In a case where the Korea Private School Promotion Foundation established the Private School Promotion Fund and runs a business of lending funds necessary for the improvement, repair, and expansion of the assets of private school institutions and the interest income generated from the loan business as reserves, and reported corporate tax for the pertinent business year by including the whole amount of the interest income generated from the loan business as reserves, and used the reserves added in deductible expenses for the loan business, and the tax authorities denied all the reserves appropriated as deductible expenses for the loan business, and imposed corporate tax and additional tax on the corporation for the pertinent business year, the case holding that the funds appropriated as reserves for the proper purpose business of the above Foundation were stored "for the loan business" and the loan business cannot be included in deductible expenses on the ground that the reserves accumulated as reserves for the loan business cannot be included in deductible expenses because they fall under the profit-making business falling under Article 2 (1) of the former Enforcement Decree of the Corporate Tax

The Korea Private School Promotion Foundation established the Private School Promotion Fund and operated a business of financing funds necessary for the improvement, repair, and expansion of the assets of private school institutions and educational facilities and equipment (hereinafter referred to as "loan business"), and reported corporate tax for the pertinent business year by establishing all interest income accrued from the loan business as reserves and adding it to deductible expenses, and used the reserves included in deductible expenses as funds for the loan business, and used them for re-financing. The tax authority denies all of the reserves for the proper purpose business appropriated as deductible expenses and imposed corporate tax and additional tax for the pertinent business year.

According to Article 29(1) of the former Corporate Tax Act (amended by Act No. 1355 of Dec. 15, 2015), where the above foundation appropriates the reserve fund for its proper purpose business as deductible expenses, it may be included in deductible expenses within a certain scope in calculating the amount of income for the business year. It is recognized that the above foundation carried out the loan business by including the interest income, etc. accrued from the loan business into the funds to private school institutions after it was incorporated into the funds. The above foundation's incorporation of funds into its own funds into the funds is established as funds under the statutes and the articles of incorporation. Thus, the funds appropriated as reserve fund for its proper purpose business are not stored "for expenditure for the loan business" but "for expenditure for the loan business" under the provisions of Article 2(1) of the Enforcement Decree of the Corporate Tax Act (amended by Act No. 1355 of Dec. 15, 201), and thus, it constitutes a business with the nature of funds for its own financing business under the provisions of Article 2(1) of the former Corporate Tax Act or its incorporation.

Articles 3(3)1 (see current Article 4(3)1), 29(1) and (8) (see current Article 29(10) of the former Corporate Tax Act (Amended by Act No. 1355, Dec. 15, 2015); Articles 2(1) (see current Article 3(1)), 56(5) and (6) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 26068, Feb. 3, 2015); Articles 6, 17, and 18 of the Korea Foundation for the Promotion of Private School Act; Article 16(1) of the Income Tax Act

Korea Foundation for the Promotion of Private School (Law Firm LLC, Attorneys Kim Jong-spon et al., Counsel for the plaintiff-appellant)

The head of the Dong-gu Tax Office (Law Firm LLC, Attorneys Cho Jae-ho et al., Counsel for the defendant-appellant)

Daegu District Court Decision 2017Guhap23713 Decided September 20, 2018

March 8, 2019

1. Revocation of the first instance judgment.

The plaintiff's claim is dismissed.

2. All costs of the lawsuit shall be borne by the Plaintiff.

1. Purport of claim

The Defendant’s corporate tax of KRW 5,681,201,650 (including additional tax of KRW 2,125,339,067) that reverts to the Plaintiff on November 7, 2016; corporate tax of KRW 3,608,724,840 (including additional tax of KRW 1,184,321,185); corporate tax of KRW 5,275,39,790 (including additional tax of KRW 1,450,689,757); corporate tax of KRW 4,220,834,120 (including additional tax of KRW 896,819,222); corporate tax of the business year that reverts to the Plaintiff on November 7, 2014; and corporate tax of KRW 576,61,690 (including additional tax of KRW 1,69,695,7935385) that reverts to the business year 2015;

2. Purport of appeal

The same shall apply to the order.

1. Details of the disposition;

The following facts are not disputed between the parties, or may be acknowledged by the respective entries in Gap evidence 1 through 6, Eul evidence 2 and 4 (including the number when it is not indicated specially; hereinafter the same shall apply) and the whole purport of pleadings, and there is no counter-proof:

A. On December 4, 1989, the Plaintiff is a non-profit corporation established pursuant to the Korean Private School Promotion Foundation Act (hereinafter “Private School Foundation Act”) for the purpose of operating and managing affairs concerning the creation and financing of funds for the educational environment of private schools in a rational manner.

The Plaintiff established a Private School Promotion Fund pursuant to the Private School Foundation Act and operated a business to lend funds necessary for the improvement, repair, and expansion of the property of private school institutions and educational facilities and equipment (hereinafter “instant loan business”).

Upon reporting corporate tax from 2011 to 2015, the Plaintiff filed a report on all interest income accrued from the instant loan project as a reserve fund and filed a report on inclusion in deductible expenses (No. 1).

The plaintiff has used the reserves included in deductible expenses as financial resources of the financing business for re-financing.

B. From May 2, 2016 to June 3, 2016, Daegu regional tax office conducted a regular tax investigation with respect to the Plaintiff, and as a result, on July 26, 2016, the Plaintiff notified the Plaintiff of the result of tax investigation that the instant loan business constitutes a profit-making business and does not constitute a proper purpose business prescribed in Article 29 of the Corporate Tax Act and Article 56 of the Enforcement Decree of the same Act. Therefore, the Plaintiff denied all of the reserves for proper purpose business appropriated as deductible expenses from the business year 2011 to the business year 2015, and notified the Plaintiff of the result of tax investigation that the Plaintiff would impose

On August 26, 2016, the Plaintiff filed a request for pre-assessment review with the National Tax Service, but the National Tax Service decided not to accept the said request on October 28, 2016.

On November 7, 2016, the Defendant imposed corporate tax and additional tax on the Plaintiff for the business year from 2011 to 2015 (hereinafter “instant disposition”).

On February 6, 2017, the Plaintiff filed an appeal seeking revocation of the instant disposition with the Tax Tribunal, but the Tax Tribunal rendered a decision to dismiss the said claim on July 25, 2017.

C. The statutes related to the disposition of this case are as shown in the attached Form.

2. The plaintiff's assertion

The instant disposition should be revoked on the grounds that it is unlawful for the following reasons.

A. The Plaintiff is a non-profit corporation established under the Private School Foundation Act, whose organization and duties are controlled and supervised by the Ministry of Education, and the Ministry of Strategy and Finance with respect to the operation of the Fund. The instant Fund has independent public foundation or its equivalent substance distinct from the Plaintiff. The Plaintiff spent interest income generated from the instant loan project to the Fund, which constitutes a business creating the instant Fund, and the instant Fund creation project constitutes a business creating the instant Fund, and the instant Fund creation project was made pursuant to Article 29(1) of the former Corporate Tax Act (amended by Act No. 13555, Dec. 15, 2015; hereinafter the same shall apply) and Article 56(5) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 26068, Feb. 3, 2015). The Plaintiff appropriated the interest income generated from the instant loan project as a reserve fund to disburse it to the instant Fund. However, the said reserve fund should be included in deductible expenses.

B. Unless otherwise, while running the loan business in this case as one of the target businesses, the Plaintiff raised a significant portion of the funds necessary for the loan business in this case from the government contributions or loans, decision-making right to important matters such as financing and operation belongs to the State, and the loan interest rate in private school institutions is equally applied. The loan business in this case is not for profit-making and the business itself does not have profit-making. Thus, the loan business in this case constitutes "high purpose business" under Article 29 (1) of the former Corporate Tax Act and Article 56 (5) of the former Enforcement Decree of the Corporate Tax Act. The Plaintiff appropriated the interest income generated from the loan business in this case as a reserve to disburse it for the loan business in this case. Thus, the above reserve should be included in deductible expenses, notwithstanding the fact that it should be included in deductible expenses as the reserve for the proper purpose business in this case.

3. Criteria for determining whether to allow inclusion in deductible expenses

(a) Relevant statutes;

1) According to Article 3(3) of the former Corporate Tax Act, income generated from businesses or revenues under each subparagraph of Article 3(3) of the former Corporate Tax Act is subject to corporate tax. Business prescribed by the Presidential Decree as businesses such as manufacturing, construction, wholesale, retail, consumer product repair, real estate leasing, and business services (Article 16(1) of the Income Tax Act), and interest income, etc. under Article 16(3) of the Income Tax Act

According to the provisions of Article 29 of the former Corporate Tax Act, where a non-profit domestic corporation appropriates reserve funds for proper purpose business for its proper purpose business as deductible expenses to disburse them for the proper purpose business of the corporation, they may be included in deductible expenses within a specific scope in the calculation of income amount for the business year (paragraph (1)), the scope of proper purpose business, etc.

2) According to Article 56 of the former Enforcement Decree of the Corporate Tax Act, “high purpose business” under Article 29(1) of the former Enforcement Decree of the Corporate Tax Act refers to a business which directly performs the purpose of establishment prescribed by the laws and regulations of a non-profit domestic corporation or its articles of incorporation and which is not a profit-making business under Article 2(1) of the Enforcement Decree of the Corporate Tax Act (Article 2(5)), and in applying Article 29(1) through (4) of the Corporate Tax Act on the inclusion of reserve funds for proper purpose business in deductible expenses, the amount listed in each subparagraph of paragraph (6), such as the amount used directly by a non-profit domestic corporation for the pertinent proper purpose business, such as the acquisition cost

According to Article 2 (1) of the former Enforcement Decree of the Corporate Tax Act, "profit-making business prescribed by Presidential Decree" under Article 3 (3) 1 of the former Corporate Tax Act means income generated from among each business under the Korean Standard Industrial Classification publicly announced by the Commissioner of the Statistics Korea, except for the business prescribed by each subparagraph of Article 2 (1) of the

3) According to the former Korean Standard Industrial Classification publicly notified by the Commissioner of the Statistics Korea pursuant to Article 22 of the Statistics Act (amended by Presidential Decree No. 2007-53, Dec. 28, 2007; Presidential Decree No. 2017-13, Jan. 13, 2017; hereinafter “former Korean Standard Industrial Classification”), “financial business” (large Classification No. 64) refers to “financial business” (i.e., raising funds other than insurance or pension purposes, and re-distribution, supply, and brokerage of such funds, and (ii) industrial activities (i.e., raising funds for specific business, and managing them), but (iii) it is classified according to the type of business that operates the business.

B. Specific criteria for permission of inclusion in deductible expenses

In light of the principle of no taxation without law, or the requirements for tax exemption or tax exemption, the interpretation of tax laws shall be interpreted in accordance with the text of the law, barring any special circumstance, and it shall not be extensively interpreted or analogically interpreted without reasonable grounds. In particular, it is necessary to strictly interpret that the provision is clearly considered as a preferential provision among the requirements for reduction or exemption (see, e.g., Supreme Court Decisions 2002Du9537, Jan. 24, 2003; 2008Du11372, Aug. 20, 209).

In full view of the relevant laws and regulations, even if a non-profit domestic corporation’s business directly performs the purpose of establishment prescribed in its laws and regulations or its articles of incorporation, if such business falls under a profit-making business falling under Article 2(1) of the Enforcement Decree of the Corporate Tax Act, i.e., a business that occurs among each business under the Korea Standard Industrial Classification (excluding the business prescribed by each subparagraph of Article 2(1) of the former Enforcement Decree of the Corporate Tax Act), it does not constitute a “high-purpose business” under Article 56 of the former Enforcement Decree of the Corporate Tax Act, and in such case

4. Determination

A. Whether the defendant's deductible expenses denied are the reserve funds for the creation of the Fund of this case

According to the provisions of Article 29 (1) of the former Corporate Tax Act, where the reserve fund for proper purpose business is appropriated as deductible expenses for the purpose of "expenses" for proper purpose business, the plaintiff may include the reserve fund for proper purpose business in deductible expenses within a specific scope.

In light of the following facts: ① the Plaintiff’s incorporation of interest income, etc. accrued from the instant loan business into the Fund and then deemed to have carried out the instant loan business by lending the instant funds to private school institutions; ② the incorporation of funds owned by the Plaintiff into the Fund is determined by the law and the articles of incorporation as the Fund of this case. As such, the funds transferred to the Fund is limited to the purposes of the instant loan business, such as the instant loan business, and ③ there is no evidence to prove that the Plaintiff separately carried out cash transactions or financial transactions in the instant funding business before the funds appropriated as the reserve funds for proper purpose business are loaned to private school institutions; and ③ there is no evidence to prove that the funds appropriated as the reserve funds for proper purpose business of this case are not stored “for expenditure in the instant funding business”, not “for expenditure in the instant funding business.” Accordingly, the Plaintiff’s assertion as stated in the above 2. A. on a different premise is without merit.

B. Whether the loan business reserve fund of this case is included in deductible expenses

1) Requirements for “import-generating business”

As seen earlier, even if a non-profit domestic corporation’s business directly performs the purpose of establishment prescribed in the statutes or its articles of incorporation, if the business falls under a profit-making business falling under Article 2(1) of the Enforcement Decree of the Corporate Tax Act, that is, where the business falls under a “income from among each business under the Korea Standard Industrial Classification” (excluding the business prescribed by each subparagraph of Article 2(1) of the former Enforcement Decree of the Corporate Tax Act), the business does not fall under a “high-purpose business” under Article 56 of the former Enforcement Decree of the Corporate Tax Act,

2) Facts of recognition

The following facts are acknowledged in light of no dispute between the parties or the evidence of the above cited cases.

① The Plaintiff operated the instant loan project by continuously and repeatedly financing private school institutions from 2011 to 2015 as follows.

The amount of 4140 2424 232150 of the total amount of 2015, 2013, 2012, contained in the main sentence, shall be 2,171,728 1,500 1,350 1,350 1,569,318

② The loan project in this case resulted in a loan interest rate higher than the loan interest rate during the period from 2011 to 2015, and as a result, the accumulated earned surplus accrued by the end of the business year in 2015 continuously accrued each year after deducting the expenses disbursed in the loan project in this case.

3) nature of the loan business in this case and whether to allow inclusion in deductible expenses

In full view of the following circumstances, the loan business of this case constitutes a profit-making business falling under Article 2 (1) of the Enforcement Decree of the Corporate Tax Act, that is, the revenue generated from each business under the Korea Standard Industrial Classification (excluding the business under each subparagraph of Article 2 (1) of the former Enforcement Decree of the Corporate Tax Act), and thus, the reserve funds accumulated to disburse for the loan business of this case cannot be included in the calculation of losses, and the plaintiff's assertion as stated in Article 2

① As interest income derived from the instant loan business falls under “non-business profit” under Article 16(1)11 of the Income Tax Act or “non-business profit” under subparagraph 12 of Article 16(1) of the Income Tax Act, it is reasonable to deem that such business income has occurred.

② In light of the method, details, scale, etc. of operating a loan business against private school institutions during the taxable period, the Plaintiff operated the interest income accrued from the instant loan business again as financial resources for the loan business. In light of the method, details, and scale, etc. of operating the loan business against private school institutions, the instant loan business belongs to the financial business among the Korean Standard Industrial Classification, which is “the creation of funds other than insurance or pension purposes and the redistribution, supply, and intermediary business thereof,”

③ The circumstance that the Plaintiff is obligated to achieve the public interest purpose pursuant to statutes or the articles of incorporation, or to be managed and supervised by the competent authorities is merely a result of the Government’s exercise of rights as a contributor to the Plaintiff, or merely a management and supervision by the competent authorities to maintain and secure the public interest of non-profit corporations regardless of profit-making business and non-profit-making business, and thus, cannot be the standard for determining whether the business conducted by the Plaintiff is “profit-making business falling under

④ In light of the fact that the Plaintiff reported corporate tax from the year 201 to the year 2015 and appropriated interest income from the instant loan business as deductible expenses for its proper purpose business, the Plaintiff seems to have also understood that the instant loan business constituted “income-generating business”.

⑤ Supreme Court Decision 2003Du12455 Decided September 9, 2005, which the Plaintiff cited as the ground for inclusion in deductible expenses, is related to the case where a non-profit corporation’s loan interest rate is significantly lower than the loan interest rate, and thus, this case’s loan business and fact-finding relation is different.

C. Sub-decision

Therefore, it is legitimate for the instant disposition to deny the Plaintiff’s reserve funds as deductible expenses and to recognize them as taxable objects. Therefore, the Plaintiff’s assertion is without merit.

5. Conclusion

Therefore, the plaintiff's claim shall be dismissed as it is without merit. Since the judgment of the court of first instance is unfair with different conclusions, it is revoked and the plaintiff's claim is dismissed. It is so decided as per Disposition.

[Attachment] Relevant Statutes: omitted

Judges Jin Sung-chul (Presiding Judge)