In cases where a non-profit corporation has disbursed income generated from its proper purpose business to its deductible expenses within the limit of the inclusion of its reserves for proper purpose business in deductible expenses, whether it is allowed to include such income in deductible expenses, separately from the inclusion of such expenses in deductible expenses (negative)

Article 3(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that a non-profit corporation shall impose corporate tax only on “income for each business year” and “income accruing from the transfer of land and other property.” Article 3(3) of the former Corporate Tax Act provides that a non-profit corporation’s income for each business year shall be income accruing from its business or revenue (hereinafter “profit-making business”). In addition, Article 113(1) of the former Corporate Tax Act provides that where a non-profit corporation operates a profit-making business, it shall keep separate accounts of assets, liabilities, and profits and losses belonging to the profit-making business and those belonging to any other business

Meanwhile, Article 29(1) of the former Corporate Tax Act provides that where a non-profit corporation appropriates reserve funds for proper purpose business as deductible expenses for each fiscal year for the proper purpose business of a corporation, it shall be included in deductible expenses within the scope of a certain limit in calculating the income amount for the pertinent fiscal year, and where the reserve funds for proper purpose business is not used for proper purpose business by the date on which five years elapse after the end of the fiscal year in which the reserve funds for proper purpose business are appropriated as deductible expenses, the balance shall be included in the gross income in calculating the income amount for the fiscal year in which the relevant cause arises. These provisions do not allow non-profit corporations to include the reserve funds for proper purpose business in deductible expenses in deductible expenses even before the amount appropriated as reserve funds for proper purpose business is disbursed for proper purpose business in advance, instead of allowing them to include the reserve funds for proper purpose business in deductible expenses by the date on which five years elapse after

In full view of the language and structure of the above-mentioned regulations, especially the purport that the former Corporate Tax Act separates non-profit corporations from profit-making business and proper purpose business, and imposes tax only on income generated from profit-making business, but allows them to include the proper purpose business reserve fund for profit-making business in deductible expenses within a certain limit, barring any special circumstance, income generated from profit-making business in the case of a non-profit corporation shall not be deemed expenses paid for profit-making business in order to earn income from profit-making business. Thus, it can be included in deductible expenses within the limit of inclusion of the proper purpose business reserve fund for profit-making business in deductible expenses, and it is reasonable to deem that it is not allowed to separately include the expenses in

Articles 3(1) (see current Article 4(1)), 29(1), and 29(3)4 (see current Article 29(5)4) and 113(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010);

Supreme Court Decision 2016Du59249 Decided March 9, 2017 (Gong2017Sang, 660)

Korea Local Administration Mutual Aid Association (Law Firm LLC, Attorneys Kim Jong-spon et al., Counsel for the plaintiff-appellant)

The Head of Yongsan Tax Office (Law Firm Seop, Attorneys Cho Jae-ho et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2017Nu60859 decided November 23, 2017

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).

1. The judgment of the court below concerning ground of appeal No. 1

A. The lower court acknowledged the following facts in full view of the admitted evidence.

1) The Plaintiff is a non-profit domestic corporation established under the Korea Local Administration Mutual Aid Association Act (hereinafter “non-profit corporation”) to promote the stabilization of livelihood and the promotion of welfare by establishing and operating an efficient mutual aid system for public officials of local governments.

2) The Plaintiff has invested in various financial products or real estate as financial resources, including the amount of retirement benefit paid from its members, the amount of contribution paid from the members, and the amount of contribution paid by the members as retirement benefits, the amount of contribution paid by the members in accordance with the payment criteria stipulated in the Plaintiff’s articles of incorporation, etc., and the amount of contribution paid by the members in Korea. The specific details are as follows.

A) In the case of retirement benefits, the Plaintiff’s member is obligated to pay charges calculated at the rate of KRW 10,000 per month by selecting the number of the Gu units within 100 units of account. If a member retires, etc., he/she shall be paid the charges already paid plus the amount of penalty calculated at the retirement benefit rate, etc.

B) In the case of Han-man Savings Deposit Benefits, a person who is or was a member of the Plaintiff’s member shall be paid at once within KRW 500,000,000, which shall not exceed KRW 500,000,000, and upon maturity, he/she shall be paid the paid contributions plus an additional amount calculated according to a certain rate of payment.

3) The Plaintiff included KRW 240,392,668,398 in the amount of the reserve fund for essential business under the income statement for the business year 2010 + KRW 205,504,862,880 in the reserve fund for retirement benefits + KRW 30,443,295,340 in the reserve fund for retirement benefits + KRW 444,510,178 in the amount of the reserve fund for essential business under the income statement for the business year 2010; among them, the Plaintiff reported and paid corporate tax to the Defendant by adding the amount exceeding KRW 239,180,77,128 in the amount of the reserve fund for essential business to deductible expenses.

4) On March 27, 2014, the Plaintiff: (a) acknowledged the transfer amount of the reserve fund for essential business to the Defendant as deductible expenses (hereinafter “instant surcharge”) and applied the remainder of the reserve fund for essential business purposes; (b) revised the statement of the reserve fund for essential business purposes within the limit of the reserve fund for essential business purposes; and (c) accordingly, (d) requested the Defendant to rectify the amount of KRW 1,211,891,270, the portion reported to be included in deductible expenses as the excess amount of the reserve fund for essential business purposes at the time of filing a corporate tax return for the business year 2010 to the effect that the Plaintiff filed a claim for correction of KRW 374,972,628, including corporate tax, etc. for the business year 2010, by deeming the amount of KRW 1,211,891,270 as deductible expenses.

5) On May 15, 2014, the Defendant rejected the Plaintiff’s request for correction on the ground that “the Plaintiff, a non-profit corporation, is not a profit-making business for mutual aid business operated by the Plaintiff for its members according to the purpose of its establishment, and the amount of surcharge paid by the business sector for the proper purpose shall not be treated as losses for the profit-making business sector” (hereinafter “instant refusal

B. Based on the facts acknowledged as above, the court below held that the disposition of rejection of the other premise was unlawful on the ground that the interest expense may be included in the deductible expenses for the profit-making business if the additional amount is recognized as the interest expense if the additional amount is paid after adding the amount of the charge received from the members and the amount of the charge derived from the profit-making business, which was derived from the operation of the profit-making business with the financial resources thereof, and that the additional amount can be included in the expenses for the profit-making business of the plaintiff as the interest expense, in light of the following circumstances:

1) The Plaintiff, as the price for the deposit of the instant surcharge, set by the prior agreement, regardless of its management performance, an amount calculated according to a certain rate of payment, as the instant surcharge was set in accordance with the prior agreement, and thus, the payment of the surcharge is essentially similar to the payment of interest on the loan.

2) From the standpoint of the members who receive the instant surcharge as consideration for the use of money, it is logical to view that the instant surcharge constitutes interest expense from the Plaintiff’s standpoint that it is subject to taxation of interest income tax under the Income Tax Act.

3) The Plaintiff takes the management method of receiving charges from members and paying surcharges from the profits earned by investing them in various financial institutions and real estate, etc. However, such management method does not vary depending on the management method of banks and other financial institutions.

2. Judgment of the Supreme Court

However, such determination by the court below is difficult to accept for the following reasons.

A. Article 3(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that a non-profit corporation shall impose corporate tax only on “income for each business year” and “transfer income, such as land,” on a non-profit corporation. Article 3(3) of the same Act provides that income for each business year of a non-profit corporation shall be generated from a business or income (hereinafter “profit-making business”). In addition, Article 113(1) of the former Corporate Tax Act provides that where a non-profit corporation operates a profit-making business, it shall keep separate accounts of assets, liabilities, and profits and losses belonging to the profit-making business and falling under any other business.

Meanwhile, Article 29(1) of the former Corporate Tax Act provides that where a non-profit corporation appropriates reserve funds for essential business for proper business purposes as deductible expenses in each business year for the purpose of spending the reserve funds for proper business purposes of the corporation, it shall be included in deductible expenses within a certain limit in calculating the income amount for the relevant business year, and where the reserve funds for proper business purposes are not used for proper business purposes by the date on which five years elapse after the end of the business year in which the reserve funds for proper business purposes are appropriated as deductible expenses, the balance shall be included in the gross income in calculating the income amount for the business year in which the relevant cause arises. Such provision provides that the non-profit corporation shall allow the inclusion in deductible expenses in advance, instead of allowing the inclusion in deductible expenses for the portion appropriated as reserve funds for proper business purposes in deductible expenses even before the end of the business year in which the reserve funds for proper business purposes are appropriated as deductible expenses, it is intended to enable a non-profit corporation to smoothly conduct public business for the above period (see Supreme Court Decision 2016Du59249, Mar

In full view of the language and structure of the above-mentioned regulations, especially the purport that the former Corporate Tax Act separates non-profit corporations from profit-making business and proper purpose business, and imposes tax only on income generated from profit-making business, but allows them to include the proper purpose business reserve fund for profit-making business in deductible expenses within a certain limit, barring any special circumstance, income generated from profit-making business in the case of a non-profit corporation shall not be deemed expenses paid for profit-making business in order to earn income from profit-making business. Thus, it can be included in deductible expenses within the limit of inclusion of the proper purpose business reserve fund for profit-making business in deductible expenses, and it is reasonable to deem that it is not allowed to separately include the expenses in deductible

B. In light of the above legal principles, in full view of the reasoning of the judgment below and the following circumstances revealed by the evidence duly admitted by the court below, the surcharge in this case is paid by the plaintiff for the salary business which is the proper purpose business, and cannot be deemed expenses paid by the plaintiff for the profit-making business. Thus, it shall not be included in the expenses for the plaintiff'

1) According to the provisions of the former Local Administration Mutual Aid Association Act (amended by Act No. 11491, Oct. 22, 2012; hereinafter the same) and the Plaintiff’s articles of incorporation, etc., the retirement benefit business and the Korea Local Administration Mutual Aid Association’s business constitute the Plaintiff’s proper purpose business for the purpose of promoting the stable livelihood and promotion of welfare of its members and for the payment of benefits to its members. The instant surcharge is paid to the Plaintiff’s salary business, which is the Plaintiff’s proper purpose business, and thus, cannot be deemed as the Plaintiff’s expense paid to the Plaintiff for the purpose

2) According to Article 29(1) of the former Corporate Tax Act and Article 29(1) of the former Local Administration Mutual Aid Association Act, the Plaintiff shall appropriate and accumulate the reserve fund for essential business for the payment of surcharges included in retirement benefits and deposit benefits of Han-man Savings, and only if the reserve fund for essential business is appropriated as deductible expenses, it can be included in deductible expenses concerning profit-making business within the scope of the maximum amount. If the instant amount can be included in deductible expenses for the reserve fund for essential business, there is no reason to establish the provision on the limit of deductible expenses

3) As seen earlier, the instant surcharge is disbursed for wage business, which is the Plaintiff’s proper purpose business, and thus, should be kept separately from the accounting for the proper purpose business (i.e., non-profit business) in accordance with the separate accounting principle of non-profit-making business, as prescribed by Article 113(1) of the former Corporate Tax Act. The Plaintiff merely accounts for the amount of KRW 240,392,668,398 transferred from the reserves for the business year 2010 as “transfer of reserves for proper purpose business” and did not account as “interest expenses” item generated from the profit-making business sector. Nevertheless, it is difficult to conclude that the instant surcharge falls under losses related to profit-making business solely on the ground that the amount transferred was

4) Even if the instant surcharge received by the Plaintiff’s members falls under a taxable object of interest income tax, whether the instant surcharge constitutes a taxable object of interest income tax of the members who received it, and whether it is recognized as a deductible expense of the Plaintiff’s profit-making business, is separate issues. Thus, it cannot be deemed that the Plaintiff’s profit-making business should be recognized as deductible expenses.

C. Nevertheless, the lower court, solely on the grounds indicated in its reasoning, determined that the instant disposition of refusal was unlawful, premised on the premise that the instant surcharge paid in the business sector with a proper purpose cannot be included as deductible expenses in the business sector. In so determining, the lower court erred by misapprehending the legal doctrine on the legal nature of the payment of the instant surcharge, thereby adversely affecting the conclusion of the judgment.

3. Conclusion

Therefore, without further proceeding to decide on the remaining grounds of appeal, 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 Jong-hee (Presiding Justice)