In cases of funds directly borrowed for the purpose of acquiring any assets through construction, etc., whether the interest paid is included in the tax base for acquisition tax (affirmative), and where the interest paid on borrowed funds for other purposes may be added to the tax base for acquisition tax / In such cases, whether the tax authority bears the burden of proof as to the fact that the interest paid on borrowed funds for other purposes is required for the acquisition of taxable objects (affirmative in principle)

The former Local Tax Act (wholly amended by Act No. 10221, Mar. 31, 2010) provides that interest on loans appropriated for construction capital shall be included in the tax base of acquisition tax on the ground that it is an amount indirectly required for acquisition. Thus, in the case of funds directly borrowed for the purpose of acquiring any assets through construction, etc., such interest paid shall be included in the tax base of acquisition tax; however, the interest paid on loans borrowed for other purposes shall be deemed indirectly required for the acquisition of objects of taxation, and the interest paid on such loans borrowed for other purposes may be deemed to have been substantially invested, unless there are special circumstances such as the person liable for tax payment’s capitalization and appropriately reflected in the acquisition price. In addition, the existence of tax requirements and the burden of proof on the tax base shall be imposed on the tax authority, and in principle, the tax authority bears the burden of proof on the fact that the interest paid on other funds borrowed

Article 111(5) and (8) (see current Article 10(5) and (7) of the former Local Tax Act (wholly amended by Act No. 1021, Mar. 31, 2010); Article 82-2(1)1 of the former Enforcement Decree of the Local Tax Act (wholly amended by Presidential Decree No. 22395, Sept. 20, 2010; see current Article 18(1)1)

Supreme Court Decision 86Nu811 Decided January 31, 1989 (Gong1989, 358) Supreme Court Decision 2009Du17179 Decided April 29, 2010 (Gong2013Ha, 1837) Decided September 12, 2013 (Gong2013Ha, 1837)

D. S.C. (Law Firm Sejong, et al., Counsel for the defendant-appellant)

Head of Seoyang-si (Law Firm TELS, Attorneys Lee Jae-in et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2014Nu4436 decided November 12, 2014

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined (to the extent of supplement in case of any statement in the supplemental appellate brief not timely filed).

1. Article 111(5) and the main sentence of Article 82-2(1) of the former Enforcement Decree of the Local Tax Act (wholly amended by Presidential Decree No. 22395, Sep. 20, 2010) by delegation of Article 111(8) of the former Local Tax Act (wholly amended by Act No. 10221, Mar. 31, 2010; hereinafter the same) provides, “The acquisition price pursuant to Article 111(5)1 through 4 of the Act shall be the total amount of direct expenses paid or payable to the other party to the transaction or a third party for acquiring the pertinent goods as of the time of acquisition and indirect expenses falling under any of the following subparagraphs.” Article 82-2(1) of the former Enforcement Decree of the Local Tax Act provides, “The acquisition price pursuant to Article 111(5)1 through 4 of the Act shall be the total amount of interest

As can be seen, prescribing that interest on loans appropriated for construction capital under the former Local Tax Act is included in the tax base of acquisition tax based on the fact that it is indirectly required for acquisition (see, e.g., Supreme Court Decision 2009Du17179, Apr. 29, 2010). If so, in the case of loans borrowed directly for the purpose of acquiring a certain asset through construction, etc., the relevant interest paid shall be included in the tax base of acquisition tax, and the interest paid on loans borrowed for other purposes shall be deemed as indirectly required for the acquisition of taxable object, and may be deemed as having been substantially invested in the tax base of acquisition tax, unless there are special circumstances such as where a taxpayer takes an adequate consideration in the acquisition price by capitalizing the borrowed funds. In addition, the existence of taxation requirements and the burden of proof on the tax base is the tax authority, and in principle, the tax authority bears the burden of proof as to the fact that the interest paid on other funds borrowed

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

(1) From December 9, 2005 to May 14, 2010, the Plaintiff purchased 529,248.34 square meters of land and 1,766.22 square meters of land (hereinafter “instant real estate”) other than 581 square meters, in order to construct an apartment building, etc., and around that time, the Plaintiff reported and paid acquisition tax, etc. to the Defendant by using the purchase price as acquisition price of KRW 299,250,05,675.

(2) Meanwhile, the Plaintiff accounts for the total amount of KRW 14,088,712,259 (hereinafter “interest paid in the instant case”) paid on several loans incurred during the said period as a cost account.

(3) On December 14, 2010, the Defendant imposed acquisition tax of KRW 485,861,270, special rural development tax of KRW 36,941,510, and registration tax of KRW 447,519,260, and local education tax of KRW 89,502,60 (including additional tax) on the ground that the instant interest paid, disposal trust fees, etc. should be included in the tax base (hereinafter “instant disposition”).

B. Examining the above facts in light of the legal principles as seen earlier, the Plaintiff merely accounted for the instant interest in the cost account and did not reflect it in the acquisition price of the instant real estate by means of capitalization. Even based on the evidence submitted by the Defendant, it is difficult to deem that the funds borrowed by the Plaintiff were directly borrowed for the purpose of using them in the acquisition of the instant real estate, or that it was indirectly required for the acquisition of the instant real estate and actually invested. Therefore, the lower court should determine whether the instant interest may be added to the tax base of the instant real estate by further examining the nature and use of the funds borrowed by the Plaintiff and the relevant use thereof, etc.

3. Nevertheless, the lower court, without deliberating on it, deemed that the interest paid after the non-taxable practice had ceased solely on the grounds as indicated in its reasoning, may be included in the tax base for acquisition tax of the instant real estate in accordance with the corporate accounting standards, and determined that the portion of the interest paid after January 23, 2006 among the instant disposition was lawful.

In so determining, the court below erred by misapprehending the legal principles as to the interest on loans appropriated for construction funds and the burden of proof, which are included in the acquisition price, which is the tax base of acquisition tax, and thereby adversely affecting the conclusion of the judgment. The ground of appeal

4. Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Cho Jae-chul (Presiding Justice)