In a case where a business operator who implements a housing redevelopment improvement project acquires a inventory asset and removes a building on the ground, and then constructs a new building, whether it can be determined that the cost paid for the construction of a new building, such as a house, constitutes an input tax amount disbursed in connection with the land (negative), and the method of determining whether the cost is an input tax amount for the tax-free project cost disbursed in connection with the land or an input tax amount for the

In the case of a business that supplies both taxable and tax-free land, the input tax amount for the expenses paid in relation to the housing can be deducted from the output tax amount pursuant to Article 17(1)1 of the former Value-Added Tax Act (amended by Act No. 9268, Dec. 26, 2008; hereinafter the same) as the input tax amount related to the taxable business, while the input tax amount for the expenses paid in relation to the land as inventory assets may not be deducted from the output tax amount pursuant to the former part of Article 17(2)4 of the former Value-Added Tax Act,

An input tax amount on the land not deducted from the output tax amount is recovered by means of including the cost for acquisition of the land when transferring the land, and, in cases of the input tax amount deducted from the output tax amount, the input tax amount is recovered by the method of deducting the input tax amount. Therefore, if an entrepreneur who implements a housing redevelopment project acquires the land as inventory assets and the previous building on the ground, and removes the previous building, and then constructs a new building, such expenses do not constitute the acquisition cost of the land, it is not readily concluded that they constitute the input tax amount disbursed in relation to the land. Furthermore, whether the cost is an input tax amount on the tax-free project cost incurred in relation to the land or an input tax amount on the taxable project cost disbursed in relation to

Articles 12(1)12 (see current Article 26(1)14), 17(1)1 (see current Article 38(1)1), and 17(2)4 (see current Article 39(1)7) of the former Value-Added Tax Act (Amended by Act No. 9268, Dec. 26, 2008);

king New Zealand District Housing Redevelopment and Improvement Project Association (Attorney Ahn Byung-jin, Counsel for the plaintiff-appellant)

head of Sung Dong Tax Office

Seoul High Court Decision 2012Nu5048 decided September 14, 2012

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Regarding ground of appeal No. 1

A. Article 17(1)1 of the former Value-Added Tax Act (amended by Act No. 9268, Dec. 26, 2008; hereinafter the same) provides that “the tax amount for the supply of goods or services used or to be used for one’s own business shall be deducted from the output tax amount.” However, Article 17(2)4 of the former Value-Added Tax Act provides that “the input tax amount related to the business that supplies goods or services exempt from value-added tax (including the input tax amount related to investment) and the land-related input tax amount as prescribed by the Presidential Decree” as one of the input tax amounts not deducted from the output tax amount. Furthermore, under Article 12(1)12 of the former Value-Added Tax Act

B. The court below, citing the reasoning of the judgment of the court of first instance, determined that the part of land (hereinafter “general parcel-out land”) in which the Plaintiff, a redevelopment and consolidation project association, constructed a general parcel-out house exceeding the size of national housing subject to value-added tax (hereinafter “general parcel-out house”) among the land in which the Plaintiff received an investment in kind from its members, shall be deemed to be owned by the Plaintiff acquired from its members in order to appropriate for the project expenses incurred in performing the purpose project (hereinafter “the project in this case”), and on the premise thereof, whether the cost of removal, etc. paid by the Plaintiff in order to construct a new building on the land

C. From among the lands that the Housing Redevelopment Project Association received as investment in kind from its members, the land for general sale is not returned to its members, and thus, it cannot be deemed that the land actually belongs to its members.

In addition, in light of these circumstances and the above provisions, the above judgment of the court below is acceptable. Contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the attribution of ownership of general parcels of land under redevelopment improvement project.

2. Regarding ground of appeal No. 2

A. In the case of a business that supplies both taxable houses and tax-free land, the input tax amount for the expenses paid in relation to the housing is an input tax amount related to the taxable business, which can be deducted from the output tax amount under Article 17(1)1 of the former Value-Added Tax Act. On the other hand, the input tax amount for the expenses paid in relation to the land of inventory assets, which is an input tax amount related to the tax-free business, shall not be deducted from the output tax amount

An input tax amount on the land not deducted from the output tax amount is recovered by means of including the acquisition cost of the relevant land when transferring the relevant land, and, in cases of the input tax amount deducted from the output tax amount, the input tax amount is recovered by the method of deducting the input tax amount. Therefore, if an entrepreneur who implements a housing redevelopment improvement project acquires a plot of land and its previous building on the ground and removes the previous building, and the cost paid for constructing a new building on the housing, etc. does not constitute the acquisition cost of the land, it is not readily concluded that the said cost constitutes an input tax amount disbursed in relation to the land. Furthermore, whether the cost is an input tax amount on the housing regardless of the cost of the tax-free project paid in relation to the land or an input tax amount

B. The reasoning of the lower judgment reveals the following facts.

(1) The Plaintiff spent appraisal fees, environmental and traffic impact assessment expenses, costs for civil engineering design and installation of fundamental infrastructure, measurement costs, and costs of lawsuit (hereinafter “instant costs”) during the second period of 2008 when implementing the instant project.

(2) On February 25, 2009, the Plaintiff: (a) deemed that the instant expenses were commonly disbursed for general houses for sale in lots and other association members’ houses for sale in lots, and housing below the scale of national housing; and (b) sought a refund of input tax amount for the expenses related to the general houses for sale in lots; (c) however, the Defendant deemed that such expenses were related to the land for which the input tax amount was not deducted, and thus, rendered the instant

(3) However, appraisal fees are the expenses required to assess the estimated value of the site or structure scheduled for parcelling-out and the price of the previous land or structure in order to establish the management and disposal plan. ② The environmental and traffic impact assessment expenses are the expenses required for the environmental and traffic impact assessment to be implemented in formulating the project plan concerning the project in this case. ③ The expenses for the civil engineering, design and installation of infrastructure for rearrangement are the expenses required for the construction of infrastructure in the Plaintiff’s project implementation district. ④ The expenses for the measurement are the expenses required for the survey of the cadastral status and the current status of the building and road within the Plaintiff’s project implementation district. ⑤ The expenses for the lawsuit between the Plaintiff and the association members are the expenses paid to the attorney-at-law as to the lawsuit (the lawsuit of partially revoking the approval for the redevelopment of housing, the lawsuit of partially revoking the approval for the renewal of housing, the lawsuit of cancellation of the management and disposal plan, the lawsuit of confirming the status of the object

C. The above facts are determined as follows in light of the legal principles as seen earlier.

(1) First of all, the cost of services required to estimate the estimated value of the building site and structure scheduled for sale among the appraisal fees is not related to the acquisition of land, unlike the cost of services required to assess the price of the previous land or structure, and cannot be deemed to constitute the cost of land acquisition.

(2) The cost of environmental and traffic impact assessment is based on the former Act on Assessment of Impacts of Works on Environment, Traffic, Disasters, Etc. (wholly amended by Act No. 9037, Mar. 28, 2008) to assess impacts of noise, vibration, population concentration, water quality, soil and traffic on the surrounding environment, and there is no cost related to the acquisition of land according to the assessment items.

(3) The cost of civil engineering design and installation for the construction of infrastructure for rearrangement corresponds to the cost of acquiring the relevant structure, and in principle, does not constitute the cost incurred in relation to land or the cost for acquisition of land (see Supreme Court Decision 2004Du39, Mar. 25, 2004).

(4) If the survey cost is for the convenience of removing the previous building, it can be viewed as the cost disbursed for acquiring the land. However, if it is for calculating the contribution of the association members in light of the purpose of the survey and the details of service cost, it may be viewed differently.

(5) In light of the substance of the lawsuit, if the cost of the lawsuit was disbursed for the smooth progress of the project of this case by resolving legal disputes with members, it cannot be deemed that the cost of the lawsuit was paid in relation to the land or that the cost of the land acquisition is not

(6) Ultimately, in order to determine whether the input tax amount for the instant cost constitutes an input tax amount for the tax-free project cost disbursed in connection with the land for which the input tax amount is not deducted, the lower court should determine whether the instant cost is a tax-free project cost disbursed in connection with the land or a tax-free project cost disbursed irrespective of the land, by specifying the details of the Plaintiff’s project and the purpose

D. Nevertheless, the lower court determined otherwise by deeming the instant disposition lawful on the ground that the instant cost was ultimately incurred in relation to the land for general sale, and thus, constituted an object of the non-deduction of the input tax amount. Therefore, in so determining, the lower court erred by misapprehending the legal doctrine on the input tax amount on the cost incurred in relation to the land for which the non-deduction of the input tax amount was stipulated under Article 17(2)4 of the former Value-Added Tax Act, thereby failing to exhaust all necessary deliberations, thereby adversely affecting the conclusion of the judgment. The allegation contained in the grounds of appeal

3. Conclusion

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)