in accordance with the disposition authority principle.

In addition, under the foregoing premise, the Plaintiff is deemed to be KRW 513,877,30 increased compared to the amount initially corrected and imposed for the business year 2014, and thus, the Plaintiff’s claim for this part of the corporate tax cannot be accepted.

3. Conclusion

Therefore, the plaintiff's claim of this case is reasonable within the scope of the above recognition, and the remaining claim is dismissed as it is without merit. It is so decided as per Disposition.

[Attachment]

Judges Park Jae-sung (Presiding Judge)

Note 1) hereinafter “non-profit corporation” means “non-profit domestic corporation” and a foreign corporation does not take into account.

Note 2) 80/100 in the case of a juridical person that uses a given amount as a scholarship