Whether profits from the exercise of stock options by issuing new stocks are included in deductible expenses.

In order to constitute a loss, the transaction that reduces the net assets of the relevant corporation must be caused by the "transaction that reduces the net assets of the relevant corporation". When exercising stock options, a corporation that has granted the said stock options shall not only increase the capital as much as the value of the exercise of such stock options,

2018Guhap64024 Disposition of revocation of refusal to correct corporate tax

○○○○○○○

○ Head of tax office

December 18, 2018

February 15, 2019

1. All of the plaintiff's claims are dismissed.

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

Cheong-gu Office

The Defendant’s rejection of correction of corporate tax of KRW 000 for the business year 201, corporate tax of KRW 000 for the business year 2012, and corporate tax of KRW 000 for the business year 2013 shall be revoked on May 29, 2017.

1. Details of the disposition;

A. The Plaintiff, who is a stock company that runs the manufacture and sales business of ○○, etc., granted its executives and employees a stock option that allows the Plaintiff to purchase new stocks issued by the Plaintiff at a predetermined price (as an exercise price) (hereinafter “new stocks stock option”).

B. Some of the executives and employees of the Plaintiff (hereinafter “instant executives and employees”) exercised a stock option from 2011 to 2013 business years, and the Plaintiff did not include the amount equivalent to the gains from the exercise as indicated below (the amount obtained by deducting the exercise value at the market price of new stocks at the time of the event; hereinafter “the gains from the exercise in this case”) as deductible expenses at the time of filing a corporate tax return for each business year.

C. The Plaintiff: (a) provided the instant executive officers and employees with the same amount of expenses incurred in providing the benefits equivalent to the instant marginal profits from the event with labor cost; (b) on March 24, 2017, the Plaintiff deemed that the amount equivalent to the instant marginal profits from the event constituted deductible expenses under the Corporate Tax Act; (c) subsequently, on March 24, 2017, deducted the corporate tax base for the business year 200 won; (d) refunded the said reduced tax amount by reducing the corporate tax base for the business year 2012; (e) refunded the said reduced tax amount by reducing the corporate tax base for the business year 200 won; and (e) filed a request for correction to refund the reduced tax amount by reducing the corporate tax base for the business year 200 won; and (e) the Defendant rejected the instant request for correction on May 29, 2017 (hereinafter “instant disposition”).

D. On August 25, 2017, the Plaintiff appealed to the Tax Tribunal, but the Tax Tribunal dismissed the Plaintiff’s request on January 30, 2018.

[Reasons for Recognition] Unsatisfy, each entry in Gap evidence 1 to 3 (including virtual numbers), and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The issues of the instant case

As seen earlier, the Plaintiff filed the instant claim for correction on the premise that the amount equivalent to the instant event marginal profit constitutes deductible expenses. However, the Defendant rendered the instant disposition on the premise that the amount equivalent to the instant event marginal profit does not constitute deductible expenses. Therefore, the key issue of the instant case is whether the amount equivalent to the instant event marginal profit constitutes deductible expenses for each business year from 2011 to 2013.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Article 19(1) and (2) of the former Corporate Tax Act (amended by Act No. 1522, Dec. 19, 2017; hereinafter the same) provides, “The amount of losses incurred from transactions that reduce the net assets of the pertinent corporation, excluding refund of capital or investment, disposal of surplus funds, and those prescribed in this Act,” respectively, as “the amount of losses or expenses incurred or incurred in connection with the business of the said corporation, which are generally accepted as ordinary or directly related to profits,” and Article 19(3) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 24357, Jan. 1, 2014) provides, “the amount of losses” as “the amount of losses.”

On the other hand, Article 340-2 of the Commercial Act provides that "the company may grant its executives and employees the right to receive new shares (stock option) or the right to purchase its own shares (stock option to pay the difference in cash or transfer its own shares equivalent to the difference (stock option) by a resolution of the general meeting of shareholders under Article 434 of the Commercial Act, as stipulated by the articles of incorporation."

2) In light of the following circumstances acknowledged by the contents and purport of each of the above provisions, the amount equivalent to the instant event marginal profit does not constitute the Plaintiff’s deductible expenses for each business year from 2011 to 2013. Therefore, the instant disposition rejecting the instant claim for correction is lawful.

A) As seen earlier, the transaction that reduces the net assets of the pertinent corporation should be caused by the “transaction that reduces the net assets of the pertinent corporation.” In the event that the difference between the actual value of stocks and the exercising value of the difference compensation-type stock option is compensated, the corporation that granted the said stock option may reduce the net assets to the degree of the difference in compensation. On the other hand, while the corporation that granted the said stock option at the time of exercising the stock option with the option to issue new stocks, the corporation that granted the said

Therefore, the Plaintiff asserts to the effect that, in the case of a stock option in the form of new stocks, the difference between the case of issuing new stocks to a third party and the case of issuing new stocks at the market price, or that the difference between executives and employees should be recognized as losses, as in the case of a difference compensation-type stock option. However, the granting of new stocks differs from the case of a difference compensation-type stock option, such as the type of transaction, legal effect, etc., and the Plaintiff selects the method of granting new stocks in order to recognize such difference and achieve a certain economic purpose. Nevertheless, the reversal of the result by means of assumptive and constructive reorganization of transaction details or comparison and application of the case of issuing new stocks to a third party, which is a legal relationship entirely different from the case of granting new stocks, goes beyond the scope of substantial taxation, and thus, the Plaintiff’s assertion cannot be accepted (the Plaintiff cannot be viewed as having sustained the difference between the issuance price of new stocks and the case of exercising the stock option at the time of exercising the stock option and the case of exercising the stock option at a fair market price.

B) Article 20(3) of the Income Tax Act and Article 38(1)17 of the Enforcement Decree of the same Act stipulate that, in the case of stock options that are newly issued, profits from exercising such stock options shall be deemed as earned income of executives and employees, and even if the Plaintiff withheld and paid the labor income tax on the gains from the exercise of this case pursuant to each of the above provisions, this is only the result of the application of the income tax laws and regulations that choose the principle of listing taxable income. Thus, the taxation and payment of the earned income tax on the gains from the exercise of this case cannot be the basis for deeming the gains from the exercise of this case as deductible expenses. Even in the case of this case where the reduction of net assets related to granting the stock option that only earned income is recognized as a result of deductible expenses and paid corresponding thereto does not result in the denial of the corporate expenses that were incurred, there is no logical basis for deeming the Plaintiff to be included as deductible expenses in the amount as

In this regard, the Plaintiff asserts that the exercise marginal profit of this case should be included in deductible expenses on the basis of corporate accounting standards, which reflects the exercise marginal profit following the exercise of appraisal rights for new stocks as deductible expenses. However, the concept of expense in the account and the concept of deductible expenses in corporate tax cannot be seen as completely identical. In addition, considering Article 43 of the Corporate Tax Act and Article 43 of the Restriction of Special Taxation Act, it is difficult to consider corporate accounting standards as the basis for determining whether it falls under deductible expenses under the Corporate Tax Act, since it is difficult to accept the Plaintiff’s above assertion.

C) According to the main sentence of Article 20 subparagraph 1 of the former Corporate Tax Act, where the disposal of a surplus is appropriated as deductible expenses, it shall be excluded from deductible expenses, but Article 20 (1) 3 (b) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 28640, Feb. 13, 2018; hereinafter the same shall apply) upon delegation under the proviso to the same subparagraph, which provides for exceptions, provides that where stocks are issued to a person who has been granted stock options as prescribed by Ordinance of the Ministry of Strategy and Finance (hereinafter referred to as "Ordinance No. 28640, Feb. 13, 2018, the difference between the actual purchase price and the market price of such stocks shall be included in deductible expenses. According to Articles 1 and 2 of the Addenda (Presidential Decree No. 25640, Sep. 26, 2014) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21501, Oct. 1, 2014, 2014).

In addition, under the Enforcement Decree of the Corporate Tax Act amended by Presidential Decree No. 28640 on February 13, 2018, a provision was newly established to add "the difference between the actual purchase price and the market price of the new shares in the stock option to the loss included in deductible expenses" (Article 19 subparagraph 19-2 (a) (ii); hereinafter referred to as "Article 19 subparagraph 19-2 (a) (ii); hereinafter referred to as "new provision"; hereinafter referred to as "each new provision"). According to Article 2 of the Addenda, the new provision of Article 2 applies from the business year beginning on January 1, 2018.

The gains from the exercise of this case occurred before the time of application of each new provision, and the plaintiff asserts that the gains from the exercise of stock option in the form of new stocks constitutes losses, since the nature of each new provision is not a creative provision, but a provision that confirms that the gains from the exercise of stock option in the form of new stocks constitute losses. Thus, the plaintiff asserts that the gains from the exercise

However, in full view of the following circumstances, since each newly established provision has the nature of a creative provision newly established for tax policy purposes, the Plaintiff’s assertion that it is merely the purport of confirming that the amount equivalent to the marginal profit from the exercise of stock option under a different premise constitutes “labor cost” or “other losses.”

(1) Each new provision is specified in the Addenda, and applying the same retroactively to the gains from the event in this case before the time of application is contrary to the language and text of the supplementary provision specifying the time of application.

(2) In addition, the new provision of Article 1 expanded the scope of disposal of surplus funds allowed to be included in deductible expenses from the existing difference compensation type stock option to the existing case of new stock option, and its new provision of Article 1 newly established that "if stocks are issued at a price lower than the market price by exercising stock option granted by a venture business, etc. in order to support the attraction of outstanding human resources by venture business, etc. at the time of the new revision, the difference between the market price and the purchase price of stocks can be included in deductible expenses."

③ The newly established provision is a newly established provision at the time of amendment of the former Enforcement Decree of the Corporate Tax Act (amended by February 13, 2018), which was deleted, and the reason for such amendment (amended by the former Enforcement Decree) is not specified. However, in light of the content of the newly established provision and the reason for amendment of the newly established provision, it seems to have been newly established to expand the permissible scope of inclusion of deductible expenses in accordance with policy considerations, like the newly established provision in Article 1.

④ The Plaintiff cited Supreme Court Decision 2012Du3491 Decided November 17, 2015, on the basis of the assertion that each new provision is merely a confirmative provision. However, in a case where the parent company compensates for the difference that it paid to its executives and employees in cash and reduces net assets equivalent to the compensated amount, the above preservation amount of the subsidiary constitutes personnel expenses provided for in Article 19 subparag. 3 of the former Enforcement Decree of the Corporate Tax Act, and otherwise, it is difficult to view that this case is applied as it is to the acquisition right of new stocks for which no separate net asset reduction has occurred (In addition, in the judgment of the lower court of the above Supreme Court, it is clear that Article 19 subparag. 19 of the Enforcement Decree of the Corporate Tax Act, which was amended by Presidential Decree No. 21302, Feb. 4, 2009, which was amended by the Ministry of Strategy and Finance, is amended by Act No. 2008.

3. Conclusion

Thus, the plaintiff's claim is dismissed as it is without merit.

1) Article 10-3 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 480, Mar. 13, 2015) provides for appraisal rights granted by founders under the Support for Small and Medium Enterprise Establishment Act, new technology enterprises under the Korea Technology Credit Guarantee Fund Act, and venture enterprises under the Act on Special Measures for the Promotion of Venture Businesses. The specific details are as stated in the corresponding