In the event that expenses incurred in relation to corporate accounting are denied as a result of the difference between tax accounting and accounting and the tax adjustment, etc. is made in the form of "reserve", whether the effect of extinguishment shall be denied and the tax adjustment, etc. shall be made in the form of "Reservation" in the calculation of losses in the relevant business year (affirmative)

Article 40(1) of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008) provides, “The business year to which the profits and losses of a domestic corporation accrue shall be the business year which includes the date on which the profits and losses are determined.” Even if liabilities or expenses accrue according to corporate accounting, where a domestic corporation denies inclusion of expenses in deductible expenses due to corporate accounting due to a difference in tax accounting that takes the principle of confirmation of rights and obligations and where a corporation conducts tax adjustment, etc. of liabilities to "reserve", even if the liabilities are extinguished due to business transfer, it shall be denied as long as they cannot be deemed liabilities due to tax accounting, and tax adjustment, etc. shall be made as “B-st reservation,” while denying the effect of extinguishment and inclusion in deductible expenses in the relevant business year. This is because, without such adjustment, gains from transfer under the tax law

Article 40 (1) of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008)

E.C. Investment Co., Ltd. (Law Firm LLC, Attorneys Gangnam-hun et al., Counsel for the plaintiff-appellant)

Head of Central Tax Office

Seoul High Court Decision 2016Nu621 decided February 15, 2017

The part of the lower judgment against the Plaintiff is reversed, and that part of the case is remanded to the Seoul High Court. The Defendant’s appeal is dismissed.

The grounds of appeal are examined.

1. As to the Defendant’s ground of appeal

After finding facts as stated in its reasoning based on evidence, the lower court determined that the amount of preservation of the instant case that the Plaintiff paid upon the exercise of the stock option by its officers and employees falls under Article 19(1) and (3) of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same shall apply) and Article 19 subparag. 3 of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 21301, Feb. 4, 2009; hereinafter the same shall apply) and should be included in deductible expenses.

Examining the record in light of the relevant provisions and legal principles, the lower court did not err in its judgment by misapprehending the legal doctrine as to inclusion in deductible expenses under the Corporate Tax Act, failing to exhaust all necessary deliberations, or by failing

2. Plaintiff’s ground of appeal

A. The lower court acknowledged the following facts in full view of the evidence.

1) The Plaintiff, a subsidiary of a new financial holding company (hereinafter “new financial holding company”) granted the instant stock option from May 2, 2002 to March 2006 by way of settling the difference between the Plaintiff’s shares of new financial branch and its executives and employees. Meanwhile, when executives and employees exercise the stock option, the Plaintiff paid the difference settlement cost to the new financial branch owner to its executives and employees.

2) The Plaintiff recognized the stock option costs of this case to be paid to the next new financial branch owner from 2002 to 2006 as stock compensation costs (long-term unpaid costs) in accordance with corporate accounting standards. However, in calculating the corporate tax base, the Plaintiff did not include them in deductible expenses, but made tax adjustment as non-deductible expenses.

3) When part of the stock options in the instant case were exercised during 2007, the Plaintiff paid KRW 1,432,580,821 to the officers and employees who exercised the stock options in 2007.

4) Meanwhile, on October 1, 2007, the Plaintiff transferred the business to El Card Co., Ltd., and transferred the remaining 2,931,736,175 won of long-term unpaid costs (hereinafter “instant transfer amount”) which were included in corporate accounting liabilities.

5) In filing a corporate tax return for the business year of 2007, the Plaintiff included the stock option costs of KRW 4,364,316,996 (the preserved amount of KRW 1,432,580,821 + the transferred amount of KRW 2,931,736,175) in deductible expenses (the reservation of KRW 2,931,736,175). At the same time, the Plaintiff did not include all the stock option costs in deductible expenses.

6) On March 16, 2011, the Plaintiff filed a claim for correction to the effect that all of the instant stock option costs should be included in deductible expenses, but the Defendant rejected the claim.

B. Next, the lower court determined that the instant transfer amount cannot be included in deductible expenses, on the ground that it is reasonable to adjust the amount of the instant stock option costs, which the Plaintiff had tax adjustment as non-deductible expenses, to non-deductible expenses, in cases where there is no difference between assets and liabilities under corporate accounting and assets and liabilities under tax laws.

C. However, the lower court’s determination is difficult to accept for the following reasons.

1) Article 40(1) of the former Corporate Tax Act provides, “The business year to which a domestic corporation’s gross income and deductible expenses accrue shall be the business year which includes the date on which the relevant gross income and deductible expenses are determined.” Even if liabilities or expenses accrue through corporate accounting, where expenses arising from corporate accounting are denied as deductible expenses and tax adjustment, etc. is made in accordance with corporate accounting due to a difference between tax accounting and tax accounting taking the principle of confirmation of rights and duties, and where the liabilities are reduced to “reserve” due to business transfer, the liabilities should be denied as long as they cannot be deemed liabilities due to the relevant business transfer, so long as they cannot be deemed as tax accounting, the effects of extinguishment shall be denied and the tax adjustment, etc. shall be made in accordance with the tax law related to the business transfer

2) Examining the aforementioned facts in light of the legal principles as seen earlier, the part of the transfer amount of this case, which the Plaintiff had appropriated as long-term unpaid expenses (debt) in corporate accounting, was subject to tax adjustment from 2002 to 2006 as non-deductible expenses, and even if its liabilities were extinguished due to business transfer in 2007, it is reasonable to dispose of the same as the “sub-sub-sub-sub-sub-sub-sub-sub-sub-sub-sub

3) Nevertheless, the lower court erred by misapprehending the legal doctrine on tax adjustment, etc., thereby adversely affecting the conclusion of the judgment. The Plaintiff’s ground of appeal assigning this error is with merit.

3. Conclusion

Therefore, the part of the judgment of the court below against the plaintiff is reversed, and that part of the case is remanded to the court below for a new trial and determination, and the defendant's appeal is dismissed. It is so decided as per Disposition by the assent of all participating

Justices Park Jung-hwa (Presiding Justice)