[1] Where shares issued through a debt-to-equity swap as a substitute for repayment of existing rehabilitation claims, etc. through a debt-to-equity swap without requiring separate payment, etc. in the rehabilitation plan, whether a rehabilitation claim, etc., which is a premise of debt-to-equity swap, constitutes “a claim confirmed as impossible to be recovered according to a decision to authorize the rehabilitation plan,” as stipulated in Article 19-2(1)5 of the Enforcement Decree of the Corporate Tax Act

[2] In a case where Gap corporation, which was supplied with goods or services from Gap corporation, filed an application for commencing rehabilitation procedures, and Gap corporation retired its stocks issued through a conversion into equity investment without compensation in accordance with the rehabilitation plan that decided to substitute for the repayment of rehabilitation claims by converting its sales claims into equity investment, and the head of the competent tax office imposed value-added tax by subtracting the bad debt amount of Eul corporation from its input tax amount equivalent to the bad debt amount of sales claims from Eul corporation, the case affirming the judgment below that the above disposition is lawful

[1] If shares issued through a debt-to-equity swap are decided to be retired without compensation in lieu of repayment of existing rehabilitation claims, etc. through a debt-to-equity swap without requiring separate payment, etc. in the rehabilitation plan, 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

[2] In a case where Eul corporation, which was supplied with goods or services from Gap corporation, filed an application for commencing rehabilitation procedures, and Gap corporation retired its stocks issued through a conversion of investment without compensation in lieu of repayment of rehabilitation claims by converting sales claims against Eul corporation, according to the rehabilitation plan, and the head of the competent tax office imposed value-added tax by subtracting the bad debt amount deducted from Eul corporation's input tax amount, which is equivalent to the bad debt amount deducted from the sales claims from the value-added tax, the case affirming the judgment below that the sales claims against Eul corporation, which was converted into investment in accordance with the rehabilitation plan approval plan, constitute "a claim confirmed to be impossible to be recovered by the decision of the rehabilitation plan" under Article 19-2 (1) 5 of the Enforcement Decree of the Corporate Tax Act, and thus, the above disposition is lawful.

[1] Article 45(1) and (3) of the Value-Added Tax Act, Article 87(1) of the Enforcement Decree of the Value-Added Tax Act, Article 19-2(1)5 of the Enforcement Decree of the Corporate Tax Act, Articles 205(1), 206(1), 252(1), and 264(1) and (2) of the Debtor Rehabilitation and Bankruptcy Act / [2] Article 45(1) and (3) of the Value-Added Tax Act, Article 87(1) of the Enforcement Decree of the Value-Added Tax Act, Article 19-2(1)5 of the Corporate Tax Act, Articles 205(1), 206(1), 252(1), and 264(1) and (2) of the Debtor Rehabilitation and Bankruptcy Act

TP Co., Ltd. (Law Firm Hosan, Attorneys Kim Ro-ray et al., Counsel for the defendant-appellant)

Head of the Office of Government

Seoul High Court Decision 2017Nu52650 decided October 24, 2017

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

The grounds of appeal are examined.

1. Article 45(1) main text of the Value-Added Tax Act provides that "Where an entrepreneur supplies goods or services subject to the imposition of value-added tax, and receives a bad debt tax credit under paragraph (1) prior to the closure of his/her business, due to the bankruptcy or compulsory execution of a person who receives the supply of all or any other sales claims (referring to those including value-added tax) or other causes prescribed by Presidential Decree, 10/110 of the irrecoverable amount due to bad debt (hereinafter referred to as " bad debt tax amount") may be subtracted from the output tax amount in the taxable period whereto belongs the date when the bad debt becomes final and conclusive." The main text of Article 45(3) provides that "Where the entrepreneur who receives the supply of goods or services, in applying paragraphs (1) and (2), has the whole or part of the amount equivalent to bad debt tax amount deducted from the bad debt tax amount under Article 38, if the supplier of the goods or services has received a bad debt tax credit under paragraph (1) prior to the closure of business, the entrepreneur receiving the

In addition, Article 87(1) of the Enforcement Decree of the Value-Added Tax Act provides for “any reason for recognizing bad debts pursuant to Article 19-2(1) of the Enforcement Decree of the Corporate Tax Act” as one of the “any bankruptcy, compulsory execution and other grounds prescribed by the Presidential Decree” under the main sentence of Article 45(1) of the Act, and Article 19-2(1)5 of the Enforcement Decree of the Corporate Tax Act provides for “a claim confirmed to be impossible to be recovered due to a decision to grant authorization for the rehabilitation plan under the Debtor Rehabilitation and Bankruptcy Act (hereinafter “ Debtor Rehabilitation Act”) or

Meanwhile, when it is decided to grant authorization for the rehabilitation plan, the rights of rehabilitation creditors, rehabilitation secured creditors, shareholders and equity right holders are altered according to the rehabilitation plan (Article 252(1) of the Debtor Rehabilitation Act); and the court may, by prescribing the rehabilitation plan on matters, such as the amount of debts to be decreased by the issuance of new shares, etc., require the debtor, who is a stock company, to issue new shares without having rehabilitation creditors, rehabilitation secured creditors or shareholders make new payments or make investments in kind (Article 206(1) of the Debtor Rehabilitation Act). When the court prescribes the amount of capital to be reduced and the methods of reducing capital are prescribed in the rehabilitation plan, the debtor’s capital to be a stock company may be reduced according to the rehabilitation plan. In such cases, the provisions of Articles 343(2), 439(2) and (3), 440 (Procedures of Consolidation), 41 (Procedures of Consolidation), 445 (Procedures of Consolidation of Shares), and 446(2) of the Commercial Act shall not apply (Article 205(1), (206(2) and (1)6) of the Debtor Rehabilitation Act).

Ultimately, in the rehabilitation plan, even though it is decided to substitute for repayment of existing rehabilitation claims, etc. through a conversion of shares through a conversion of shares without requiring separate payment, if shares issued through a conversion of shares are decided to be retired 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 clear that they will be retired without any other consideration. Therefore, it is reasonable to view that rehabilitation claims, etc., which are the premise of such conversion of shares as above, have become impossible to recover

2. The lower court acknowledged the following facts: (a) the Plaintiff filed an application for commencing rehabilitation procedures on July 10, 2012 with the Government-Funded District Court 2012 Gohap16, and (b) the said court decided to convert the remainder of the commercial transaction obligations with the exception of the portion of cash repayment, out of the rehabilitation claims against the Plaintiff of Switzerland Co., Ltd. on February 18, 2014; and (c) determined the instant rehabilitation plan to the effect that “the conversion of investment is substituted for the repayment of the relevant rehabilitation claim on the effective date of the shares newly issued by the company, and the capital reduction is free of charge for all the shares issued by the conversion of investment; and (d) accordingly, the Plaintiff retired all the shares that the Plaintiff received through the conversion of investment into equity as above through the reduction of capital without compensation.

Based on such factual basis, the lower court determined that the instant disposition was lawful by deducting the amount corresponding thereto from the Plaintiff’s input tax amount for 1 year 2014, on the ground that the sales claim against the Plaintiff of Switzerland C&C, which was converted into investment according to the instant rehabilitation plan, constitutes “a claim confirmed to be impossible to be recovered according to the authorization of the rehabilitation plan” under Article 19-2(1)5 of the Enforcement Decree of the Corporate Tax Act, in view of the circumstances as indicated in its reasoning, such as that the instant rehabilitation plan provides that stocks issued through a conversion into investment without compensation, unlike ordinary conversion into investment, shall be retired

3. Examining the foregoing provisions and legal principles in light of the foregoing, the lower court did not err in its judgment by misapprehending the legal doctrine on the interpretation of Article 19-2(1)5 of the Enforcement Decree of the Corporate Tax Act and the deduction of bad debt tax amount under the Value-Added Tax Act,

4. 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 Ko Young-han (Presiding Justice)