[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] The case affirming the judgment below holding that the above disposition is lawful in case where Eul corporation, which received goods or services from Gap corporation, applied for commencement of rehabilitation procedures, and Gap corporation received stocks issued through a conversion into equity investment without compensation in accordance with the rehabilitation plan which decided to retire the stocks issued through a conversion into equity investment in substitution for repayment of claims for credit, and the head of the competent tax office imposed value-added tax on Eul corporation by subtracting the amount equivalent to the bad debt amount deducted from the bad debt amount of credit account receivable from the value-added tax from the input tax amount of Eul corporation

[1] Article 17-2(1) and (3) (see current Article 45(1) and (3) (see current Article 45(3)) of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013); Article 63-2(1) (see current Article 87(1) and (5) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24683, Jun. 28, 2013); Article 19(1) and 5 of the Enforcement Decree of the Corporate Tax Act; Articles 205(1), 206(1), 252(1), and 264(1) and (2) of the former Enforcement Decree of the Value-Added Tax Act / [2] Article 45(3) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 18, 2013); Article 28(3) of the former Enforcement Decree

[1] Supreme Court Decision 2017Du68295 Decided June 28, 2018 (Gong2018Ha, 1508)

Western Factor Co., Ltd. (LLC, Attorneys Kim Tae-type et al., Counsel for the defendant-appellant)

The head of the Chungcheong District Tax Office (Law Firm Lee & Lee, Attorneys Kim Tae-an et al., Counsel for the plaintiff-appellant)

Daejeon High Court (Cheongju) Decision 2015Nu11548 decided December 7, 2016

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

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

The grounds of appeal are examined.

1. The main sentence of Article 17-2(1) of the former Value-Added Tax Act (wholly amended by Act No. 11873, Jun. 7, 2013) provides that "where an entrepreneur supplies goods or services subject to the imposition of value-added tax, where all or part of credit sales or other sales claims (referring to those that include value-added tax) related to the supply of such goods or services are bad debt and irrecoverable due to the bankruptcy, compulsory execution, or other causes prescribed by Presidential Decree, 10/10 of the amount recoverable as bad debt (hereinafter referred to as " bad debt tax amount") may be subtracted from the output tax amount for the taxable period whereto belongs the date when the bad debt becomes final and conclusive," and the main sentence of paragraph (3) provides that "where an entrepreneur supplied goods or services deducts all or part of bad debt tax amount as input tax amount under Article 17, and the entrepreneur who received the supply becomes final and conclusive before the closure of the business, the amount equivalent to bad debt tax amount shall be deducted from the input tax amount for the taxable period whereto belongs the date when the bad debt becomes final and conclusive."

In addition, Article 63-2(1) of the former Enforcement Decree of the Value-Added Tax Act (wholly amended by Presidential Decree No. 24683, Jun. 28, 2013) provides for “any reason that is recognized as bad debt 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 Presidential Decree” and Article 19-2(1)5 of the Enforcement Decree of the Corporate Tax Act provides for “a bad debt amount determined as impossible due to a decision on authorization of the rehabilitation plan under the Debtor Rehabilitation and Bankruptcy Act (the Debtor Rehabilitation Act) or a court’s immunity.”

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 January 3, 2009 with the Cheongju District Court 2009 Ma17, and (b) the said court decided to convert the remaining amount, excluding the portion of the amount of the credit to be repaid to the Cheongju District Court on December 10, 2012, with the exception of the exemption or cash repayment from the amount of the credit to be repaid to the Korea Stock Exchange; and (c) decided to approve the instant rehabilitation plan with the purport that “the conversion is substituted for the repayment of the relevant bonds on the date of the entry into force of the stocks newly issued by the company, but the stocks issued by the conversion into investment shall be retired without compensation; and (c) accordingly, on December 12, 2012 the Plaintiff

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 the second period of value added tax in 2012, on the ground that the instant rehabilitation plan constitutes “a claim for credit sales against the Plaintiff in Korea-do, a stock company converted into investment in accordance with the instant rehabilitation plan,” as stipulated in Article 19-2(1)5 of the Enforcement Decree of the Corporate Tax Act, in view of the circumstances as stated in its reasoning, such as that the stocks issued through a conversion into investment are to be retired without compensation, unlike ordinary conversion into investment

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 Park Sang-ok (Presiding Justice)