Credices Securities (Law Firm LLC, Attorneys Jeon Young-young et al., Counsel for the plaintiff-appellant)

The director of the Nam-gu Tax Office (Law Firm Samong, Attorney Yu Byung-ok, Counsel for defendant-appellant

June 28, 2016

Seoul Administrative Court Decision 2015Guhap54216 decided November 20, 2015

1. The defendant's appeal is dismissed.

2. The costs of appeal shall be borne by the Defendant.

1. Purport of claim

The Defendant’s imposition of KRW 30,126,705,450 (including additional taxes) of corporate tax for the business year 2008 on June 26, 2013 against the Plaintiff; the imposition of KRW 24,260,653,490 of corporate tax for the business year 2010 on July 16, 2013; the imposition of KRW 89,132,710 of corporate tax for the business year 2010; the imposition of KRW 34,215,731,130 of corporate tax for the business year 201 on July 15, 201; and the imposition of KRW 635,560 of corporate tax for the business year 201.

2. Purport of appeal

The judgment of the first instance is revoked. The plaintiff's claim is dismissed.

1. Quotation of judgment of the first instance;

The reasoning for the court's explanation concerning this case is as follows: (a) No. 15 of the first instance court's ruling "paragraph (1)" shall be read as "the main sentence of Paragraph (1)"; and (b) No. 23, No. 10 through No. 13 as "the amount calculated by adding acquisition tax, registration tax, and other incidental expenses to the purchase price: the value of assets purchased from another person: the amount calculated by adding acquisition tax, registration tax, and other incidental expenses to the purchase price;" and (c) except for adding the following judgments, it shall be cited as the reasons for the first instance judgment.

2. The addition;

A. The defendant's assertion

According to Article 40(1) of the Corporate Tax Act, the fiscal year of accrual of earnings and losses of a corporation for each fiscal year shall be the fiscal year which includes the date on which the relevant gross income and losses are determined. This is also applicable mutatis mutandis to a foreign corporation pursuant to Article 92(1) of the Corporate Tax Act. Since the difference between the acquisition price and the market price when the Plaintiff accepts ELW from the issuer and sells it to investors is merely offset with the profits and losses arising from over-the-counter derivatives transactions, and thus it cannot be said that the difference between the acquisition price and the market price is not feasible or is considerably mature, and thus, it cannot be said that it has been determined as losses for the pertinent fiscal year. Accordingly, the measures that the Defendant did not include losses recognized by the Plaintiff by accepting and selling ELW, the maturity

B. Determination

1) Article 40(1) of the Corporate Tax Act provides that “The fiscal year of accrual of earnings and losses of a domestic corporation for each fiscal year shall be the fiscal year which includes the date on which the concerned earnings and losses are settled.” Meanwhile, Article 40(2) of the Corporate Tax Act provides that “the matters necessary for the scope, etc. of the fiscal year of accrual of earnings and losses under the provisions of paragraph (1) shall be prescribed by the Presidential Decree” and Article 68(1)3 and 1 of the Enforcement Decree of the Corporate Tax Act provides that “the fiscal year of accrual of earnings and losses shall be the fiscal year which includes the date on which the concerned earnings and losses are settled.” Article 68(1)3 and 1 of the Enforcement Decree of the Corporate Tax

2) Comprehensively taking account of the above provisions and the facts acknowledged as above, as well as the following circumstances acknowledged by the purport of the statements and arguments as stated in Gap evidence Nos. 9 and 10, it is reasonable to deem that the plaintiff has realized and confirmed the loss equivalent to the amount obtained by subtracting the sale price from the acquisition price of the ELW while selling ELW to investors. Thus, it is justifiable to regard the plaintiff as the loss of the business year to which the time of the ELW sale belongs, and to include it in the deductible expenses for the pertinent business year as the loss under the Corporate Tax

① Since domestic securities companies can concurrently hold the position of ELW issuance and liquidity supplier (LP), transactions of over-the-counter derivatives (OTC) may be omitted. However, the Plaintiff’s third party LP, such as the Plaintiff, is bound to take over ELW from the issuer to play the role of liquidity supplier (LP) because it is impossible to directly issue ELW. Even in the case of acceptance, it is inevitable to incur losses each year due to the lower limit of the ELW issuance price set by the Korea Exchange, and thus, it is inevitable to entail transactions of over-the-counter derivatives in order to avoid losses arising from the fluctuation

(2) Although ELW acceptance and over-the-counter derivatives transactions are concluded between the same party, ELW constitutes derivative-combined securities under Article 4 (2) 5 of the Financial Investment Services and Capital Markets Act, the over-the-counter derivatives fall under derivative-combined securities under Article 3 (2) 2 (b) of the same Act and fall under different kinds of products, and the two are concluded by separate contracts.

③ Even if the issue price of ELW and over-the-counter derivatives was set higher than the market price, there would be no distortion of profits and losses in accordance with the corporate accounting standards as seen earlier. However, under the tax law, only the disposal losses of ELW are recognized in the business year in which both ELW and over-the-counter derivatives are not allowed to be assessed, and there is only an evaluation profit of over-the-counter derivatives in the business year in which the maturity has not yet arrived after the maturity. Thus, the Plaintiff’s separate return of tax base and tax amount of ELW and over-the-counter derivatives is justifiable as an act to comply with the tax law, and there is no ground to offset the profits and losses of ELW

④ As long as the Plaintiff purchased the ELW from the issuer and sold it at lower market price than it, it cannot be said that the profit or loss of the ELW and OTC derivatives should be included in the calculation of earnings and losses, as long as it had already been realized at the maturity of OTC derivatives. Therefore, the ELW disposal loss cannot be deemed as losses or losses not feasible.

⑤ Since the time when the ELW profit and loss reverts is “the date when a sales contract was concluded” pursuant to Article 40(1) of the Corporate Tax Act and Article 68(1)5 of the Enforcement Decree of the same Act, when the Plaintiff sells ELW in the market, the business year in which the date when the sales contract was concluded belongs shall be the time when the disposal profit and loss accrue.

3. Conclusion

Therefore, the judgment of the first instance court is just, and the defendant's appeal is dismissed as it is without merit.

Judge highest order (Presiding Judge)