Seoul High Court 2014Nu73076 (2015.09.10)

Seocho 2013west 091 (2013.09.02)

Retirement allowances under the provision of payment, which is only temporary neglect to distribute corporate funds, are not subject to deductible expenses under the Corporate Tax Act (Reversal and return).

It is reasonable to view that the instant retirement allowance provision is merely a temporary measure to distribute corporation funds generated from gains on transfer of real estate, etc., and therefore, it should be deemed that only the amount calculated by the formula prescribed in Article 44(4)2 of the Enforcement Decree of the Corporate Tax Act among each of the instant retirement allowances is subject to inclusion in the calculation of retirement benefits

Article 44 of the Enforcement Decree of Corporate Tax Act

2015du53398 Disposition of revocation of imposition of corporate tax, etc.

○ Stock Company

○ Head of tax office et al.

Seoul High Court Decision 2014Nu73076 Decided September 10, 2015

December 18, 2016

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

The grounds of appeal are examined.

1. Article 26 subparagraph 1 of the Corporate Tax Act provides that "the amount recognized as excessive or unjust as prescribed by Presidential Decree among personnel expenses shall not be included in deductible expenses for the purpose of calculating the amount of income of a domestic corporation for each business year, and Article 44 (4) of the Enforcement Decree of the Corporate Tax Act provides that "the amount in excess of the amount falling under any of the following subparagraphs among retirement benefits paid by a corporation to an executive officer shall not be included in deductible expenses" under subparagraph 1 of the same Article provides that "the amount prescribed in the articles of incorporation if the amount to be paid as retirement benefits (including retirement benefits, etc.) is determined by the articles of incorporation," and "the amount calculated by multiplying the amount equivalent to 1/10 of the total salary paid to the relevant executive officer for one year retroactively from the date of retirement by the number of years retroactively calculated by the method prescribed by Ordinance of the Ministry of Strategy and Finance" under paragraph (5) of the same Article.

In light of the language and structure of such provisions and the legislative intent of preventing an unfair reduction of corporate income, the retirement benefits paid to an officer pursuant to the articles of incorporation or the rules on payment of retirement benefits delegated by the articles of incorporation or the rules on payment of retirement benefits (hereinafter “the rules on retirement benefits”) shall be included in the calculation of losses in principle. However, if a person in a position that may affect the enactment or amendment of the rules on retirement benefits or a person who is closely related with such a person has been paid retirement benefits rapidly increased as an officer, he/she was paid such increased retirement benefits. Accordingly, the amount of retirement benefits actually paid is deemed to be a consideration for labor or contribution during the period of service of the relevant officer or other corporations similar to those of the relevant corporation, and if it is deemed that such excessive retirement benefits could no longer be paid after considering the regulations on the retirement benefits itself or the financial situation or business outlook of the relevant corporation, the provisions of Article 4(1)4 of the Corporate Tax Act, which is merely a temporary payment of retirement benefits, is not a specific type of retirement benefits under the provisions of Article 4(4) of the Corporate Tax Act.

2. Review of the reasoning of the lower judgment and the record reveals the following facts.

A. OrA and his husband KimB, their husband, have taken over the entire issuance of the Plaintiff’s shares on or around September 00, together with KimCC and KimD, which are children, and are appointed as the Plaintiff’s internal director and auditor respectively.

B. On March 31, 200, the Plaintiff, a corporation operating real estate sale and lease business, acquired ○○○○○○○○-dong, ○○-1 land and buildings on its ground (hereinafter collectively referred to as “instant real estate”). On January 5, 200, the Plaintiff transferred ○○○ billion won to EE on January 5, 200.

C. On January 17, 200, the Plaintiff: (a) held a temporary general meeting of shareholders on January 17, 200; (b) held that “the remuneration of officers or retirement allowances of officers shall be determined by the resolution of the general meeting of shareholders” under Article 33 of the articles of incorporation, which provides that “the remuneration of officers or officers shall be determined by the resolution of the general meeting of shareholders (paragraph (1)); (c) amended that “the retirement allowance of officers or officers who retired shall be governed by the rules on payment of retirement allowances for officers (paragraph (2) ; (b) determined a new provision on the payment of retirement allowances for officers or officers who retired from office (hereinafter “instant retirement allowance rules”) x payment rate of the amount calculated by the formula of “the amount equivalent to 30 days’ average wages for three months before the date of retirement and the bonus for the latest one year x the amount equivalent to 100 times’s annual salary for officers or officers who retired from office” (hereinafter “instant retirement allowance rules”); and (d) paid KRW 200 times’s monthly remuneration for officers’ successful sale of real property in this case.

D. On December 29, 200, pursuant to the instant retirement allowance provision, the Plaintiff paid the retirement allowance of 00 won to 00 won to 00 won for 10 times for 00 years and less than 4 years but less than 10 years for 00 years, and the retirement allowance of 00 won for 00 won to 00 won for 00 years but less than 10 years for 0 years.

E. Meanwhile, the amount reported by the Plaintiff at the time of filing each corporate tax return for the business year 2008 through 2010 was each ○○○○○, ○○○○, and ○○○○○, and ○○○, due to the shortage of operating funds, the Plaintiff received the provisional deposit from KimB in 2008 and around 2009, and made KimB re-paid and used the annual ○○ or ○○○, as activity expenses. Since January 2012, 2012, the Plaintiff did not pay remuneration to OA and KimB due to the shortage of funds.

3. The following circumstances revealed by such factual basis, namely, ① the Plaintiff was holding the entire shares issued by OrA, KimB, and its children, and there was no officer other than OrA, KimB. ② The instant retirement benefits provision was made in the manner that the Plaintiff transferred the instant real estate and made approximately KRW 120,000,000 transfer gains, and did not have any separate provision regarding the officer’s remuneration or retirement allowances until that time. ③ Although the Plaintiff was making a rent from the instant real estate, it was not good financial resources until the transfer of the instant real estate to the officers of OrA and KimB, even though the Plaintiff was using the pertinent real estate as a loan for the repayment of the interest of the loans to the financial institution, the Plaintiff’s payment of the special bonus to the officers of OrA and KimB, and eventually, the Plaintiff’s payment of each of the instant retirement benefits to the officers of OB and KimB for more than 3B0,000,0000 won of the instant real estate’s retirement benefits payment to each of the instant real estate during the period of 200 years.

Nevertheless, solely on the grounds indicated in its reasoning, the lower court deemed that the instant retirement benefit provision constitutes a provision on payment of retirement benefits delegated by the articles of incorporation under Article 44(5) of the Enforcement Decree of the Corporate Tax Act, and determined that each of the instant dispositions, which issued a notice of change in income, was unlawful by treating the excess amount as a bonus for the AA and KimB, and by disposing of it as a retirement benefit payment under Article 44(4)2 of the Enforcement Decree of the Corporate Tax Act, by deeming that the instant retirement benefit provision constitutes a provision on payment of retirement benefits delegated by the articles of incorporation. The allegation contained in the grounds of appeal on this point is with merit.

4. Therefore, without examining the remaining grounds of appeal, the judgment of the court below is reversed, and the case is remanded to the court below for a trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.