Whether the value-added tax borne at the time of acquisition of assets is included in the acquisition value (affirmative in principle), and whether the value-added tax on the remaining goods borne by the business proprietor who closes his/her business pursuant to Article 6(4) of the former Value-Added Tax Act is included in the “other incidental expenses” required for acquisition (affirmative)

Considering the contents and legislative purport of the provisions of Article 97(1) of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009), Articles 89(1)1, 163(1)1 of the Enforcement Decree of the Income Tax Act, and Article 6(4) of the former Value-Added Tax Act (amended by Act No. 9915 of Jan. 1, 2010), etc., the value-added tax borne at the time of the acquisition of assets shall, in principle, be included in the acquisition value as “other incidental expenses incurred at the time of acquisition.” However, in the case of a business operator, the value-added tax shall not be considered as the incidental expenses incurred at the time of acquisition because it cannot be deemed that the value-added tax on the remaining assets, such as a building, is not disposed of until the closure of the business, and thus, the amount of the value-added tax deducted by the input tax amount should be included in the “other expenses incurred at the time of acquisition.”

Article 97(1) of the former Income Tax Act (Amended by Act No. 9897, Dec. 31, 2009); Articles 89(1)1 and 163(1)1 of the Enforcement Decree of the Income Tax Act; Article 6(4) of the former Value-Added Tax Act (Amended by Act No. 9915, Jan. 1, 2010);

Plaintiff

Deputy Director of the Tax Office

Seoul High Court Decision 2011Nu35509 decided May 18, 2012

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 supplemental appellate briefs not timely filed).

Article 97 (1) of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009; hereinafter the same) provides that "the necessary expenses to be deducted from the transfer value in calculating gains on transfer of residents" shall be the acquisition value, such as the actual transaction price of assets under each subparagraph of Article 94 (1) of the former Income Tax Act (Article 1) and the capital expenses as prescribed by the Presidential Decree (Article 2) (Article 4). Article 163 (1) of the Enforcement Decree of the Income Tax Act provides that "The actual transaction price for acquisition" in the main sentence of Article 97 (1) 1 (a) of the Income Tax Act shall be the sum of the amounts under each of the following subparagraphs. Article 89 (1) of the Enforcement Decree of the Income Tax Act provides that "the value equivalent to the cost for acquisition calculated by applying mutatis mutandis the provisions of Article 89 (1) 1 of the same Act shall be excluded from the acquisition value of the goods purchased by a third party, and Article 163 (2) of the former Value-Added Tax Act shall be excluded:

According to the reasoning of the judgment below, the court below determined that the Defendant’s disposition of this case, which did not deduct the output amount of this case from the capital gains tax, is legitimate, on the grounds that it is apparent that the output amount borne by the Plaintiff for the remaining goods upon closure of business under each subparagraph of Article 97(1) of the former Income Tax Act and Article 163(4) of the Enforcement Decree of the Income Tax Act is not listed as the necessary expenses for capital gains, and that the output amount of this case, which was the value-added tax on the building of this case, is not included in the “purchase price” or “acquisition tax, registration tax, or other incidental expenses” under Article 89 subparag. 1 or 3 of the Enforcement Decree of the Income Tax Act,

However, we cannot accept the above determination by the court below for the following reasons.

First, according to the above income tax law, the “other expenses incurred in acquiring assets” can be deemed as being listed as one of the “actual transaction value” included in the necessary expenses to be deducted from the transfer value. In addition, in view of the provisions of the above relevant laws and regulations and their legislative purport, the value-added tax borne at the time of acquisition of assets is, in principle, included in the acquisition value as “other expenses incurred at the time of acquisition”. However, in the case of an entrepreneur, it cannot be deemed that the input tax was deducted from the input tax amount. Therefore, in the case of fixed assets, such as the instant building, the value-added tax on the remaining goods, which was not disposed of by the time of acquisition, shall not be deemed as the incidental expenses incurred at the time of acquisition. As such, the value-added tax on the remaining goods, which was paid at the time of acquisition, may be deemed as having been actually re-paid due to the loss of the status of the value-added tax borne at the time of acquisition that was deducted as the input tax amount,

Nevertheless, on a different premise, the lower court determined that the Defendant’s disposition was lawful, which did not deduct the output tax amount of this case from the capital gains as necessary expenses. Accordingly, it erred by misapprehending the legal doctrine on “other incidental expenses under Article 89(1)1 of the Enforcement Decree of the Income Tax Act, which is applicable mutatis mutandis under Article 163(1)1 of the Enforcement Decree of the same Act, thereby affecting the conclusion of the judgment.

Therefore, 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 Kim So-young (Presiding Justice)