The bad debt tax amount of this case shall be the claim confirmed to be impossible to be recovered by the decision to authorize the rehabilitation plan.

If shares newly issued according to the validity of the authorized rehabilitation plan do not have the right as a shareholder and it is clear that they will be retired without any other consideration, it is reasonable to view that rehabilitation claims, etc., which are the premise of conversion of investment, have become impossible to recover according to the authorization of the rehabilitation plan.

Article 45 of the Value-Added Tax Act/ Article 87 of the Enforcement Decree of the Value-Added Tax Act

2018Guhap64369 Disposition to revoke the imposition of value-added tax

○○&W Co., Ltd.

O Head of tax office

July 18, 2018

August 29, 2018

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s imposition of value-added tax of KRW 24,730,990 against the Plaintiff on December 2, 2016 shall be revoked.

1. Details of the disposition;

A. The Plaintiff (formerly, ○○○○, Inc.) is a manufacturing and selling company of environmental pollution preventive facilities, etc. established on March 23, 1985.

B. On April 4, 2013, due to the aggravation of financial structure, the Plaintiff filed an application for commencing rehabilitation procedures as Seoul Rehabilitation Court 201* **, the Plaintiff received a decision to commence rehabilitation procedures from the above court on April 16, 2013, and obtained the rehabilitation plan approval on December 27, 2013.

다. 한편 원고의 매입거래처인 주식회사 ☆☆☆☆☆그라스(이하 '이 사건 거래처'라고 한다)는 2013. 4.경 원고에 대하여 449,950,215원의 매출채권을 가지고 있었는데, 위 매출채권에 관한 회생계획의 내역은 아래 표의 기재와 같고, 위 회생계획인가결정에 따라 출자전환 되어 발행된 원고의 신주는 전부 무상소각 되었다.

Sales Bonds

Rehabilitation Claims

-investment conversion (87.99%)

Cash Repayment (12.01%)

49,950,215 won

395,911,194 won

54,039,021 won

D. On December 2, 2016, the business partner of the instant case deducted KRW 272,040,945 from the date of the occurrence of default on payment, etc. 272,040,945 out of the remainder of the sales claim against the Plaintiff excluding the amount of cash reimbursement, etc. ; and 24,730,990 won calculated by multiplying the said amount by 10/110 (=272,040,945 won x 10/110,000 won x less than 10/110,000 won ; hereinafter “the instant bad debt tax amount”). Accordingly, on December 2, 2016, the Defendant deducted the Plaintiff from the amount of bad debt tax amount under Article 45(3) of the Value-Added Tax Act (hereinafter “instant disposition”).

E. The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on February 28, 2017, but the Tax Tribunal dismissed the said appeal on February 19, 2018.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1 through 3, Eul evidence No. 1, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

The plaintiff paid part of the purchase obligation to the business partner of this case in cash and repaid the remainder through a debt-equity swap. Since the sales claim of the business partner of this case repaid through a debt-equity swap cannot be deemed to have been confirmed as impossible to be recovered in accordance with the rehabilitation plan for the plaintiff, it does not constitute a bad debt tax under Article 45 of the Value-Added Tax Act. Nevertheless, the disposition of this case where part of the sales claim against the plaintiff by the business partner of this case constitutes bad debt tax amount, which is calculated by deducting the amount equivalent to the above sales claim from

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) The main sentence of Article 45(1) of the Value-Added Tax Act provides that "where an entrepreneur supplies goods or services subject to the imposition of value-added tax, and all or any part of credit sales or other sales claims (referring to those that include value-added tax) cannot be recovered as bad debt due to the bankruptcy or compulsory execution of a person who has received the supply, or other causes prescribed by Presidential Decree, 10/110 of the irrecoverable amount due to bad debt (hereinafter referred to as " bad debt tax") may be subtracted from the output tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive, from the input tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive." In applying Article 45(1) and (2), where the entrepreneur supplied goods or services deducts all or part of the amount equivalent to bad debt tax amount as the input tax amount under Article 38 before the entrepreneur closes the bad debt tax amount under paragraph (1), the entrepreneur supplied with such goods or services shall deduct the relevant bad debt tax amount

In addition, Article 87 (1) of the Enforcement Decree of the Value-Added Tax Act provides for "a reason that is recognized as bad debt pursuant to Article 19-2 (1) of the Enforcement Decree of the Corporate Tax Act" as one of the causes of bankruptcy, compulsory execution or other causes prescribed by Presidential Decree, and Article 19-2 (1) 5 of the Enforcement Decree of the Corporate Tax Act provides that "a claim confirmed as impossible due to a decision on authorization of rehabilitation plan or a court's decision on immunity pursuant to the Debtor Rehabilitation and Bankruptcy Act (hereinafter "DRA") shall be treated as bad debt."

Meanwhile, when it is decided to authorize the rehabilitation plan, any right of rehabilitation creditors, rehabilitation secured creditors, shareholders and equity right holders shall be altered according to the rehabilitation plan (Article 252(1) of the Debtor Rehabilitation Act); and the court may, by prescribing the rehabilitation plan on the matters, such as the amount of liabilities that are to be decreased by issuing new shares, etc., require the debtor, who is a stock company, to not make new payments or make investments in kind to rehabilitation creditors, rehabilitation secured creditors or shareholders (Article 206(1) of the Debtor Rehabilitation Act). When the rehabilitation plan provides for the amount of capital and the methods of reducing capital, the court may reduce the debtor's capital that is a stock company according to the rehabilitation plan. In such cases, the provisions of Articles 343(2), 439 (2) and (3), 40, 441, 445 and 446 of the Commercial Act shall not apply (Article 205(1), 26(1) and (2) of the Debtor Rehabilitation Act).

Ultimately, if shares issued through a debt-to-equity swap without requiring separate payments, etc. in the rehabilitation plan are to be substituted for repayment of existing rehabilitation claims, etc. through a debt-to-equity swap without compensation, the shares newly issued pursuant to the validity of the approved rehabilitation plan are not likely to be exercised as shareholders and it is evident that they will be retired without any other consideration. Therefore, it is reasonable to view that rehabilitation claims, etc., which are the premise for such debt-to-equity swap, have become impossible to recover according to the rehabilitation plan’s decision (see, e.g., Supreme Court Decision 2017Du68295, Jun. 28, 201

2) In full view of the aforementioned legal principles and the purport of the entire argument as seen earlier, in the rehabilitation procedure commenced upon the Plaintiff’s request, the Seoul Rehabilitation Court decided to convert the remainder of commercial transaction obligations except for the portion of cash repayment among the rehabilitation claims against the Plaintiff of the Plaintiff of the instant transaction partner on December 27, 2013. It can be acknowledged that the conversion of investment made a plan for the rehabilitation of the said rehabilitation claim on the effective date of the shares newly issued by the Plaintiff in lieu of the repayment of the relevant rehabilitation claim, and the said plan for the rehabilitation of the entire shares issued by the conversion of investment without compensation, unlike the ordinary conversion of investment (refer to the evidence No. 1, No. 84 of the rehabilitation plan, and the rehabilitation plan No. 84 of the rehabilitation plan). Accordingly, it is reasonable to view that the part of the sales claims against the Plaintiff of the transaction partner of this case, which was converted into equity by the decision to authorize the rehabilitation plan of the Plaintiff, constitutes a value-added tax which becomes final and conclusive according to the authorization decision for the rehabilitation plan. Therefore, the Plaintiff’s claim is legitimate.

3. Conclusion

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