[1] The purpose of the taxation deferment provision for physical division under the former Corporate Tax Act and the requirements for the application of the above provision

[2] Whether the input tax amount of value-added tax related to capital expenditures, which is the cost required to increase the real value of land, is deducted from the output tax amount (negative)

[1] Where a divided corporation acquires stocks of a corporation established through a spin-off and satisfies certain statutory requirements, an amount equivalent to the gains from the transfer of assets of the divided corporation shall be appropriated as the advanced depreciation reserve fund for the inclusion of the said stocks in deductible expenses and the corporate tax shall be deferred until the relevant stocks are disposed of [Articles 47(1) and 46(1) of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same shall apply], Article 83(1) and (2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same shall apply], and where a divided corporation meets such requirements, it shall not be deemed the supply of goods subject to value-added tax [Article 6(6)2 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010)]

The provisions on taxation deferment of the above physical division were prepared in the introduction of corporate restructuring tax system, such as merger and division, by the amendment of the Corporate Tax Act on December 28, 1998. The purpose of this provision is to support corporate restructuring through corporate division without regard to the existence of a structural change in which part of the existing business is divided into a separate complete subsidiary, even though there was no substantial change in the interests of the company, including a share relationship, when there was no change in the interests of the company, such a change in the corporate division. The individual requirements under the former Corporate Tax Act and subordinate statutes to be seen below have

The physical division is a division of an independent business division that can be operated separately, and the assets and liabilities of the divided business division shall be comprehensively succeeded, and the corporation established by division shall continue to operate the business succeeded to by the end of the business year which includes the registration date of the division, and where the total division received by the divided corporation is the stocks of the corporation established by division,

Here, the requirement of “an independent business division that can conduct business by separating” (Article 82(3)1 of the former Enforcement Decree of the Corporate Tax Act) refers to the division of a business division that can conduct the existing business activities independently after division from a functional point of view. It is intended to distinguish between cases where only individual assets that cannot be independent business activities are transferred and realizing gains on transfer. It is also possible to divide part of a single business division if an independent business is possible.

Article 82(3)2 of the former Enforcement Decree of the Corporate Tax Act provides that “The assets and liabilities of a divided business division shall be comprehensively succeeded (Article 82(3)2 of the former Enforcement Decree of the Corporate Tax Act) shall be complementary to the requirements of the aforementioned independent business division, and the assets and liabilities necessary for the relevant business activities shall be transferred at once to a corporation established through division. The assets and liabilities jointly used in another business division that cannot be divided, such as assets and liabilities, shall not be succeeded

The requirement of “a continuous operation of the succeeded business” (Article 46(1)3 of the former Corporate Tax Act) is that the substantial identity of the business before and after the division is maintained, and it is not different from the discontinuance of the business if it is disposed of at least 1/2 of the value of fixed assets acquired prior to the end of the business year to which the date of the registration of the division belongs or is not used directly for the succeeded business (Articles 83(4) and 80(3) of the former Enforcement Decree of the Corporate Tax Act). The issue of disposition or direct use should be objectively determined based on the actual use relationship

The requirement that the total cost of division should be “stocks” (Article 47(1) of the former Corporate Tax Act and Article 46(1)2 of the same Act) provides that a divided corporation should acquire only the stocks of a corporation established through division in return for transferring the assets and liabilities of the divided business division to a corporation established through division. The continuity of equity relationship is determined.

[2] Capital expenditures, which are expenses required to increase the real value of land, are not expenses for the business year during which such expenditures are made, but are subject to depreciation by combining the cost for acquisition with the cost for acquisition [Article 31(1) and (2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010); Article 17(2)4 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010); Article 60(6) of the former Enforcement Decree of the Value-Added Tax Act (amended by Presidential Decree No. 22043, Feb. 18, 2010)].

[1] Articles 46(1) and 47(1) of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009); Article 80(3) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22184, Jun. 8, 2010; see current Article 80-2(7)); Article 82(3)1 (see current Article 82-2(3) and 2 (see current Article 82-2(5)); Article 83(1) (see current Article 84(1)); Article 84(2) (see current Article 84(2) and (4) (see current Article 82-2(9)); Article 80(1) of the former Enforcement Decree of the Corporate Tax Act (Amended by Act No. 1982, Jan. 1, 2010; Presidential Decree No. 2019, Feb. 1, 2019>

[2] Supreme Court Decision 2004Du13844 Decided July 28, 2006, Supreme Court Decision 2006Du5502 Decided April 11, 2008 (Gong2008Sang, 703)

Ora Co., Ltd. (Attorney Jeong Byung-chul et al., Counsel for the defendant-appellant)

Head of the Southern District Tax Office and one other (Attorneys Cho Jae-ho et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2015Nu38414 decided May 12, 2016

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. Case summary and key issue

A. Case summary

(1) On May 1, 2008, the Plaintiff established DNA Co., Ltd. (hereinafter “corporation newly established”) by dividing the chemical product manufacturing division and the urban development business division of the Incheon Factory into physical division in the existing other business division (hereinafter “instant division”), and completed the registration of division on May 6, 2008.

(2) In light of the fact that the instant division satisfies the requirements for taxation deferment under the law, the Plaintiff reported the corporate tax for the business year 2008, appropriated the amount of KRW 748.5 billion from the gains from the transfer of assets due to the division as the advanced depreciation reserve for stocks, and treated that the transfer of assets pursuant to the division does not constitute the supply of goods subject to taxation even under the Value-Added Tax Act.

(3) Meanwhile, the Plaintiff carried out a construction project for reclaiming waste tin, which has been set up for a long time in the Incheon factory, in the reservoir in the Incheon factory and creating it as an amusement park (hereinafter “closed stone disposal project”). At the time of filing a corporate tax return for the business year 2008, the Plaintiff treated the construction cost as ordinary expenses and deducted the relevant input tax amount from the output tax amount of value-added tax for January 2008. The Plaintiff carried out a construction project for creating an eco-friendly lake by improving the number of Incheon Park (hereinafter “Seman Financial and Security Project”). Each value-added tax input tax amount was deducted from each output tax amount when filing a return of value-added tax for February 2, 2009 and January 2010.

(4) On August 22, 2013, the head of the Seoul Southern District Tax Office notified the Plaintiff of the rectification of approximately KRW 300 billion of corporate tax (including additional tax) for the business year 2008, and notified the Plaintiff of the increase in the amount of KRW 640 million (including additional tax) on November 11, 2013.

(5) On July 5, 2013, the head of the Incheon District Tax Office notified the Plaintiff of the correction of the value-added tax amounting to KRW 110,100,000 (including additional tax) on August 19, 2013, on the ground that the instant division falls under the supply of goods, and the cost of the closed stone processing corporation and the housing finance corporation is the capital expenses of the land subject to the non-deduction of the input tax amount.

(6) The court below accepted the Plaintiff’s assertion on the closed stone disposal works of this case and revoked the relevant part of the Defendants’ respective dispositions against the Defendants, without accepting the Plaintiff’s assertion on the closed stone disposal works of this case, and appealed to the part against which the Plaintiff and the Defendants lost.

B. Issues

The main issue of the instant case is whether the instant division satisfies the requirements for tax deferment under the law. While the lower court appears to have satisfied the requirements for tax deferment of physical division, the Defendants are dissatisfied with them through the grounds of appeal. The issue is whether each of the expenses of the closed stone processing corporation and the lake finance corporation violates the principle of prohibition of double tax investigation and double tax investigation.

2. As to whether the requirements for deferred taxation of the division of this case are satisfied (the defendant's grounds of appeal Nos. 1 to 7)

A. Where a divided corporation acquires stocks of a corporation established through a spin-off and satisfies certain statutory requirements, the divided corporation shall appropriate the amount equivalent to the gains from the transfer of its assets as the advanced depreciation reserve fund for inclusion in deductible expenses and transfer of corporate tax until the disposal of the relevant stocks [Articles 47(1) and 46(1) of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same shall apply], Article 83(1) and (2) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same shall apply], and where a division meets such requirements, such division shall not be deemed the supply of goods subject to value-added tax [Article 6(6)2 of the former Value-Added Tax Act (amended by Act No. 9915, Jan. 1, 2010; hereinafter the same shall apply].

The provisions on taxation deferment of the above physical division were prepared in the introduction of corporate restructuring tax system, such as merger and division, by the amendment of the Corporate Tax Act on December 28, 1998. The purpose of this provision is to support corporate restructuring through corporate division without regard to the existence of a structural change in which part of the existing business is divided into a separate complete subsidiary, even though there was no substantial change in the interests of the company, including a share relationship, when there was no change in the interests of the company, such a change in the corporate division. The individual requirements under the former Corporate Tax Act and subordinate statutes to be seen below have

The physical division is a division of an independent business division that can be operated separately, and the assets and liabilities of the divided business division shall be comprehensively succeeded, and the corporation established by division shall continue to operate the business succeeded to by the end of the business year which includes the registration date of the division, and where the total division received by the divided corporation is the stocks of the corporation established by division,

Here, the requirement of “an independent business division that can conduct business by separating” (Article 82(3)1 of the former Enforcement Decree of the Corporate Tax Act) refers to the division of a business division that can conduct the existing business activities independently after division from a functional point of view. It is intended to distinguish between cases where only individual assets that cannot be independent business activities are transferred and realizing gains on transfer. It is also possible to divide part of a single business division if an independent business is possible.

Article 82(3)2 of the former Enforcement Decree of the Corporate Tax Act provides that “The assets and liabilities of a divided business division shall be comprehensively succeeded (Article 82(3)2 of the former Enforcement Decree of the Corporate Tax Act) shall be complementary to the requirements of the aforementioned independent business division, and the assets and liabilities necessary for the relevant business activities shall be transferred at once to a corporation established through division. The assets and liabilities jointly used in another business division that cannot be divided, such as assets and liabilities, shall not be succeeded

The requirement of “a continuous operation of the succeeded business” (Article 46(1)3 of the former Corporate Tax Act) is that the substantial identity of the business before and after the division is maintained, and it is not different from the discontinuance of the business if it is disposed of at least 1/2 of the value of fixed assets acquired prior to the end of the business year to which the date of the registration of the division belongs or is not used directly for the succeeded business (Articles 83(4) and 80(3) of the former Enforcement Decree of the Corporate Tax Act). The issue of disposition or direct use should be objectively determined based on the actual use relationship

The requirement that the total cost of division should be “stocks” (Article 47(1) of the former Corporate Tax Act and Article 46(1)2 of the same Act) provides that a divided corporation should acquire only the stocks of a corporation established through division in return for transferring the assets and liabilities of the divided business division to a corporation established through division. The continuity of equity relationship is determined.

B. Examining the factual relations in the judgment below in light of the aforementioned legal principles, it is reasonable to view the instant division as follows only a structural change, and the substantial identity of the company continues to be maintained, thereby satisfying all the requirements for deferment of taxation under the former Corporate Tax Act and subordinate statutes.

(1) The Plaintiff’s chemical product manufacturing business division and urban development business division are the business division capable of carrying on business activities independently from the existing other business sections. The content and functional characteristics of the business division cannot be said to be a division of an independent business division on the grounds that employees of the existing business division were not transferred to a corporation established by division, excluding some of the employees of the existing business division.

(2) A corporation established through division succeeds to the rights and obligations related to the divided business division, including obligations related to closed stone disposal works. The debt secured by the Incheon factory site is commonly related to the Plaintiff’s other business sector, and it is difficult to view it as the requirement for the Plaintiff to succeed only to the corporation established through division with the exception of part of corporate bonds and corporate tax payments.

(3) A corporation established through division shall not be deemed to have actually used the succeeded fixed assets in the manufacturing division of chemical products and urban development division, and shall not be deemed to have entrusted its business with the method of its use. Moreover, it is difficult to deem that the establishment of a trust registration in order to secure loan obligations of financial institutions while continuing a business succeeded by a corporation established through division constitutes a disposal of fixed assets deemed to be a discontinuance of a succession business

(4) The Plaintiff received only the shares of the corporation established through division as the price for division under the division contract. The circumstance that some of the borrowed money prior to the division was not succeeded to the corporation established through division is only the content to be examined in relation to the requirements for comprehensive succession of rights and obligations as seen above, and there is no connection with the division.

C. Therefore, contrary to what is alleged in the grounds of appeal, the lower court did not err in its judgment by misapprehending the legal doctrine as to inclusion in deductible expenses of equivalent gains on transfer of assets due to physical division under the former Corporate Tax Act, and division not deemed the supply of goods

3. As to whether each cost of the closed stone disposal corporation and housing finance corporation is capital expenditure of land ( Plaintiff’s ground of appeal No. 2 and Defendants’ ground of appeal No. 8)

Capital expenditures (see, e.g., Supreme Court Decision 2006Du5502, Apr. 11, 2008) which are expenses required to increase the real value of land do not constitute the cost for the business year during which the expenditure was made and are merely subject to depreciation by combining the cost for acquisition (Article 31(1) and (2) of the former Enforcement Decree of the Corporate Tax Act). The input tax amount related thereto is not deducted from the output tax amount (Article 17(2)4 of the former Value-Added Tax Act and Article 60(6) of the former Enforcement Decree of the Value-Added Tax Act).

After recognizing the facts as indicated in its holding, the lower court determined that the waste stone treatment corporation actually increases the value of land, such as housing site creation, and its expenses constitute capital expenditures for the Incheon Factory site, but it is difficult to view that the Housing Finance Corporation has increased the value of the Incheon Factory site, and thus its expenses do not constitute capital expenditures.

The above determination by the court below is based on the legal principles as seen earlier, and it did not err by misapprehending the legal principles as to capital expenditures, as otherwise alleged in the grounds of appeal.

4. As to whether the prohibition of double tax audit violates the principle (Plaintiff’s ground of appeal No. 1)

In principle, a tax official may not conduct a reinvestigation on the same item of taxation and the same taxable period. However, in cases where there is clear evidence to prove a suspicion of tax evasion, an investigation on a transaction partner is necessary, in cases where there are two or more taxable periods, or a reinvestigation is conducted in accordance with the decision of disposition such as a request for a review, etc., a reinvestigation is allowed only in exceptional cases prescribed by Acts and subordinate statutes (amended by Act No. 9911, Jan. 1, 2010); Article 81-4(2) of the former Framework Act on National Taxes; Article 63-2 of the former Enforcement Decree of the Framework Act on National Taxes (amended by Presidential Decree No. 22038, Feb. 18, 2010).

After recognizing the facts as indicated in its reasoning, the lower court determined that the expansion of the object of the tax investigation conducted in 2013 to the business year of 2008 does not constitute a duplicate tax investigation prohibited because it constitutes a reinvestigation for the handling of all kinds of taxation data provided to the director of the Seoul Regional Tax Office after preparing or acquiring for the purpose

In light of the contents of the statutory provisions and the relevant legal principles, the lower court’s judgment did not err by misapprehending the legal doctrine on exceptional grounds for allowing duplicate tax investigations, as otherwise alleged in the grounds of appeal.

5. Conclusion

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

Justices Kim Jae-hyung (Presiding Justice)