In a case where the State or a local government entrusts a certain organization with the management of facilities for use and profit-making and supplies goods or services to a third party on its own name and on its own account, whether the State or a local government provides real estate rental services instead of conducting tax-free business under Article 12(1)17 of the former Value-Added Tax Act (affirmative); and whether value-added tax may be imposed and related input tax may be deducted if the State or a local government supplies such real estate rental services for consideration as an independent supplier of business (affirmative)

If the State or a local government entrusts a certain organization with the management of facilities, etc. to use or profit from facilities, and the organization supplies goods or services to a third party in its name and on its account, the State or the local government does not directly supply goods or services to a third party as a transaction party. Thus, it cannot be deemed that the State or the local government is engaged in tax-free business pursuant to Article 12(1)17 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010); and it shall be deemed that the organization provides real estate leasing services with the object of the relevant facilities, unless the State or the local government provides such real estate leasing services as an independent supplier for business purposes, the value-added tax is levied unless it is paid, and the relevant input tax amount is deducted, and even if the facilities provided for the leasing services fall under the administrative property or the goods or services supplied by the organization are in the nature of public interest because of its use, etc., it does not change

Articles 2(1)1 and (2) (see current Article 3 subparag. 1), 12(1)17 (see current Article 26(1)19) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010); Article 38 subparag. 3 (see current Article 46 subparag. 3) of the former Enforcement Decree of the Value-Added Tax Act (Amended by Presidential Decree No. 22043, Feb. 18, 2010); Article 38 subparag. 3 (see current Article 46 subparag. 3)

Busan-si (Law Firm Han-do, Attorneys Kim Min-soo et al., Counsel for the plaintiff-appellant)

Busan District Tax Office (Law Firm LLC, Attorneys Kang-gu et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2014Nu55474 decided July 8, 2015

All appeals are dismissed. The costs of appeal are assessed against each party.

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

1. Plaintiff’s ground of appeal

A. Article 2(1)1 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010; hereinafter the same) provides that an entrepreneur who is a person liable to pay value-added tax shall be the person who independently supplies goods or services for business regardless of whether it is for profit or not. Article 12(1)17 of the former Value-Added Tax Act provides that the person liable to pay value-added tax shall include the State or a local government. Meanwhile, Article 38 of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 22043, Feb. 18, 2010) provides that the State or a local government’s real estate rental business provided by the State or a local government under subparagraph 3 shall be excluded from the scope of value-added tax exemption.

Where the State or a local government entrusts a certain organization with the management of facilities, etc. and allows it to use or profit from facilities, and the organization supplies goods or services to a third party in its name and on its account, the State or the local government does not directly supply goods or services to a third party as a transaction party. Thus, it cannot be deemed that the State or the local government is engaged in a tax-free business under Article 12(1)17 of the former Value-Added Tax Act, and the State or the local government provides real estate rental services to the organization with the object of the pertinent facilities. Furthermore, the value-added tax is levied unless the State or the local government supplies such real estate rental services independently as a supplier of business. The relevant input tax amount is deducted, unless it is paid for, and the relevant input tax amount is deducted, and even if the goods or services provided by the organization fall under the administrative property or have the character of public interest

B. According to the reasoning of the lower judgment and the record, the following facts are recognized.

(1) On January 208, the Plaintiff commenced the construction of the construction of the construction of the construction of the Gongcheon Intangible Cultural Heritage Site (hereinafter “instant construction distance facilities”) and the remodelling construction of the Macheon Successor of Important Intangible Cultural Heritage (hereinafter “the instant intangible cultural heritage successor”), and completed each registration of preservation of ownership on October 27, 2008 and December 12, 2008.

(2) On February 24, 2009, the Plaintiff concluded an agreement with the Korean Federation of Gyeonggi Intangible Cultural Heritage (hereinafter “the instant federation”) and entrusted the management of the instant official distance facilities by entrusting the management of the instant official distance facilities. On December 24, 2008, the Plaintiff concluded the agreement with the South Korean Association, etc. (hereinafter “the instant South Korean Companies, etc.”) and entrusted the management of the instant intangible cultural heritage successor. On the other hand, the Plaintiff provided the instant federation and the South Korean Companies, etc. with the management of the instant intangible cultural heritage successor and entrusted the management of the instant intangible cultural heritage successor. On the other hand, the Plaintiff did not receive a separate payment for the use and profit-making of the instant official distance facilities and the intangible cultural heritage successor.

(3) On October 25, 201, the Plaintiff reported and paid the value-added tax from the second to the first period of 2008 without deducting the acquisition cost of the instant public street facility and intangible cultural heritage successor as the input tax amount, and thereafter, the Plaintiff filed a claim for correction to the Defendant for refund of the input tax amount for the creation and remodeling of the instant public street facility and intangible cultural heritage successor, on the grounds that the relevant input tax amount should be deducted because the real estate rental business of a local government is a taxable business of value-added tax.

(4) On January 18, 2012, the Defendant rejected the Plaintiff’s request for correction on the grounds that the said input tax amount is an input tax amount for the public interest related to the Plaintiff’s proper purpose business, not a real estate leasing business (hereinafter “instant first disposition”), and added the grounds for disposition to the effect that the instant official distance facility and intangible cultural heritage transfer agent are not subject to value-added tax without compensation leased in the process of the instant lawsuit, and the relevant input tax amount is not subject to value-added tax.

C. Examining these facts in light of the legal principles as seen earlier, the Plaintiff entrusted the management and operation of the instant official distance facilities and intangible cultural heritage transfer hall to the Association and the Southern History, etc., so the supply of the services that did not receive any consideration does not constitute value-added tax objects, and accordingly, the input tax amount related to the creation and remodeling of the instant official distance facilities and intangible cultural heritage transfer hall cannot be deducted from the output tax amount. Furthermore, even if the Defendant, as alleged by the Plaintiff, deducted the input tax amount related to the Plaintiff’s lease of other facilities, such circumstance alone does not contravene the principle of tax equality, etc.

Although the reasoning of the lower judgment is partly inappropriate, the conclusion that the instant first disposition is lawful is justifiable, since the input tax amount related to the instant public passage facility and the intangible cultural heritage successor cannot be deducted from the output tax amount. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on the principle of tax equality and

2. As to the Defendant’s ground of appeal

A. The lower court acknowledged the following facts based on the admitted evidence.

(1) On August 20, 2007, the Plaintiff decided that it is an entrusted operator of the Daecheon-si Hospital for the Aged, Specialized Care Center for the Aged and the Support Center for the Aged for the Aged (hereinafter “the instant Medical Foundation”) under Article 27 of the former Public Property and Commodity Management Act (amended by Act No. 9174 of Dec. 26, 2008), the former Ordinance on the Establishment and Operation of the Welfare Facilities for the Aged, and the Welfare Facilities for the Aged of the Aged (amended by Ordinance No. 2278 of Jan. 10, 2008) as an incorporated foundation.

(2) On December 6, 2007, the Plaintiff started work for the elderly welfare facility of this case and completed September 7, 2009. The medical foundation of this case bears KRW 4,201,00,000 out of total new construction cost of KRW 37,647,800,000, and paid to the Plaintiff an amount equivalent to 30% of the operating profit of the elderly specialized hospital every year.

(3) The Plaintiff reported and paid the value-added tax from the second to the first period of 2008 without deducting the acquisition cost of the instant welfare facility from the input tax amount as the input tax amount, and thereafter, the Plaintiff deemed that the real estate rental business of a local government is a taxable business of value-added tax, and thus, the relevant input tax amount is deducted. Accordingly, on October 25, 201, the Plaintiff filed a request for correction with the Defendant for refund of the input tax amount related to the creation of

(4) On January 18, 2012, the Defendant rejected the Plaintiff’s request for correction on the grounds that the above input tax amount is an input tax amount for the public interest related to the Plaintiff’s proper purpose business, not a real estate rental business (hereinafter “instant disposition”).

B. Next, the lower court determined that the instant disposition was unlawful on the following grounds, since the lease of welfare facilities for the aged of this case constitutes taxable objects under the Value-Added Tax Act, and the input tax amount related to the creation of welfare facilities for the aged of this case should be deducted.

(1) In light of the fact that the instant medical foundation provides the Plaintiff with 30% of the new construction cost and the profits of a specialized hospital for the aged as consideration for the use and profit-making of the instant welfare facility for the aged, and that the Plaintiff can reduce the construction and repair cost of the instant welfare facility for the aged, it constitutes a substantial and economic relationship with the Plaintiff’s use and profit-making of the instant welfare facility for the aged and payment of 30% of the profits of a specialized hospital for the aged, since it is in a substantial and economic relationship with the Plaintiff’s use and profit-making of the instant welfare facility for the aged.

(2) The Plaintiff has continuously leased a number of administrative property to a third party, and the Plaintiff has continued and repeated to the extent that it can be seen as a business activity in light of the scale, period, etc. of allowing the use and profit-making of the instant welfare facilities for the aged in the instant medical foundation, etc., the Plaintiff’s use and profit-making of the instant welfare facilities for the aged in the instant medical foundation constitutes value-added tax transaction as part of real estate rental business.

(3) In full view of the circumstances that the instant medical foundation operated independently the instant welfare facility for the aged on its own responsibility and account, and that part of the new construction cost and profit paid to the Plaintiff and 30% of the Plaintiff cannot be seen as expenses for voluntary donations or reimbursement of actual expenses, it is difficult to deem that the Plaintiff managed and entrusted the instant welfare facility for the aged to perform the Plaintiff’s unique duties, or that the instant welfare facility for the aged was operated jointly with the instant medical foundation.

C. Examining the record in light of the aforementioned legal principles, the lower court did not err in its judgment by exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules, contrary to what is alleged in the grounds of appeal, by exceeding the bounds of the principle of free evaluation of evidence, or by misapprehending the legal doctrine on the classification of administrative property and real estate rental business, feasibility

3. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against each party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Chang-suk (Presiding Justice)