Whether stock dividends constitute business income under the Income Tax Act in the event that the stock dividends fall under income generated from the financial business of a corporation carrying on a financial business (affirmative)

The scope of ‘financial business' which is subject to business income under the Income Tax Act is not limited to pawning business, price business, and foreign exchange exchange transfer business, but to all business classified by ‘financial business' under the Korea Standard Industrial Classification Table. Even if dividends are paid to the stocks held by a corporation carrying on financial business, if such dividend income falls under income generated from the financial business, it shall be deemed that such dividend income falls under business income other than the dividend income under the Income Tax Act

Article 63 (1) 2 of the former Corporate Tax Act (amended by the Addenda of the Income Tax Act (Act No. 4803 of Dec. 22, 1994), Article 20 (1) 8 and (3) (see Article 19 (1) 10 and (3) of the former Income Tax Act (amended by Act No. 4803 of Dec. 22, 1994), Article 142 (1) 2 (see Article 127 (1) 2 of the current Act), Article 36 subparagraph 1 of the former Enforcement Decree of the Income Tax Act (amended by the Presidential Decree No. 1467 of Dec. 31, 194), Articles 39 (see Article 29 of the current Act)

Supreme Court en banc Decision 91Nu384 delivered on December 24, 1991 (Gong1991, 1795), Supreme Court Decision 91Nu384 delivered on May 24, 1991 (Gong192, 710)

Korean Corporate Lease Co., Ltd. (Attorney Gangwon-hun, Counsel for defendant-appellee)

The director of Gwangju Tax Office

Gwangju High Court Decision 96Gu29 delivered on May 3, 1996

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

The grounds of appeal are also examined.

According to the reasoning of the judgment below, the court below determined that the non-party Industrial Bank of Korea held 48.94% of the total stocks issued by the non-listed corporation; 9.6% of the total stocks issued by the non-party Gwangju Bank and Jeonbuk Bank, 0.96% of the non-party Gwangju Investment Bank; 11.51% of the non-party Han-chul Securities Corporation (the acquisition of the stocks held by the non-party mobilization industry corporation from the business year of 1992) from the business year of 1990 to the business year of 1993 ( March 31, 1990) ( March 1, 1993) without changing the holding ratio; and that the non-party company did not submit the payment records of the above company's dividends to the defendant, who is the head of the tax office having jurisdiction over the above shareholders in each of the above business year; and therefore, it did not submit the payment records of the company's dividends to the plaintiff company for 414 years since it did not submit the payment records of the above company's dividends to the defendant.

Article 63 (1) 2 of the former Corporate Tax Act (amended by the Addenda of the Income Tax Act (amended by Act No. 4803 of Dec. 22, 1994) provides that where a person who pays the amount of income as prescribed in Article 142 (1) 1 through 6 of the Income Tax Act pays such amount, he/she shall submit a payment record to the Government as prescribed by the Presidential Decree. Article 142 (1) 2 of the former Income Tax Act (amended by Act No. 4803 of Dec. 22, 1994; hereinafter the same shall apply) provides that the amount of dividend shall be paid. Meanwhile, Article 20 (1) of the Income Tax Act provides that business income generated during the pertinent year shall be determined by the Presidential Decree from financial business, etc.; Article 20 (3) of the former Income Tax Act provides that matters necessary for the scope of business income under paragraph (3) of the same Article shall be determined by the Presidential Decree, and Article 20 (3) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 1467 of Dec. 14, 19, 19).

In full view of the provisions of the relevant laws and regulations, the scope of ‘financial business' which is taxable as business income under the Income Tax Act includes all businesses classified as ‘financial business' on the Korean Standard Industrial Classification Table, rather than limited to the pawning business, the price business, and the foreign exchange exchange transfer business. Even if dividends are paid to the stocks held by a corporation operating a financial business, such dividend income shall be deemed as business income rather than the dividend income under the Income Tax Act if such dividend income falls under income generated from the financial business (see, e.g., Supreme Court Decisions 91Nu407, May 24, 1991; 91Nu384, Dec. 24, 1991).

In addition, according to the table of the Korea Standard Industrial Classification before the amendment of September 9, 1991, large classification 8. Financial, insurance, real estate, and business service, mid-classification 81. Financial and Small-type 810. Financial and Small-Scale 810. Financial and Small-type 8102. Financial and Small-Scale 8102. Investment companies engaged in securities investment, etc. are included in non-negotiable financial institutions in the tax classification 81023. Pursuant to the Korean Standard Industrial Classification after the amendment notice, the large classification 65. Financial and Insurance, Small-Scale 65. Financial and Medium-Scale 659. Other financial businesses and small-type 659. Tax classification 6591.

Therefore, barring any special circumstance, the dividend paid to the above shareholders who engage in financial business from the Plaintiff Company constitutes business income, not dividend income. The above shareholders held the Plaintiff Company’s shares during the pertinent business year, and such circumstance alone does not change.

Nevertheless, the court below held that the above shareholders' dividends received from the plaintiff company constitute not business income generated from financial business but dividend income, and thus, the court below erred by misapprehending the legal principles on the classification of income, thereby affecting the conclusion of the judgment. The grounds for appeal pointing this out are with merit.

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below. It is so decided as per Disposition by the assent of all participating Justices.

Justices Lee Don-hee (Presiding Justice)