[1] The requirements for taxation of the value of business rights as a merger evaluation marginal profit in the case of a merger of corporations

[2] In a case where Company A, a KOSDAQ-listed corporation, merged Company B, a non-listed corporation, and included Company B’s deficit in the accounting book in accordance with corporate accounting standards, but, upon reporting corporate tax, it voluntarily made tax adjustment by deeming that it does not constitute an operating right under the tax law, and the tax authority imposed corporate tax on Company A on the premise that the amount constitutes a business right under the tax law and should be included in gross income and depreciation, the case holding that Company A’s operating right included in the accounting book cannot be deemed as satisfying the requirements for recognition of assets under the tax law

[1] Article 17 (1) 3 of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009; see current Article 17 (1) 5); Article 12 (1) 1, Article 15 (2) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22184, Jun. 8, 2010; see current Article 17 (1) 5); Article 24 (4) / [2] Article 17 (1) 3 of the former Corporate Tax Act (Amended by Act No. 9898, Dec. 31, 2009; see current Article 17 (1) 5); Article 12 (1) 1, Article 15 (2) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22184, Jun. 8, 2010; see current Article 24 (1) 2); Article 4 (1) 4 (2)1)

Hancom Co., Ltd. (Law Firm specifications, Attorneys Kim Sea-ju et al., Counsel for the plaintiff-appellant)

Head of Seocho Tax Office

Seoul High Court Decision 2017Nu38241 decided July 25, 2017

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. A. Article 17(1)3 proviso of the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter the same) provides that where the merged corporation succeeds to the evaluation of assets from the merged corporation, the portion exceeding the book value of the merged corporation shall be imposed as a merger evaluation marginal profit from the value of the assets (Article 17(1)3 proviso of the former Corporate Tax Act, Articles 15(2) and 12(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter the same). In the case of a merger, the business right appropriated by the merged corporation shall be limited to where the merged corporation evaluates the assets of the merged corporation and succeeds to the business value of the merged corporation with its trade name, transaction relationship, and other trade secrets, etc. (hereinafter “trade name, etc.”), and thus, the depreciation property shall be limited to the amount paid for consideration (Article

B. According to the relevant Acts and subordinate statutes, in order to impose the value of business rights as a merger evaluation marginal profit in the case of a merger of corporations, the merged corporation is deemed as an intangible asset value that can obtain excess profits from the trade name, etc. of the merged corporation and evaluated its business value and paid compensation. Whether the business value has been assessed shall be objectively determined by comprehensively taking into account various circumstances, such as the details and motive of the merger, the current business status of the merged corporation and the merged corporation at the time of the merger, and details of tax returns after the merger, etc., and it shall not be inferred solely on the basis that the business rights

(1) In order to be taxed as a merger evaluation marginal profit of a merged corporation, it should be recognized as the assets of the merged corporation in the first place. Even if a corporation creates an intangible business right due to its internal business activity, it is not recognized as an asset under tax law, and it is recognized as an asset of the merged corporation only in cases where it satisfies the requirements prescribed in the Enforcement Decree

Tax law and corporate accounting have different purposes and purposes and separately provided for in the corporate tax law. In the event of a merger, the requirements for recognition of goodwill are also included in such cases. The requirements for evaluation of business value with respect to goodwill under the Enforcement Decree of the Corporate Tax Act were introduced to be limited to the recognition of goodwill under the tax law at the time of amendment of the Enforcement Decree of the Corporate Tax Act on December 31, 1998, and the framework for the imposition of the merged taxation is also maintained under Article 80-3(2) of the Enforcement Decree of the Corporate Tax Act as amended on June 8, 2010.

(2) In the case of a merger, the issue of requirements for recognizing a business right as an asset under the tax law is different from the issue of whether it is appropriate to calculate the business right in excess of the net asset value of the merger price when determining the appropriateness of the detailed evaluation method. Therefore, it is not inconsistent with the precedents that affirms the appropriateness of the business right evaluation based on the difference theory to require the evaluation of the business value of the trade name, etc.

(3) The taxation of merger evaluation marginal profit is imposed upon the acquisition of profits generated from tangible and intangible assets held by the merged corporation prior to the merger with a certain requirement. As such, Article 15(2) of the former Enforcement Decree of the Corporate Tax Act only refers to the calculation method under which Article 12(1)1 of the former Enforcement Decree of the Corporate Tax Act is accepted, and there is no relation to the capital reserve [Article 16(1)2(a) of the former Corporate Tax Act] under the concept. The merger marginal profit, which is the simple difference between the net asset value transferred by the merged corporation and the face value of the merged stocks, cannot be the requirement for taxation of merger evaluation marginal

2. A. The reasoning of the lower judgment and the record reveal the following facts.

(1) On July 18, 2007, the Plaintiff, as a KOSDAQ-listed corporation that runs the music record business, was merged with YEB, Inc., Ltd., a non-listed corporation, YENEM and Paero Media Co., Ltd., Ltd. (hereinafter “TTB”), and completed the merger registration on December 1, 2007. Pursuant to the relevant Acts and subordinate statutes, the Plaintiff calculated the merger ratio based on the Plaintiff’s share price and the weighted average of the value of assets and profits of the merged corporation as of the base date of appraisal ( April 30, 2007), and did not receive the merger subsidy separately.

(2) At the time of the merger, the merged corporation was in a capital erosion as deficit accumulated, and the Plaintiff appropriated approximately KRW 32.9 billion in the account book as business rights in accordance with the corporate accounting standards, but when filing a corporate tax return for the 2007 business year, the said difference does not constitute a business right under the tax law, and was voluntarily subject to tax adjustment, such as denial of depreciation of business rights.

(3) However, the Defendant, on March 18, 2013, imposed corporate tax of KRW 2.8 billion (including additional tax) on the Plaintiff for the business year 2007 on the premise that the said amount constitutes a business right under the tax law, deeming that it ought to be included in the gross income as a merger evaluation marginal profit and depreciation.

B. Examining the above facts in light of the legal principles as seen earlier, the above amount appropriated as a goodwill in the account book is merely deemed to be in accordance with the relevant corporate accounting standards, and it is difficult to deem that the Plaintiff assessed the value of its business as an intangible asset value with excessive profits, such as the trade name, transaction relations, and other trade secrets of the merged corporation, and thus, it cannot be deemed that it satisfies the requirements for recognition of business rights under tax law. As such, in the case of a corporate merger of corporations, since it does not meet the requirements for recognition of business rights as an asset under tax law, it is not allowed to impose the tax by deeming the amount in the account of business rights as a merger evaluation marginal profit. The precedent cited

The judgment of the court below as to this conclusion is partly inappropriate, but it is not erroneous in the misapprehension of legal principles as to business rights under tax law, contrary to what is alleged in the grounds of appeal.

3. Therefore, the appeal is 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 Cho Jae-chul (Presiding Justice)