Interest paid on the provision of deposits as collateral in deductible expenses and inclusion of recognized interest in gross income;

In the form of deposit security, the interest paid under the premise that it is a non-business-related temporary payment with respect to the act of providing loans to persons with a special relationship is unlawful in violation of the principle of no taxation without law. However, the calculation of recognized interest such as wrongful calculation is lawful.

Article 27 (Non-Inclusion of Interest Paid in Loss)

Article 52 (Dispudiation of Wrongful Calculation)

1. The Defendant’s disposition of imposing corporate tax of KRW 1,00,550,580 for the business year of 2002 imposed on the Plaintiff on November 1, 2003, which exceeds KRW 648,525,881, shall be revoked.

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

The same shall apply to the order.

1. Details of the disposition;

A. The Plaintiff is a corporation established to manufacture and sell paints, etc., and the Plaintiff is a corporation that vicariously carries out the transportation of paint products and product management affairs produced by the Plaintiff (hereinafter “○○”).

B. On April 1, 2002, the Plaintiff: (a) deposited 1.1 billion won in the ○ bank; and (b) deposited 2.2 billion won in the △△ Bank on May 21, 2002 (hereinafter “the instant term deposit”); and (c) opened a pledge on the said deposit; and (d) on April 1, 2002, ○○ obtained a loan of KRW 1.1 billion from the ○ Bank on April 1, 2002, and KRW 2.2 billion in total from the △△ Bank on May 21, 2002 (hereinafter “instant loan”).

C. From around 1999 to 2000, the Defendant purchased facilities, which are water paints facilities (hereinafter “instant facilities”) and ship paints, which are business assets, in ○○ factory ○○○○ located in Gyeongnam-gun, 1999, and installed them, and was subject to temporary tax credit from 1999 to 2001.

D. On July 31, 2002, the Plaintiff entered into a contract for the transfer of the remaining human and physical facilities except for the facilities of this case to 23.3 billion won ("transfer") on July 31, 2002 as part of restructuring, and entered into a contract for the removal of the facilities of this case with 3.3 billion won around September 13, 2002, and paid all the construction price to the Plaintiff by December 27, 2002 by 10.30,000 won until December 27, 2005 ("20,000,000,0000 won) by 20,000 won for the loan of this case to 1.30,000 won ("20,000,000 won) and 20,000 won, which is 25,000 won prior to the amendment of the former Corporate Tax Act (amended by Presidential Decree No. 1782, Dec. 28, 2002).1.

F. On July 31, 2004, the Plaintiff claimed a national tax adjudication and received a decision of dismissal on December 7, 2005.

[Basis] Evidence Nos. 1, 2-1, 3-9, evidence Nos. 4-1 through 9, evidence Nos. 6-1, 2, A-12, 13, evidence Nos. 1, 2, 3-1, 2, 5-1, 5-2, and 5-2

2. Determination on the instant disposition

A. The parties' assertion

The Defendant asserts that the instant disposition is lawful, and the Plaintiff’s part relating to the grounds of subparagraphs 1 and 2 of the instant disposition is unlawful for the following reasons. As such, the Plaintiff asserts that the part of the instant disposition in excess of KRW 648,525,881 (513,00,000,000,000,000,0000,0000,0000,000,02,437,381, 33,088,500,000, excluding the part related to the grounds of subparagraphs 1 and 2, should be revoked.

(1) Any assertion related to the ground for appeal No. 1

(A) In accordance with the financial institution’s demand that the Plaintiff deposit and pledge of the Plaintiff’s term deposit for the extension of the due date of the existing loan or for the new loan, the Plaintiff opened the instant term deposit and set up a pledge. As such, the instant term deposit is not a provisional deposit irrelevant to the business, but a deposit of the instant term deposit and the instant loan are separate acts under private law. Therefore, construing it as a bypass is contrary to the principle of no taxation without law.

(B) At the time of providing the instant term deposit as security, the Plaintiff offered a security to ○○○ with respect to the instant business without any intention to unfairly reduce the tax burden, and even in substance or form between ○○ and ○○, the said act of offering security cannot be deemed as a lending at an interest rate lower than the appropriate interest rate, and thus, it cannot be deemed as an abnormal transaction lacking economic rationality, inasmuch as the said act of offering security did not unreasonably reduce the tax burden, thereby making it difficult for the Defendant’s application of the provision of wrongful calculation by deeming it as an unfair transaction without economic rationality.

(C) Although corporate tax is not imposed on a corporation which provided a term deposit which the defendant had already subscribed as security, it goes against the principle of fair taxation to impose corporate tax only on a corporation which provided a new term deposit as the plaintiff by opening a new term deposit and providing a security.

(2) Any assertion related to the grounds of No. 2

The Plaintiff removed the instant facilities at the request of ○○○○○ in the process of transferring all of the business of lurgy factory with the facilities installed with the instant facilities, which were subject to the deduction of investment tax amount, and the amount invested in the instant facilities is merely 6.98% out of the total amount of the facility investment of lurg○ factory, and even if the instant facilities were removed, it did not differ from continuing to operate the instant facilities by succession to lurgy factory as it was almost as it was. Thus, the instant transfer constitutes the succession to the business, which is the ground for exclusion from the collection, and even if it does not constitute succession to the business, such additional collection should be limited to the portion of the amount of the investment tax deducted from the investment of the instant facilities.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

(1) Determination on the grounds for No. 1

(A) Judgment on the Plaintiff’s first argument

1) Article 28(1)4(b) of the Corporate Tax Act and Article 53(1) of the Enforcement Decree of the Corporate Tax Act, which provides that where a person having a special relationship lends money irrelevant to the business of the pertinent corporation regardless of the name, the interest on the loan corresponding to the amount of the loan shall be excluded from deductible expenses. This includes not only pure meaning loans, but also loans corresponding to the nature of the bonds, but also those cases where a person having a special relationship provides the provisional payment upon receiving reasonable interest from the person having a special relationship. The existence of a relationship with the provisional payment shall be objectively determined based on the corporation’s purpose of business or business contents. In determining whether a person having a special relationship has lent money, the provisions on the calculation of the tax base in the tax law, which provide for the application of the substance of the loan, shall be interpreted based on the principle of substantial taxation under Article 14(2) of the Framework Act on National Taxes, regardless of the name or form of transaction.

However, the principle of substantial taxation shall be applied to the extent permitted by the principle of no taxation without law and the constitutional principle, and the interpretation of tax laws and regulations is not permitted under the principle of no taxation without law. Therefore, the legal concept in interpreting and applying tax laws cannot escape itself from the language and text of the legal provision.

In light of the above legal principles, provisional payment in office refers to a direct loan regardless of business. Here, the term "loan" refers to a loan equivalent in nature to a loan, for example, the company in question directly pays the debt of a related party, but the deposit and loan are separate legal acts and do not constitute a single lending act. Thus, the act of offering security such as deposit of term deposit and establishment of a pledge on behalf of a third party is not included in "loan."

2) The fact that the Plaintiff received the instant loan from the financial institution by depositing the instant term deposit and setting up and granting a pledge right thereto is as seen in the foregoing 1.B. However, such an act is merely merely an act of offering security, and thus, it cannot be deemed as a provisional payment irrelevant to the instant term deposit or the amount equivalent to the instant loan.

Therefore, the part of the disposition of this case, which was excluded from deductible expenses, is unlawful on the ground that it is a provisional payment irrelevant to business affairs, and the plaintiff's assertion is justified

(B) Judgment on the second argument of the Plaintiff

1) In a case where a corporation’s wrongful calculation under Article 52 of the Corporate Tax Act’s transaction with a person in a special relationship is deemed to have avoided or reduced the burden of tax arising from the process of abuse or circumventing, multi-stage act, or other abnormal transaction by taking the forms of trade as enumerated in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act, the latter is deemed to have avoided or reduced the burden of tax arising from the process of ordinary rational transaction by denying it by the taxation authority, and by deeming that there is income objectively and reasonable in a manner prescribed by the law, and is a system to ensure fairness in taxation and to prevent the act of tax evasion, and is also deemed to have neglected the economic rationality by calculating the negative and unreasonable act without a reasonable method by a normal economic person (see, e.g., Supreme Court Decision 95Nu18697, May 28, 197).

As a requirement for the establishment, ① is a transaction with a related party (the requirements of the related party), ② the calculation of an act is unfair (the above form of act has been selected, objective requirements), ③ the tax burden on corporate income has been reduced (the result), and the economic rationality has to be determined based on whether the transaction is abnormal in light of sound social norms and commercial practices, considering the overall circumstances of the transaction.

2) Comprehensively taking account of the overall purport of the arguments in the evidence Nos. 2-2 and 2-2, the average interest rate for the term deposits in the instant case is 6.8% per annum, the average interest rate for the loans in the business year 2002 by the Plaintiff is 10.61% per annum, the Plaintiff’s share in half-yearly accounts for 23.33% and 17.29% of the financial assets held by the Plaintiff in the business year 2002, and the 2002 business year’s capital amount is 2.4 billion won.

According to the above facts, the Plaintiff did not repay a high interest on the loan but offered the loan to ○○ with a special relationship as security after depositing the loan in the instant fixed deposit with a low interest rate. The Plaintiff’s interest and interest are different between the Plaintiff’s interest and the Plaintiff’s interest, which led to the decrease in the Plaintiff’s income. The instant fixed deposit offered as security lost liquidity as it is impossible for ○○○ to withdraw the loan until the loan is repaid. If ○○ fails to repay the loan, there is a risk of loss of the deposit of the instant fixed deposit by exercising the security right, the amount of the loan is larger than the amount of the loan’s capital, and it is difficult to view that the funds provided to ○○ is directly related to the increase in the Plaintiff’s operating income.

From this point of view, the Plaintiff’s act of having the Plaintiff obtain the instant loan by using the instant term deposit as collateral is an abnormal transaction that lacks economic rationality in light of sound social norms and commercial practice, and constitutes “an act that is equivalent to the case of lending money at an interest rate lower than the market price or an act that is recognized as dividing the profit of a corporation by distribution,” under Article 88(1)9 of the Enforcement Decree of the Corporate Tax Act, which applies mutatis mutandis under Article 88(1)9.

Therefore, the part that the defendant denied the deposit and the act of offering security of the time deposit of this case and included the recognized interest in the calculation of the income is legitimate, and the plaintiff's assertion is without merit.

(C) Judgment on the third assertion by the Plaintiff

1) The principle of equitable taxation means that a person who is a party to a tax law must be treated equally and taxed in application of the tax law.

2) Although the corporate tax is not imposed on the corporation that provided the existing term deposit as security, there is no evidence to acknowledge that only the corporation that provided the new term deposit as security was imposed with the Plaintiff, and even if the Defendant did so at the same time, the Defendant’s act of opening the new term deposit as security and providing it as security may be distinguished from the act of offering the existing term deposit as security and may be treated differently. Thus, the Plaintiff’s act of opening the new term deposit and offering it as security cannot be viewed as violating the principle of fair taxation.

3) The Plaintiff’s assertion on this part cannot be accepted.

(2) Determination on the grounds for 2

(A) The temporary tax credit system under the Restriction of Special Taxation Act is a system that induces an investment by deducting the investment tax amount for an investment facility investment of an enterprise, and where the investment assets subject to tax credit are disposed of within a short period, and disposed of within a short period, the purpose of the system cannot be achieved, and thus, the amount of tax credit may be additionally collected. However, where the business successor continues to conduct the business with the investment assets in the process of succession, the disposal of the investment assets is made in the process of succession, it shall be excluded from the object of tax collection exceptionally because it does not hinder the achievement of the purpose of the system

The succession of business refers to the comprehensive transfer and acquisition of all rights and obligations concerning the business in fact in order to maintain the continuity of the business, regardless of the name or form of the contract, and the business here does not necessarily mean the business that is operated within one place of business, and if it is used for different purposes for each business asset acquired within one place of business, it is reasonable in light of the purpose of the temporary tax credit system.

Therefore, if several business assets are installed independently and used for different purposes, they should be regarded as being used for different businesses, and whether they are succeeded to each business asset should be determined.

(B) At the time of the transfer of this case, the Plaintiff entered into a contract for transferring the human and material facilities of lurg factory except for the instant facilities. Accordingly, the Plaintiff removed the instant facilities as seen above 1. D. In full view of the purport of Gap evidence 2-2, the entire assets of lurg factory consisting of the instant facilities and equipment, which are lurgian paints equipment, and equipment, 36,686,573,714 (building 18,74,047, 229 won + 598,141,522 won + 825,951,666,786,7950 + 97,9796,986,986,977,969,97,976,967,986,986,296,296,296,296,306,296,297,297,29467,294,27

According to the above facts, the equipment and the equipment of this case, which are ship repair equipment, are used respectively for the production of vessel repair equipment different from each other, and for the production of water supply equipment, which are ship repair equipment at the time of the transfer of this case, are deemed to have been transferred all of the business rights and human and physical assets as they are and maintained the identity of the business. Therefore, in relation to the equipment related to ship repair equipment, it is judged that there was the succession of the business, and therefore, in the disposition of this case, it is unlawful to additionally collect the deductible tax amount for the portion of the equipment that is ship repair equipment.

On the other hand, since the facility of this case was removed, it is legitimate to additionally collect the deductible tax amount on the facility of this case among the disposition of this case.

The plaintiff's assertion is partially justified.

(3) Sub-determination

In the disposition of this case, ① the part where the Plaintiff’s act of providing the time deposit of this case as security is deemed as a temporary payment unrelated to the business, and ② the part where the amount equivalent to the interest corresponding to the amount of 3.3 billion won is collected as deductible expenses, and ② the part where the amount of tax credit is collected as to the facilities of ship use, and ③ the part where the Defendant calculated the amount recognized as the prescribed method by applying the provision of the denial of wrongful calculation and calculation, and ④ the part where the amount of tax credit for the facilities of this case is collected as deductible expenses, and ④ the part where the amount of tax credit for the unlawful portion of the disposition of this case is collected as to the tax disposition of this case is legitimate. However, since there is no evidence to determine the amount of tax on the unlawful portion of the disposition of this case

4. Conclusion

The plaintiff's claim is justified.

Related Acts and subordinate statutes

【National Tax Basic Act

Article 14 (Real Taxation)

(1) If the title to the income, profit, property, act or transaction subject to taxation is merely nominal and a person to whom such title belongs exists, the tax-related Acts shall apply to such person to whom such title belongs as a taxpayer.

(2) The provisions concerning the calculation of tax base in tax-related Acts shall apply according to the substance, notwithstanding the name or form of income, profit, property, act or transaction.

m. Corporate Tax Act

- Article 28 (Non-Inclusion of Interest Paid in Loss by Law No. 6558, Dec. 31, 2001)

(1) The interest on loans falling under any of the following subparagraphs shall not be included in deductible expenses in calculating the income amount of a domestic corporation for each business year:

4. Of interest on loans paid during each business year by a domestic corporation which acquires or holds assets falling under one of the following items, the amount calculated under the conditions as prescribed by the Presidential Decree (limited to interest on loans equivalent to the value of the relevant assets):

(b) Provisional payments, etc. prescribed by the Presidential Decree to a person with a special relationship under Article 52 (1) without connection with the business of the relevant corporation; and

m. Corporate Tax Act

Article 52: Denial of Evaluation of Wrongful Acts

(1) Where the head of the district tax office having jurisdiction over the place of tax payment or the Commissioner of the competent Regional Tax Office deems that the tax burden of a domestic corporation has been unjustly reduced through transactions with persons with a special relationship prescribed by Presidential Decree (hereinafter referred to as "specially related persons"), he/she may calculate the amount of income for each business year of the relevant corporation regardless of the activities or calculation of the amount of income of the relevant corporation (hereinafter

(2) In the application of the provisions of paragraph (1), the standard for determination shall be the prices applied or to be applied in sound and generally accepted practices and normal transactions between persons without a special relationship (including rates, interest rates, rents, exchange rates and other corresponding rates; hereafter referred to as "market price" in this Article).

(3) A domestic corporation shall submit a detailed statement describing transactions with a specially related person for each business year as prescribed by the Presidential Decree.

(4) In applying paragraphs (1) through (3), matters necessary for the types of wrongful calculation, assessment of market price, etc. shall be prescribed by Presidential Decree.