[1] Legislative intent of Article 34(3)2 of the former Corporate Tax Act concerning the inclusion of provisional payments in deductible expenses of bad debts unrelated to the business affairs provided to a specially related person / When determining whether the disposal loss of claims is a provisional payment in relation to a specially related person who is not included in deductible expenses pursuant to Article 61(5) of the former Enforcement Decree of Corporate Tax Act and Article 34(3)2 of the former Corporate Tax Act

[2] Where a domestic corporation acquires and holds bonds and sells bonds to another person during the period of calculating interest accrued from the bonds, whether a corporation liable to withhold taxes pursuant to Article 73(8) of the former Corporate Tax Act is liable to withhold the amount calculated by the formula of “the face value of bonds 】 holding period 】 applicable interest rate” at the time of selling bonds (affirmative), and whether the disposal loss of the bonds occurred in the course of selling the bonds (negative)

[1] The legislative purport of Article 34(3)2, Article 28(1)4(b) of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same) and Article 53(1)2, etc. of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009; hereinafter the same) is to: (a) where a cause for bad debt becomes impossible to collect claims due to the occurrence of a cause for the lending of funds that a corporation paid to a specially related person without connection with the corporation’s business (hereinafter “provisional payment without office”) is to restrict the maintenance of an abnormal funding relationship with the specially related person by non-inclusion of bad debt as at the time of disposal of funds; and (b) encourage a company to engage in economic activities through the management of corporate funds without special relation to the disposal of funds arising from the sale of funds to a third party, and thus, it cannot be deemed that the former Enforcement Decree of Corporate Tax Act provides more losses unrelated to the special relationship.

[2] Article 73(8) of the former Corporate Tax Act (amended by Act No. 9267 of Dec. 26, 2008; hereinafter the same) and Article 46(1) of the former Income Tax Act (amended by Act No. 9270 of Dec. 26, 2008) provide that “Where a domestic corporation sells claims to another person during the period of calculating interest accruing from bonds under Article 16(1)2 of the Income Tax Act, the domestic corporation shall withhold taxes on the interest accrued from the period of holding such claims on its behalf of the withholding agent under paragraph (1) of this Article under the conditions as prescribed by the Presidential Decree. In this case, the corporation shall be deemed as the withholding agent and shall be subject to this Act.” In addition, Article 73(8) of the former Corporate Tax Act provides that “where the domestic corporation sells claims to another person during the period of calculating interest accruing from bonds under Article 16(1)2 of the Income Tax Act (amended by Presidential Decree No. 21302 of Feb. 4, 2009). 13).

The withholding system is, in principle, established in order to secure convenient taxation and securing tax revenues by withholding at the time of payment at the time of the source of income. As such, the income subject to withholding is clearly specified due to the characteristics of the withholding system. Accordingly, the pertinent provision provides that the income accrued during the period of acquisition and holding of bonds should be uniformly calculated by the formula of “value of bonds x retention period x applicable interest rate”, thereby securing effectiveness of withholding tax on the total amount equivalent to the interest corresponding to each holding period. Considering these circumstances, a corporation liable to withhold tax pursuant to Article 73(8) of the former Corporate Tax Act, which is obligated to regard the amount calculated by the aforesaid formula as the amount subject to withholding at the time of sale to another person, as the amount subject to withholding tax on the amount equivalent to the amount corresponding to the holding period of the bonds at the time of sale of the relevant bonds, and this cannot be deemed to vary on the ground that

[1] Articles 34(3)2 and 28(1)4(b) of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008); Articles 53(1) and 61(5) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 21302, Feb. 4, 2009); / [2] Article 73(1) and (8) of the former Corporate Tax Act (Amended by Act No. 9267, Dec. 26, 2008); Article 113(1) and (2) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 21302, Feb. 4, 2009); Article 46(1)6 of the former Income Tax Act (Amended by Act No. 9270, Dec. 26, 2008)

Seocho Commercial Co., Ltd. (Attorneys Son Ji-yol et al., Counsel for the plaintiff-appellant)

The Director of Gangnam District Office

Seoul High Court Decision 2012Nu21217 decided December 20, 2013

The part of the judgment below regarding the imposition of corporate tax for the business year 2008 is reversed, and that part of the case is remanded to the Seoul High Court. The remaining appeal is dismissed.

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

1. As to the grounds of appeal Nos. 1 and 2

A. Article 34(2) of the former Corporate Tax Act (amended by Act No. 9267, Dec. 26, 2008; hereinafter the same) provides that the amount of bonds which cannot be recovered for certain reasons, such as debtor's bankruptcy, among bonds held by a domestic corporation (hereinafter "deductible expenses") shall be included in deductible expenses in calculating the income amount for the relevant business year: Provided, That Article 34(3)2 and Article 28(1)4(b) of the former Corporate Tax Act and Article 53(1)2, etc. of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009; hereinafter the same shall apply) shall not be included in deductible expenses with respect to loans paid by a corporation to a specially related person without relation to the corporation's business (hereinafter "non-business losses") and Article 34(3)2, etc. of the former Enforcement Decree of the Corporate Tax Act shall also not be included in deductible expenses.

B. 1) The lower court acknowledged the following facts in full view of the admitted evidence.

① At around 2004, Korea-Igian Co., Ltd. (hereinafter “Korea-Igian”) owned 33.3% of the Plaintiff’s shares issued, and owned 58.31% of the shares issued by E-Igian Media (hereinafter “E-W).

② On August 12, 2004, the Plaintiff lent KRW 9,000,000,000 to E media (hereinafter “instant loan”) at an annual interest rate of 9%.

③ On May 1, 2005, the Plaintiff adopted the Egyptian restructuring plan presented by DI Associate Co., Ltd. (hereinafter “DI’s rate, trade name after the modification,”) and sold Egypt 1,072,686 shares of Egypt 49.9% of Egypt 58.31% of Egypt 58.31% of Egypt 58.31% of Egypt 59.31% of Egypt 1,00,000 won. Accordingly, Egypt owned 33.3% of the Plaintiff’s issued shares and sold Egypt 8.31% of Egypt 1.31% of the shares.

④ On July 4, 2005, the Plaintiff acquired the instant convertible bonds’ total face value of KRW 9,332,000,000 (hereinafter “instant convertible bonds”). The Plaintiff paid the amount by offsetting KRW 9,32,000,000 with the total amount of KRW 332,00,000,000, and interest accrued up to that time, by offsetting KRW 9,32,000 with the total amount of KRW 332,00,000.

⑤ From 2005 to 2007, the instant convertible bonds paid interest at the rate of 3% per annum on June 30, 2008, which is the date of redemption of principal and the maturity of principal, with the condition that the interest calculated at the rate of 9% per annum on the maturity redemption date shall be paid. The Plaintiff classified the instant convertible bonds as sold securities under corporate accounting and included the total amount of KRW 9,32,00,000, which is the acquisition price of the instant convertible bonds, from 2005 to 2007.

④ On March 14, 2008, the Plaintiff sold the instant convertible bonds to Dianian, etc. in KRW 260,969,000. Upon filing a corporate tax return for business year 2008, the Plaintiff recognized KRW 9,071,031,00 as a disposal loss following the sale of the instant convertible bonds (i.e., appraised loss of the instant convertible bonds and acquisition price of KRW 9,332,00,000 as well as acquisition price of KRW 9,332,000 - Sale price of the instant convertible bonds).

7) The Defendant, as the instant convertible bonds constitute a provisional payment in office, cannot be included in deductible expenses. Furthermore, on the ground that the instant convertible bonds were not included in gross income even though interest income 1,694,516,362 won (hereinafter “interest income”) accrued during the period of possession at the time of selling the instant convertible bonds, the assessed losses and acquisition price 9,32,00,000 won were not included in deductible expenses, and the instant interest income was included in gross income. As a result, on February 2, 2011, the Defendant imposed and notified corporate tax 3,620,618,640 won on the Plaintiff for the business year 2008 (hereinafter “instant disposition of imposition of corporate tax”), while the Plaintiff imposed and notified additional tax 23,723,200 won on the Plaintiff on the ground that the Plaintiff failed to perform its duty to withhold corporate tax on the instant interest income (hereinafter “instant disposition of imposition of additional tax”).

2) Next, the lower court premised on the premise that whether the pertinent convertible bonds are provisionally paid to a person with a special relationship under Article 34(3)2, etc. of the former Corporate Tax Act should be determined as at the time of the lending act. In addition, as long as the Plaintiff adopted a restructuring plan presented by Dian around May 2005 and made a decision to acquire the instant convertible bonds at the time of making a decision to acquire the instant convertible bonds, the lower court determined that, even if the instant convertible bonds were already extinguished at the time of sale of the instant convertible bonds by selling 49.9% of the shares issued by Emedia on May 10, 2005, the instant convertible bonds still constitute a provisional payment in relation to a person with a special relationship under the said provision, and therefore, the disposal loss cannot be included in deductible expenses.

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

1) The legislative purport of Article 34(3)2 of the former Corporate Tax Act (amended by Act No. 34(3)2) is to limit the maintenance of abnormal fund-raising relationship with a specially related person by non-Inclusion of bad debt in case where it becomes impossible to collect claims due to a cause for bad debt unrelated to the provisional payment provided by a corporation to a specially related person, and to induce a company to engage in healthy economic activities through the production and management of corporate funds. In addition, Article 61(5) of the former Enforcement Decree of Corporate Tax Act also provides that the disposal of claims equivalent to provisional payment unrelated to a company should be excluded from deductible expenses incurred by selling the claims to a third party. However, if a special relationship had already been extinguished prior to the occurrence of bad debt arising from the provisional payment provided by a specially related person or before the occurrence of disposal loss due to the sale of such claims, such circumstance cannot be deemed to be a lending of funds, and thus, the need to impose tax regulations on provisional payment unrelated to the business should also be determined as at the time of disposal of claims, unless special circumstances exist to the disposal of claims.

2) Examining the facts in light of the aforementioned legal principles, since the Plaintiff and the foreign media’s special relationship had already ceased at the time when the Plaintiff sold the instant convertible bonds by selling 49.9% of the shares issued by the Native Media on May 10, 2005, the disposal loss following the sale of the instant convertible bonds ought to be deemed as having been included in the deductible expenses.

3) Nevertheless, on the grounds as indicated in its reasoning contrary thereto, the lower court determined that the loss incurred from the sale of the instant convertible bonds cannot be included in the calculation of losses. In so determining, the lower court erred by misapprehending the legal doctrine on the point of time of determining the special relationship of the provisional payment in charge of business affairs, thereby adversely affecting the conclusion of the judgment.

2. Regarding ground of appeal No. 3

A. Whether the disposition imposing the corporate tax of this case which included interest income in gross income is legitimate

1) Article 40(1) of the former Corporate Tax Act provides that the business year of accrual of earnings and losses of a domestic corporation for each business year shall be the business year which includes the date on which the relevant earnings and losses are determined, and Article 70(1)1 of the former Enforcement Decree of the Corporate Tax Act upon delegation from Article 40(2) of the same Act provides that the business year of accrual of interest received by the corporation shall be the business year which includes the date on which the date of receipt of bonds under Article 45 of the Enforcement Decree of the Income Tax Act. Furthermore, Articles 16(1)2 and 46(1) and (2) of the former Income Tax Act (amended by Act No. 9270, Dec. 26, 2008; hereinafter the same) of the former Enforcement Decree of the Income Tax Act and Articles 45 subparag. 10 and 102(5) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301, Feb. 4, 2009) shall revert interest income to residents during the period of bonds sold.

2) Examining the aforementioned facts in light of the aforementioned provisions, since interest income from the holding period of the instant convertible bonds falls under the bonds issued by a domestic corporation under Article 16 subparag. 2 of the former Income Tax Act, the interest income from the holding period of the instant convertible bonds has arrived on March 14, 2008, the Plaintiff’s interest income amount of KRW 1,694,516,362 shall be included in gross income for the business year 2008. However, the Plaintiff did not report the amount of KRW 9,32,00,000, which is the acquisition price of the instant convertible bonds, to deductible expenses for the same 11,026,516,362, which is the total of KRW 260,969,00,000, which is the selling price of the instant convertible bonds at the time of disposal, and the Plaintiff did not report the amount of interest income to deductible expenses for the business year 200,000,0000 won.

3) Nevertheless, solely on the grounds indicated in its reasoning, the lower court determined that the instant corporate tax disposition, which the Defendant additionally included the instant interest income in gross income, was lawful, solely based on the premise that the instant interest income was omitted from the Plaintiff’s gross income for the business year 2008 and was reported less than the amount. In so doing, the lower court erred by misapprehending the legal doctrine on the computation of corporate tax base, thereby adversely affecting the conclusion of the judgment. The allegation in

B. Whether the imposition of additional tax in this case is legitimate

1) Article 73(1) of the former Corporate Tax Act provides that when a person who pays interest income under Article 127(1)1 of the Income Tax Act to a domestic corporation pays the amount, the person shall collect the corporate tax equivalent to the amount calculated by applying the tax rate of 14/100 to the amount paid and pay it to the district tax office having jurisdiction over the place of tax payment by the 10th of the month following the month to which

Furthermore, Article 113(8) of the former Enforcement Decree of the Corporate Tax Act and Article 46(1) of the former Income Tax Act provide that “Where a domestic corporation sells bonds to another person during the period of calculating the interest accrued from bonds under Article 16(1)2 of the Income Tax Act, the relevant corporation shall withhold the interest accrued from the period of holding the bonds on behalf of the withholding agent under the provisions of paragraph (1). In this case, the corporation shall be deemed a withholding agent and this Act shall apply to the corporation.” In addition, Article 113(1) of the former Enforcement Decree of the Corporate Tax Act provides that “In the application of the provisions of Article 73(8) of the former Corporate Tax Act, the income subject to withholding tax on the interest of bonds shall be the income accruing from the period in which the domestic corporation acquires and holds the bonds in the application of the provisions of paragraph (1).”

The withholding system is, in principle, established in order to secure convenient taxation and securing tax revenues by withholding at the time of payment at the time of the source of income. As such, the income subject to withholding is clearly specified due to the characteristics of the withholding system. Accordingly, the pertinent provision provides that income accrued during the period of acquisition and holding of bonds, which is subject to withholding, shall be uniformly calculated in accordance with the formula of “value of bonds 】 retention period 】 applicable interest rate” (hereinafter “instant formula”), thereby securing effectiveness of withholding tax on the total amount equivalent to the interest corresponding to each holding period. Considering these circumstances, it is reasonable to deem that a corporation liable for withholding tax pursuant to Article 73(8) of the former Corporate Tax Act, as at the time of sale to another person, has a duty to withhold tax by deeming the amount calculated according to the instant formula as the amount subject to withholding tax on the amount equivalent to the interest corresponding to the holding period of the bonds at the time of sale, and it cannot be deemed that there was any difference in the sales

2) Examining the facts in light of the aforementioned legal principles, as long as the Plaintiff acquired the instant convertible bonds on May 10, 2005 and sold them on March 14, 2008, the Plaintiff is liable to withhold the interest income of the instant case calculated in accordance with the instant formula, regardless of whether or not the profit actually accrued in the process of selling the instant convertible bonds exists or not. Although the reasoning of the lower judgment is somewhat inappropriate or inadequate, the lower court’s determination that the instant disposition imposing additional tax was lawful on the ground that the Plaintiff failed to perform its duty to withhold the interest income of the instant case, was justifiable. In so doing, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on additional tax not to withhold taxes, etc.

3. Conclusion

Therefore, the part of the judgment of the court below regarding the disposition imposing corporate tax for the business year 2008 is reversed, and that part of the case is remanded to the court below for further proceedings consistent with this Opinion. The remaining grounds of appeal are dismissed. It is so decided as per Disposition by the assent

Justices Kim Yong-deok (Presiding Justice)