[1] The case holding that a person working for a domestic subsidiary of a foreign parent company's domestic subsidiary constitutes earned income from the exercise of stock options against a foreign parent company

[2] The time when the profit from exercising the stock option occurs (=the time of exercising the stock option)

[3] The case affirming the calculation of the difference between the actual acquisition price and the actual acquisition price at the market price as of the date of the exercise of the stock option by a foreign parent company

[1] Article 20 (1) 2 (b) of the Income Tax Act / [2] Articles 24 (1) and 39 (1) of the Income Tax Act / [3] Articles 20 (1) 2 (b) and 24 (2) of the Income Tax Act

[1] Supreme Court Decision 2007Du1941 decided Oct. 25, 2007 (Gong2007Ha, 1866)

Plaintiff 1 and 9 others (Law Firm Gyeong & Yang, Attorneys Han-ho et al., Counsel for the plaintiff-appellant)

Head of Gangnam District Tax Office and eight others

Seoul High Court Decision 2004Nu3702 decided January 12, 2007

All appeals are dismissed. The costs of appeal are assessed against the plaintiffs.

The grounds of appeal are examined.

1. On the first, second, and fifth grounds

The wage and salary income under Article 20 (1) of the Income Tax Act, regardless of the form or name of payment, includes not only the provision of labor and all economic benefits in a quid pro quo relationship due to its nature, but also the wage which forms the contents of the working conditions closely related to the labor on the premise of the work

According to the reasoning of the judgment of the court below, the court below confirmed the fact that the plaintiffs worked for each foreign company (hereinafter "foreign parent company") which held 67% or 100% of the shares of the domestic subsidiary while serving as executive officers and employees of the foreign company's domestic subsidiary companies (hereinafter "domestic subsidiary companies"), and as a matter of principle, when the plaintiffs are employed in the domestic subsidiary companies for a certain period and when the employment contract is terminated with the domestic subsidiary companies, the contract granting the stock option becomes null and void, and the stock option granted under the condition that the assigned stock option cannot be transferred to others. After exercising the stock option from 1996 to 200, the court below determined that the difference calculated by deducting the stock option price (actual acquisition price) from the stock transaction price as of the date of the exercise (hereinafter "stock option profit of this case").

In this context, the Plaintiffs’ exercising stock option benefits are paid to the Plaintiffs by foreign parent companies directly or indirectly affecting the management and performance of their duties, and it is reasonable to deem that there exists a quid pro quo relationship or an economic rationality with the labor provided by the Plaintiffs to domestic subsidiaries. Therefore, the exercising profit of the instant stock option constitutes Class B earned income under Article 20(1)2(b) of the Income Tax Act. This does not change on the ground that there is no direct employment relationship between the Plaintiffs and foreign parent companies, and the employer under an employment contract and the stock option provider under the employment contract, or that there is no difference between the Plaintiffs and foreign parent companies, or that at the time of exercising the said stock option, the exercising profit of stock option was not listed as earned income under each subparagraph of Article 38(1) of the former Enforcement Decree of the Income Tax Act at the time of exercising the stock option.

The decision of the court below to the same purport is just, and there is no error in the misapprehension of legal principles as to the nature of profit from exercising stock option, or in the misapprehension of legal principles as to retroactive taxation under Article 20 (1) of the Income Tax Act.

2. On the third ground for appeal

In order to ensure that income subject to income tax has been realized, even if it is not necessary until it is realized, the right to receive income should be mature and confirmed considerably high in the possibility of realizing it, and it is merely established without reaching such a degree (see Supreme Court Decision 2001Du7176, Dec. 26, 2003, etc.). As stock options are entirely entrusted to the choice of the officers or employees granted the right to exercise the stock options, it cannot be deemed that any income has accrued merely by granting the stock options, and since economic profit equivalent to the difference between the market price and the market price of the stocks is determined or realized only by acquiring the stocks by exercising the stock options, it shall be deemed that the income has accrued at the time of the above exercise.

The court below's determination that the profit of exercising stock options in this case constitutes earned income in the taxable period to which the time of exercising stock options belongs is just in accordance with the above legal principles, and there is no error of law such as misunderstanding of legal principles as to

3. On the fourth ground for appeal

Article 24 (2) of the Income Tax Act provides that the income amount shall be calculated on the basis of the price at the time of the transaction, so the court below's calculation of the profit from exercising the stock option of this case as of the date of exercising the stock option of this case by converting the difference from the price at which the stock option price was deducted from the price at the market price as of the date of exercising the stock option of this case into the basic exchange is just and there is no error

4. On the sixth ground for appeal

Under the tax law, in order to facilitate the exercise of the right to impose taxes and the realization of a tax claim, where a taxpayer violates various obligations, such as a return and tax payment, as prescribed by the Act without justifiable grounds, the taxpayer’s intention or negligence is not considered, and the site, error, etc. of the Act does not constitute justifiable grounds that do not constitute a breach of duty (see Supreme Court Decision 2002Du10780, Jun. 24, 2004, etc.).

As acknowledged by the court below, in light of the circumstances such as that the National Tax Service stated its view that the profits from exercising the stock option constitute earned income after 1986 and that among the remaining taxpayers, including the plaintiffs, are paid as earned income by themselves, the court below held that there was an doubt as to whether the above plaintiffs' profits from exercising the stock option are subject to taxation due to the lack of direct and express provisions as to the stock option under the Income Tax Act and the Enforcement Decree of the Income Tax Act at the time of 1996 to 2000, when the plaintiffs as listed in the attached Table 9 through 12 exercised the stock option, or that the defendants as listed in the attached Table 9 through 12 of the judgment of the court below did not constitute a case where there was a justifiable reason not attributable to the above plaintiffs' failure to perform their duties, and there is no violation of law such as misunderstanding of legal principles as to additional tax, as otherwise alleged in the ground of appeal.

The Supreme Court precedents pointed out in the ground of appeal by the above plaintiffs are different from this case, and it is not appropriate to invoke this case.

5. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Yang Sung-tae (Presiding Justice)