Whether housing construction and sales business operators are subject to simple expense rate application and whether special tax reduction or exemption is applied to small and medium enterprises under the Restriction of Special Taxation Act.

Since the commencement of business by a housing construction and sales business operator is not formally determined on the basis of the date of business registration, etc., it is not a person subject to simple expense rate, but the plaintiff is not a person subject to the application of simple expense rate, and the plaintiff is not a person subject to special tax reduction or exemption due to

Article 143 of the Enforcement Decree of the Income Tax Act

Article 7 of the Restriction of Special Taxation Act: Special Tax Abatement or Exemption for Small or Medium Enterprises

Seoul Administrative Court 2018Guhap83659 global income and revocation of disposition

AA

BB Director of the Tax Office

July 25, 2019

August 20, 2019

1. The plaintiff's claim is dismissed.

3. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The Defendant’s imposition of global income tax of 000 won for the year 2013, global income tax of 2014, global income tax of 000 won for the year 2014, and global income tax of 000 won for the year 2015 is revoked.

1. Details of the disposition;

A. The plaintiff constructed each multi-household house (hereinafter referred to as "multi-household house of this case") as listed below, and all of the houses of this case 1 to 3 together built "each house of this case" and sold them after obtaining approval for use from the permitting authority.

B. Meanwhile, the Plaintiff calculated estimated income by applying the simple expense under Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 26982, Feb. 17, 2016; hereinafter the same shall apply) on the ground that the amount of income falls short of the amount prescribed in Article 143(4)2(b) of the former Enforcement Decree of the Income Tax Act by selling scrap metal and other by-products generated in the process of constructing a new building during the pertinent taxable period immediately preceding the pertinent year in which the sales revenue of each of the buildings of this case was generated as listed below (attached Table 1) and applied the special tax reduction and exemption for the small and medium enterprises prescribed in Article 7(1) of the former Restriction of Special Taxation Act (amended by Act No. 1527, Dec. 19, 2017; hereinafter the same shall apply).

C. The director of the Seoul Regional Tax Office, as a result of conducting a personal consolidated investigation against the plaintiff, notified the defendant of taxation data that "the plaintiff is not a business operator who has engaged in the existing business at the time of new construction and sale of each house of this case and constitutes a new business operator, not a business operator. Since the amount of income exceeds the standard amount under Articles 143 (4) 1 and 208 (5) 2 of the former Enforcement Decree of the Income Tax Act, the amount of income should be estimated by applying standard expense rate rather than simple expense rate, and that "the special tax reduction or exemption under Article 7 (1) of the former Restriction of Special Taxation Act should be denied due to the plaintiff

D. Accordingly, on October 13, 2017, the Defendant respectively corrected and notified the Plaintiff of KRW 000 global income tax for the year 2013, KRW 000 global income tax for the year 2014, and KRW 000 global income tax for the year 2015 (hereinafter “instant disposition”).

E. The Plaintiff appealed and filed an appeal with the Tax Tribunal on April 6, 2018, but was dismissed on July 30, 2018.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 4, Eul evidence Nos. 1 and 2 (including each number; hereinafter the same shall apply) and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The plaintiff asserts that the disposition of this case should be revoked in an unlawful manner for the following reasons.

1) Application of simple expense rate

The commencement date of the Housing Construction and Sales Business Act, which the Plaintiff engaged in each of the instant houses, is "the time when business activities have commenced for the purpose of newly constructing a new house." Therefore, it should be deemed that the Plaintiff started the Housing Construction and Sales Business Act on each of the instant houses at the time when the Plaintiff started business registration and started work necessary to build a new building, or when the income accrued from sales of by-products, such as scrap metal, etc. generated in the process of newly constructing a new building. Accordingly, the commencement of business related to the instant 1 house is in 2012, and the commencement of business related to the instant 2 house was in 2013, and the commencement of business related to the instant 3 house was in 2014, and therefore, Article 143 (4) 1 of the former Enforcement Decree of the Income Tax Act on the ground that the Plaintiff is a new business operator in each of the instant business years at issue, and as long as the previous income falls short of the standard amount under

(b) Special tax reduction or exemption;

Even if the constructor of each of the instant houses is not the Plaintiff but the other construction company, in fact, insofar as the Plaintiff purchased materials directly under the Plaintiff’s responsibility and supervision, and executed each of the instant houses by employing the figures, the special tax reduction and exemption under Article 7(1) of the former Restriction of Special Taxation Act should be applied by deeming that the Plaintiff was engaged in the construction business.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Determination on the application of simple expense rate

A) Under the principle of no taxation without law, a tax law shall be interpreted in accordance with the text of the law, and shall not be extensively interpreted or analogically interpreted without a reasonable reason, barring any special circumstance. However, even in the language and text of the tax law itself, if its meaning is unclear or if it appears to be contrary to or conflicting with other laws and regulations, the court must naturally indicate the true meaning of the language and text at issue through harmonious interpretation between the laws and regulations. In such cases, a judge can make a combined interpretation of the laws and regulations that consider legislative intent and purpose to the extent that it does not undermine the legal stability and predictability pursued by the principle of no taxation without law (see, e.g., Supreme Court Decision 2007Du4438, Feb. 15, 2008).

Article 1-2(1)5 of the former Income Tax Act (amended by Act No. 1358, Dec. 15, 2015; hereinafter the same) provides for the definition of "business operator" under Article 1-2(1)5 of the Income Tax Act; Article 19(1) of the Income Tax Act provides that Article 8 of the Value-Added Tax Act shall apply mutatis mutandis to a business operator who registers his/her business in accordance with the Income Tax Act, and Article 168(3) of the Income Tax Act provides that Article 8 of the Value-Added Tax Act shall apply mutatis mutandis to a business operator who registers his/her business in accordance with the Income Tax Act; and Article 6 of the Enforcement Decree of the Value-Added Tax Act does not expressly provide for the provisions that clearly determine the date of business commencement or apply mutatis mutandis to the "business income" in accordance with Article 6 of the Enforcement Decree of the Value-Added Tax Act. Therefore, it is necessary to examine when the business of the former Income Tax Act

Therefore, in full view of the language, structure, and purport of the relevant laws such as the former Income Tax Act and the Value-Added Tax Act, the starting date of the business of the business of the business income under the former Income Tax Act shall be also based on the time stipulated in each subparagraph of Article 6 of the Enforcement Decree of the Value-Added Tax Act, which provides for the starting date of the business under Article 5(2)

① Considering that Article 19(1) of the former Income Tax Act defines “income generated from various types of business, such as agriculture, forestry, fishery, mining, manufacturing, construction, etc.,” as business income, it is reasonable to view that a business is based on the premise that a real income is generated under the former Income Tax Act, considering that Article 1-2(1)5 of the same Act defines a resident as a “resident with such business income”. Therefore, it is reasonable to view that a business is based on the premise that a real income is generated. Therefore, it is difficult to simply move forward to the time the preparation for the business, which is the time of providing goods or services

② As a result, it is difficult to objectively specify the starting point of the preparation act in terms of not only a considerable irregular and broad range, but also a business operator’s subjective intent or necessity. If the preparation of a new construction and sale business is conducted prior to the starting point of the business of the new construction and sale business, which is the starting point of the acquisition of the land or the starting point of the construction or completion of the building, the revenue amount of the immediately preceding taxable period, which is the premise for the application of the simple expense rate under Article 143(4)2 of the former Enforcement Decree of the Income Tax Act, depending on the time of the preparation act, may vary depending on the time of the preparation act, and thus, the business operator’s voluntary selection of the date according to his own convenience may interfere with the national

③ Under Articles 1-2(1)5 and 19 of the former Income Tax Act, a resident with income arising from his/her own calculation and responsibility (in independence) and continuous and repeated activities for profit-making purposes becomes an entrepreneur; under Article 2(3) of the Value-Added Tax Act, a person who supplies goods or services independently for business purposes is an entrepreneur and becomes a person liable to pay value-added tax; and under this context, a person who supplies goods or services independently for business purposes is a person who supplies goods or services independently for profit-making purposes and has the type of business to an extent that a value-added tax can be created (see Supreme Court Decision 98Du16705 delivered on September 17, 199) and who supplies goods or services with continuous and repetitive intent to create a value-added tax (see Supreme Court Decision 98Du16705 delivered on September 17, 199), and there is a need to interpret business income related to one business under the former Income Tax Act uniformly from the date of commencing business under the former Value-Added Tax Act.

(4) From this point of view, the former Income Tax Act imposes an obligation on the head of the competent tax office under Article 168 (1) to make a business registration under the former Income Tax Act while imposing an obligation on the business operator who has made a business registration under Article 168 (2) of the same Act shall be deemed to have made a business registration under the former Income Tax Act, and may be deemed to impose an obligation on the person who has received the supply of goods or services by preparing an invoice or receipt as prescribed by Presidential Decree where the business operator has made a business registration under Article 163 (1) of the former Income Tax Act provides for the obligation to issue a tax invoice to the person who has received the supply of goods or services.

(5) Article 8 (1) of the Value-Added Tax Act, which provides that Article 168 (3) of the former Income Tax Act shall apply mutatis mutandis to business registration, uses the term "the starting date of business" in relation to business registration, and Article 5 (2) of the Value-Added Tax Act uses the term "the starting date of business" in relation to the first taxable period for a new business operator, and Article 6 of the Enforcement Decree of the Value-Added Tax Act sets the starting date of business under Article 5 (2) of the Value-Added Tax Act as "the starting date of

B) According to the following circumstances revealed by comprehensively taking account of the contents of the relevant statutes and the evidence and the purport of the entire pleadings, in the case of the Housing Construction and Sales Business Act that the Plaintiff engaged in the instant housing No. 3, the starting date of business shall be deemed the starting date of commencing the sale of the instant housing No. 3, which begins with the supply of goods stipulated in Article 6 subparag.

① Article 143(4)1 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22580, Dec. 30, 2010) and Article 143(4)2 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22580, Dec. 30, 2010) stipulate that: (a) Article 2 of the former Enforcement Decree of the Income Tax Act provides that: (b) a person who newly starts a business in the relevant taxable period shall apply simple expense expense to a person who has less than the standard amount of income (including the amount of income increased by determination or revision) during the immediately preceding taxable period, other than a person who started a business in the relevant taxable period; (c) a person who newly starts a business in the relevant taxable period; and (d) Article 143(4)1 of the former Enforcement Decree of the Income Tax Act, which is amended by Presidential Decree No. 22580, Dec. 30, 2010>

207.

In addition, Article 143 (4) of the Enforcement Decree of the Income Tax Act, which applies to the portion of income in the taxable period that begins after January 1, 2019, which was amended by Presidential Decree No. 28637, Feb. 13, 2018, provides that the standard expense rate shall be applied by excluding from the application of simple expense rate if the income amount in the taxable period concerned falls under the standard amount of double-entry bookkeeping, even if the total amount of income in the immediately preceding taxable period falls short of the standard amount, as well as the business operator (title 1)

In light of the amendment history of Article 143 (4) of the Enforcement Decree of the Income Tax Act, the simple expense rate system is a system that intends to minimize the tax payment costs of small small-scale business operators who lack the capacity to keep records of the principal expenses required by the standard expense rate system, and the legislators seem to have gradually reduced the scope of business operators subject to the simple expense rate application. Furthermore, according to the text of the supplementary rule, the legislators seem to be able to understand "construction commencement", "construction business, construction business, and commencement of real estate development and supply business."

Therefore, considering these legislative intent, in the case of housing construction and sales business that operates a business for a long period exceeding a certain scale due to its characteristics, it is necessary to grasp the business commencement at an objective and practical time of the supply of housing subject to sale rather than the commencement date that can be determined by the business operator's intent

② The commencement of a business of the Housing Construction and Sales Business shall be substantially determined at the time when the preparation for a business is completed and the preparation for the original business is conducted or is able to be conducted (see, e.g., Supreme Court Decision 94Nu15905, Dec. 8, 1995). The initial housing construction and sales business is included in real estate sales business given its nature (see, e.g., Supreme Court Decision 2008Du21768, Jul. 22, 2010). The purpose of the business is to sell a house, and it is difficult to view that the fact that a house has been completed

③ Whether a business income under the Income Tax Act falls under business income shall be determined according to social norms, taking into account whether business activities are continuously and repeatedly conducted in light of the business profit purpose, the scale, frequency, and mode of business (see, e.g., Supreme Court Decision 91Nu6559, Nov. 26, 1991). However, there is no evidence suggesting that the Plaintiff had objectively expressed the intent to operate a housing construction and sales business for the purpose of profit prior to commencing the sale of a third house. The fact that the Plaintiff started or completed the instant third house for profit-making purposes alone is difficult to deem that the Plaintiff continuously and repeatedly conducted activities for profit-making purposes, and that the Plaintiff has an objective substance as a new housing construction and sales business entity.

C) Therefore, the Plaintiff’s business of newly building and selling each of the instant houses ought to be deemed to have commenced at the time of commencing sale after obtaining approval for the use of each of the instant houses. Accordingly, in the case of the instant housing No. 1, it shall be deemed that each of the instant housing No. 2013, in the year 2014, and in the case of the instant housing No. 2015, in the case of the instant housing No. 3, the business was commenced in 2015. As the Plaintiff’s revenue for each business year exceeds the standard amount under Articles 143(4)1 and 208(5)2 of the former Enforcement Decree of the Income Tax Act, the Plaintiff is not subject to the application of simple expense rate, and the amount of income should be estimated by applying the “standard expense rate” under

2) Determination on whether to reduce or exempt special tax on small and medium enterprises

A) Articles 2(3), 7(1)1(g) and 7(2)2 of the former Restriction of Special Taxation Act provide that an amount equivalent to the tax amount calculated by multiplying the income tax on income generated from the relevant workplace by 20/10 shall be reduced or exempted for a company running a construction business among small and medium enterprises, and the classification of the type of business used in the relevant Act shall be in accordance with the Korean Standard Industrial Classification publicly notified by the Commissioner of the Statistics Korea pursuant to Article

However, according to the former Korean Standard Industrial Classification (amended by the Statistics Korea Notice No. 2015-311, Sept. 24, 2015) that applies in the taxable period of the instant disposition, “residential building construction business (Classification No. 4111)” refers to the industrial activities of constructing residential buildings, such as single, multi-households, apartment houses, etc., solely or multi-households. On the other hand, the industrial activities of constructing residential buildings and selling and selling them after entering into a contract with the entire construction without performing their direct construction activities are classified as “residential building development and supply business (Classification No. 68121).”

B) We examine the following circumstances, which are acknowledged as comprehensively considering the overall purport of arguments in the evidence Nos. 2, 4, 5, and 10 as follows: (i) the contractor entered the building ledger of each house of this case into the building ledger of this case not only the Plaintiff but also the Plaintiff, and (ii) the Plaintiff did not possess a construction business license, and did not submit any specific material to consider that the Plaintiff had human resources, physical facilities, or capacity to construct each house of this case under the overall responsibility of the construction works of this case; (iii) according to the data such as the tax invoice submitted by the Plaintiff at the time of the consolidated investigation, the tax invoice for withholding, the report on performance of taxes, and the statement of payment of daily wages, etc., it is acknowledged that the Plaintiff paid some expenses for daily workers, such as labor expenses, materials purchase expenses, etc., and the amount is not significantly less than the sales revenue amount of the house of this case, it is difficult to view that the Plaintiff’s business related to the new construction and sale of the house of this case constitutes a "special construction business" under the Korean Standard Industrial Classification Act.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.

1) In the case of global income in 2013 and 2014, Article 7(1) of the former Restriction of Special Taxation Act (amended by Act No. 12853, Dec. 23, 2014) is applicable, but the same content is different in addition to the application period.