Cho-2014-China-4506 (Law No. 15, 2015)

Merger evaluation marginal profits in excess of merger marginal profits shall not be included in the gross income.

Since there is no merger marginal profit, it cannot be deemed that there is a merger marginal profit within the scope of the merger marginal profit subject to the inclusion in the calculation of earnings.

Article 15 of the Corporate Tax Act: Scope of Gross Income

2015Guhap6609 Revocation of Disposition of Corporate Tax Imposition

○○○care Corporation

○ Head of tax office

2016.04.9

2016.06.14

1. The Defendant’s imposition of corporate tax of KRW 9,408,187,760 against the Plaintiff on March 14, 2014 and the imposition disposition of KRW 140,78,670 on the special rural development tax for the business year of 2008 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff entered into a merger agreement on September 30, 2008, and completed the merger registration on December 1, 2008, in order to incorporate a non-listed corporation with the main purpose of research and development of medical appliances, production and sales business, pharmaceutical sales business, and sales business of non-pharmaceutical drugs. In order to incorporate a non-listed corporation with the main purpose of manufacturing and sales business of non-pharmaceutical drugs, the Plaintiff entered into a merger agreement on September 30, 2008 and completed the merger registration on December 1, 2008.

B. The main contents of the merger contract concluded between the Plaintiff and AAF are as follows.

Article 3 (Date of Merger)

The merger date shall be scheduled on November 30, 2008: Provided, That where the merger cannot be executed by the above date, the merger date may be changed by the agreement of both parties.

Article 4 (Merger Ratio)

As of the date of merger, the Plaintiff shall allocate new shares to the shareholders listed in the register of shareholders of AAP as of the date of merger at the 14th common shares of AAF, and if a single share occurs, it shall be discarded.

Article 5 (Capital and Reserves)

1) The Plaintiff shall issue 52,855 shares of registered ordinary shares (50 won per share) by the merger of this case.

2) The Plaintiff’s capital increase to KRW 6,796,427,500 by the merger.

C. The following facts are as follows: (a) the face value of new shares issued by the Plaintiff to the shareholders of AAAF in return for the merger (26,427,50 won per share x 500 won x 52,855 won) was 33,780,188,465 won; (b) the fair value of assets succeeded from AAF was 59,267,178,365 won; and (c) the debt was 59,267,178,365 won. The Plaintiff included -25,486,989,90 won (=3,780,468,465 won -59,267,178,365 won) as the fair value of net assets acquired from AAFF as of the date of purchase in accordance with the former business rules (amended by Act No. 2098, Aug. 28, 200).

D. The Plaintiff deemed that the instant goodwill does not constitute a depreciable asset, which is a depreciable asset, under Article 24(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same), and did not include the value of the instant goodwill in the gross income, but did not dispose of the instant goodwill as a tax depreciation cost as follows.

Business year

Gross income and non-deductible expenses

Inclusion and Non-Inclusion

Subjects

Amount (won)

Disposition

Subjects

Amount (won)

Disposition

208

Operating Rights

25,486,989,900

Other

Operating Rights

25,486,989,900

Reservation

Depreciation of Business Rights

106,000,000

Reservation

E. However, the Defendant determined that the instant goodwill constitutes depreciable assets under tax law and should be included in the gross income for 2008 business year as a merger evaluation marginal profit under Article 12(1)1 of the former Enforcement Decree of the Corporate Tax Act. Accordingly, with respect to the business year 2008, the Defendant included the instant goodwill value of KRW 25,486,989,90 in the gross income, and included in the deductible expenses KRW 106,195,761 in the reserved amount of depreciation of goodwill in the deductible expenses, and on March 14, 2014, notified the Plaintiff of the rectification and notification of the corporate tax of KRW 9,408,187,760 (including additional tax of KRW 3,845,386,357), special rural development tax of KRW 140,788,670 (including additional tax of KRW 55,035,976) (hereinafter “instant disposition”).

F. On August 29, 2014, the Plaintiff filed an appeal with the Tax Tribunal on the instant disposition, but the Tax Tribunal rendered a decision to dismiss the Plaintiff’s claim on May 20, 2015.

Facts without any dispute, Gap's 1 through 4, Eul's 1, and the purport of the whole pleadings.

2. Summary of the parties' arguments;

A. The plaintiff's assertion

1) Since merger evaluation marginal profit is limited to the scope of merger marginal profit under the interpretation of Article 12(1) of the former Enforcement Decree of the Corporate Tax Act, there is no merger marginal profit subject to taxation in the event of merger marginal profit. The Plaintiff is merely a merger marginal profit as a result of a merger with AAF, and there is no merger marginal profit to be included in the calculation of earnings. Therefore, the instant disposition based on the premise that there exists

2) The Plaintiff is merely counted the amount of KRW 25,486,989,90, which is the fair value of net assets of an extinguished corporation in accordance with the former fiscal rules on corporate acquisition and merger, as an intangible asset, based on a simple difference concept, and cannot be deemed as an intangible asset separately assessed and succeeded to the value of the business of AAF. Therefore, the instant goodwill cannot be deemed as a goodwill, which is an intangible asset subject to depreciation under the Corporate Tax Act.

B. Defendant’s assertion

1) Since the merger marginal profit and the merger marginal profit are not the concept that can function as the upper limit of the former, there is no merger marginal profit or even in case where the merger marginal profit occurs, there is a merger marginal profit. Therefore, even if the merger marginal profit is not limited, it shall not be deemed that the merger marginal profit is limited to the scope of the merger marginal profit. In other words, the restriction up to reaching the amount under Article 459(1)3 of the former Enforcement Decree of the Corporate Tax Act is based on the premise that there exists the merger marginal profit, and the above restriction shall not be applied in case where there is no merger marginal profit due to the occurrence of the merger marginal profit.

2) The instant disposition, which included the value of the instant goodwill in gross income as a result of the merger, falls under a business right, which is a depreciable asset under the Corporate Tax Act, as a evaluated asset upon the merger that had not been appropriated in the AAF book, as an extinguished corporation

3. Relevant statutes;

The entries in the attached Table-related statutes are as follows.

4. Determination on the legitimacy of the instant disposition

(a) Whether merger evaluation marginal profit is taxable within the scope of merger marginal profit;

1) Article 15(1) of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same) provides that "the gains shall be the amount of profits generated from transactions which increase the net assets of the relevant corporation, except as otherwise provided for in this Act, such as payment of capital or financing and the amount of capital contribution," and Article 17(1)3 of the former Corporate Tax Act provides that "the gains from mergers shall be deemed as profits from capital transactions and shall not be included in the calculation of earnings in principle." In other words, Article 17(1)3 of the former Corporate Tax Act provides that "the gains from mergers shall not be included in the calculation of earnings in calculating the income amount of each business year of the merged corporation," Article 15(1) of the former Enforcement Decree of the Corporate Tax Act and Article 459(1)3 of the former Commercial Act provides that "the amount exceeding the amount of debts succeeded from the extinguished company, the amount paid to its shareholders, and the amount paid to the surviving company capital increase

However, the proviso of Article 17 (1) 3 of the former Corporate Tax Act provides that "merger marginal profit as prescribed by the Presidential Decree shall be excluded from the merger marginal profit which is not included in gross income." Article 15 (2) of the former Enforcement Decree of the Corporate Tax Act provides that "the amount calculated under the provisions of Article 12 (1) 1 and (3)" means the amount calculated under the provisions of Article 12 (1) 1 and (3). In the meantime, Article 12 (1) of the former Enforcement Decree of the Corporate Tax Act provides that "merger marginal profit as prescribed by the Presidential Decree" means the amount under the provisions of Article 459 (1) 2 (a) of the Commercial Act (hereafter in this Article "merger marginal profit") calculated by adding the amount under the provisions of subparagraph 3 of Article 459 (1) of the Commercial Act to the total amount under the provisions of subparagraph 1, 3 (referring to the surplus amount falling under the provisions of the main sentence of Article 16 (1) 2 of the Act) and Article 15 (1) of the former Enforcement Decree shall apply mutatis mutandis:

2) In light of the language, purport, system, etc. of the above provisions, the merger evaluation marginal profit included in gross income pursuant to Article 17(1)3 of the former Corporate Tax Act shall be limited to the merger marginal profit, and where there is no merger marginal profit, the merger marginal profit included in gross income shall not be deemed to exist.

A) Article 15 (2) of the former Enforcement Decree of the Corporate Tax Act does not stipulate "merger evaluation marginal profit as prescribed by the Presidential Decree" under the proviso of Article 17 (1) 3 of the former Corporate Tax Act as "value under Article 12 (1) 1 of the former Enforcement Decree of the Corporate Tax Act", and "amount calculated under the provisions of Article 12 (1) 1 of the former Enforcement Decree of the Corporate Tax Act" is "amount calculated under the provisions of subparagraph 1 of the former Enforcement Decree of the Corporate Tax Act". In other words, where assets are succeeded from a corporation, "merger evaluation marginal profit as prescribed by the Presidential Decree" means the amount calculated within the limit of merger marginal profit as the value of the portion exceeding the book value of the extinguished corporation,

B) Since the gross income is “the amount of profit generated from transactions which increase the net assets of the merged corporation”, if the net assets of the merged corporation are not increased due to the merger, it shall not be deemed that the amount of profit to be included in the gross income is not recognized unless the net assets of the merged corporation are increased due to the merger. Even in the case of acquisition by succession of the assets of the merged corporation, if the value of the assets succeeded from the merged corporation including it is smaller than the amount of debt succeeded from the merged corporation, the amount paid to the stockholders of the merged corporation, and the amount of the capital increase of the merged corporation, if the merger losses occur due to the merger, it shall not be deemed that the net assets of the merged corporation were increased as a result of the merger, and it shall not be deemed that the merger marginal profit which did not contribute to the increase of the net assets of the merged corporation is included in the gross income to the extent of the merger marginal profit.

C) In cases where liquidation income is generated from a merged corporation, there is a problem of double taxation with respect to the part on which the merged corporation's income is levied as liquidation income, if the merged corporation's income is subject to taxation unless liquidation income is deducted from the merger evaluation marginal profit under Articles 14 (1) 1 (c) and 12 (1) 1 of the former Enforcement Decree of the Corporate Tax Act. The liquidation income (Article 80 (1) of the former Corporate Tax Act) calculated by deducting the total amount of equity capital as of the date of the registration of the merger of the merged corporation from the total amount of the merger cost received by the stockholders, etc. of the merged corporation from the merged corporation is not included in the calculation of the merger marginal profit. Thus, if the merger marginal profit is included in the calculation of the merger marginal profit

D) General Rule 17-152 of the Corporate Tax Act provides that “merger evaluation marginal profits” under Article 17(3) of the former Corporate Tax Act shall not exceed “merger marginal profits” under Article 459(1)3 of the Commercial Act.

B. Determination on the instant case

As seen earlier, the Plaintiff’s face value of the merged shares paid by the Plaintiff to AAF’s shareholders as the price for the merger is recognized as having no profits from the merger exceeding the fair value of net assets succeeded from AAF.

As such, since there was no merger marginal profit in the Plaintiff, it cannot be deemed that there was a merger marginal profit within the scope of the merger marginal profit, the instant disposition included in the calculation of earnings in the calculation of earnings regardless of whether the instant business right can be deemed as a business right which is a depreciable asset under the Corporate Tax Act, shall be revoked as it is unlawful.

5. Conclusion

Therefore, the plaintiff's claim of this case is justified, and it is so decided as per Disposition.