Whether the bad debt tax amount of rehabilitation claims is deducted

Where capital reduction due to the consolidation of shares after conversion into investment according to the rehabilitation plan, rehabilitation claims for rehabilitation creditors' rehabilitation debtors cannot be deemed as claims confirmed as impossible to recover.

Article 19-2 (Non-Inclusion of Bad Debts in Deductible Expenses)

2018Guhap20605 Disposition to revoke the imposition of value-added tax

AAAAA

BB Director of the Tax Office

October 18, 2018

November 22, 2018

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The decision is as follows (the plaintiff stated the amount of disposition for cancellation as "35,908,579 won", but it seems that the plaintiff seeks cancellation of "35,908,570 won" imposed according to the statement in the written disposition No. 1.

1. Details of the disposition;

A. On September 16, 2015, the Plaintiff filed an application for commencement of rehabilitation procedures with the Daegu District Court 2015 Gohap134, on the ground that the Plaintiff, established on May 2, 2003, engaged in the manufacture and sale of electronic parts, and operated the manufacture and sale of electronic parts. Upon receipt of a decision to commence rehabilitation procedures on October 22, 2015 from the said court, the Plaintiff was subject to a decision to authorize the rehabilitation plan on May 9, 2016 (hereinafter referred to as “instant rehabilitation plan”).

B. With respect to the method of changing the right to rehabilitation claims and paying the amount calculated by the rate of 10.8198% for the principal of the bonds, the amount of the remaining principal of the bonds not paid in cash shall be paid in full, and the amount of the remaining principal of the bonds shall be paid in full, and the amount of 300 common share per share per common share after the authorization is granted for the rehabilitation plan shall be determined to reduce the amount of 10,000 common share per share.

C. Meanwhile, W Co., Ltd., X Co., Ltd., YY Co., Ltd. and ZZ Co., Ltd. (hereinafter “each obligee company of this case”) held rehabilitation claims against the Plaintiff. However, around June 10, 2016 according to the rehabilitation plan of this case, the amount equivalent to 10.8198% of the principal of each claim was repaid in cash. Each claim was converted into equity investment with shares of KRW 10,000 as follows, and the remaining claim was converted into equity shares of KRW 300:1.

(Omission of List)

D. Each creditor company of this case filed an application for a bad debt tax credit under Article 45(1) of the Value-Added Tax Act to the effect that the market price of stocks converted into investment was calculated as zero won and the amount of debt converted into investment became final and conclusive as irrecoverable among the principal of the bonds upon filing

E. Each creditor company of this case was recognized a bad debt tax credit from each chief of the competent tax office as follows (hereinafter referred to as "the deductible amount of each bad debt tax credit of this case").

F. Each chief of each district tax office of the creditor company of this case notified the Defendant of the above taxation data, and the Defendant, on June 1, 2017, notified the Plaintiff of the correction and notification of the amount of deduction of the Plaintiff’s amount of deduction of KRW 35,908,570 (hereinafter “instant disposition”) for the first period of value-added tax for the first period of June 1, 2016, after deducting the Plaintiff’s amount of deduction from the input tax amount for the first period of the year of 2016.

G. On August 30, 2017, the Plaintiff appealed to the Tax Tribunal for the revocation of the instant disposition. However, the Tax Tribunal rendered a decision to dismiss the said claim on December 5, 2017.

H. The statutes related to the instant disposition are as shown in the attached Form.

(attached Form omitted)

Facts without any dispute over recognition, Gap's 1, 2, Eul's 1 to 6, the purport of the whole pleadings, and the purport of the whole pleadings.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The claim against the plaintiff of each creditor company of this case is not a claim established as impossible to recover, but a debt extinguished through a debt-to-equity swap or a set-off. The debt extinguished through a debt-to-equity swap is a total amount of the debt-to-equity swap, and otherwise, the debt equivalent to the market price of the stocks converted into a debt-to-equity swap cannot be deemed to have been repaid. Therefore, the difference between the above credit amount and the market price of the stocks

Even if it is reasonable to recognize a bad debt tax credit, it is unreasonable to deduct the deduction amount from the input tax amount of value-added tax, since it falls under the case where the part of the Plaintiff’s debt to each obligee company of this case was repaid in cash and the remaining debt was fully repaid through debt-equity swap, and the business operator fully or partially repaid the bad debt amount.

Therefore, the Plaintiff’s disposition that deducts the deduction amount from the input tax amount of the first quarter of 2016 is unlawful.

B. Determination

1) Article 45(1) of the Value-Added Tax Act provides that where an entrepreneur supplies goods or services subject to the imposition of value-added tax and all or some of credit sales or other sales claims (referring to those including value-added tax) are irrecoverable as bad debts due to bankruptcy or compulsory execution of a person who receives the supply, or due to other reasons prescribed by Presidential Decree, an amount calculated according to the following formula (hereinafter referred to as "net debts tax amount") may be subtracted from the output tax amount for the taxable period in which the bad debts are determined: Provided, That where the entrepreneur collects all or part of the amount which is irrecoverable as bad debts (hereinafter referred to as " bad debts amount"), the bad debts tax amount related to the bad debts amount shall be added to the output tax amount for the taxable period in which the date the bad debts are recovered falls. Article 87 of the Enforcement Decree of the Value-Added Tax Act provides that "the bad debts tax amount" means 55(1) main sentence of Article 45(1) of the Enforcement Decree of the Income Tax Act and Article 19-2(1) of the Enforcement Decree of the Corporate Tax Act provides that "the grounds for exemption or exemption under Article 15(1) of the Debtor Rehabilitation Act".

In addition, Article 45 (3) of the Value-Added Tax Act provides that where an entrepreneur supplied with goods or services deducts all or part of the bad debt tax amount as an input tax amount under Article 38, and the supplier of the goods or services receives a bad debt tax amount deduction under paragraph (1) before the entrepreneur closes his/her business, the entrepreneur supplied with the goods or services shall deduct the relevant bad debt tax amount from his/her input tax amount in the taxable period to which

Provided, That where an entrepreneur who has received the supply fails to deduct the amount equivalent to the bad debt tax amount, the head of the competent tax office having jurisdiction over the entrepreneur shall determine or correct the input tax amount to be deducted, as prescribed by Presidential Decree.

2) In light of the aforementioned provisions and the provisions of the Debtor Rehabilitation Act, in a case where debts are converted into equity investments pursuant to the rehabilitation plan authorized based on the following, the claims to be extinguished due to a debt-equity swap cannot be deemed as falling under the “claims confirmed to be impossible to be recovered due to a decision on authorization for the rehabilitation plan or a court’s decision on immunity.” Therefore, the head of the competent tax office cannot determine or rectify the said claims as bad debt determined

① Article 252(1) of the Debtor Rehabilitation Act provides that the rights of rehabilitation creditors, rehabilitation secured creditors, shareholders and equity right holders may be altered according to the rehabilitation plan when it is decided to grant authorization for the rehabilitation plan. This provision provides that any rights of rehabilitation creditors, etc., according to a decision to grant authorization for the rehabilitation plan, including rehabilitation creditors, shall have the effect of substantially changing according to the content of the rehabilitation plan. As such, when it is decided to grant authorization for the rehabilitation plan, any rights of rehabilitation creditors, etc., including rehabilitation creditors, shall have the effect of wholly or partially exempting obligations pursuant to the provisions of the rehabilitation plan, and if it is determined to postpone the deadline, the deadline for obligations shall be extended, and where rehabilitation claims or rehabilitation security rights are converted into equity swap, such rights shall expire at the time when the authorization is decided or the rehabilitation plan is prescribed (Supreme Court

Therefore, in cases where it is prescribed in the rehabilitation plan as substitute for repayment of any rehabilitation claim or any rehabilitation security right due to conversion of shares into investment in the method of issuing new shares, if it is prescribed in the rehabilitation plan as to the value of any rehabilitation claim or any rehabilitation security right to be extinguished due to conversion of shares into investment, it is reasonable to view that any rehabilitation claim or any rehabilitation security right equivalent to the value thereof is extinguished as of the effective date of issuing new shares (see, e.g., Supreme Court Decision 2008Da18376, Jul. 2

② Article 206(1)4 of the Debtor Rehabilitation and Bankruptcy Act provides for "one of the matters to be prescribed in the rehabilitation plan when the debtor who is a stock company conducts the conversion of investment into new shares for rehabilitation claims, etc., but the amount of liabilities to be reduced by the issuance of new shares." This provision also seems to be premised on the fact that when the rehabilitation plan provides for the conversion into investment, the rehabilitation creditor is issued new shares and the total amount of liabilities converted into investment, i.e., the book value of rehabilitation claims converted into investment

③ Article 72(2) of the Enforcement Decree of the Corporate Tax Act provides that, in principle, “stocks acquired through a debt-to-equity swap with respect to the acquisition value of assets shall be based on the market price at the time of acquisition: Provided, That in cases where a corporation whose rehabilitation plan including the content of converting its liabilities into investments under the Debtor Rehabilitation Act conducts a debt-to-equity swap, the book value of the debt-to-equity swap shall be deemed the acquisition value of stocks; thus, there is no taxation problem at the time of the debt-to-equity swap; and later, in disposing of the stocks at a price lower than the book

④ Under Article 252(1) of the Debtor Rehabilitation Act, the rehabilitation plan is formulated and approved on the premise that the rights of rehabilitation creditors, rehabilitation secured creditors, shareholders, and equity right holders are modified according to the rehabilitation plan. However, in cases where, even though a certain ratio of rehabilitation claims or rehabilitation security rights are determined to be substituted for repayment by conversion of shares into equity, the amount actually paid is limited to the market price of shares and the remainder is deemed to be an impossible claim, the rehabilitation obligor, like the instant disposition, bears an unforeseeable obligation in the rehabilitation plan. This contradicts the purport of the Debtor Rehabilitation Act (Article 1 of the Debtor Rehabilitation Act) for efficient rehabilitation of the debtor or his/her business.

⑤ Rehabilitation creditors shall be deemed to have been fully exempted from claims under the premise that rehabilitation creditors’ rights are changed according to the rehabilitation plan, and only a part of the claims shall be repaid, and the remaining part shall be deemed to have consented to or have objection to the substitution of repayment through a conversion of investment. If, in the case of a conversion of investment, the difference between the market price of shares and the claim in substitution for repayment is not repaid, but is deemed to be an irrecoverable bad debt, rehabilitation creditors who have selected the conversion of investment take advantage of the profits not anticipated in the rehabilitation plan, and

(6) The debtor rehabilitation system intends to seek rehabilitation of a debtor or his/her business. As shares acquired through a debt-equity swap are likely to increase its value if rehabilitation procedures are implemented smoothly, and rehabilitation creditors who have selected a debt-equity swap have selected a debt-equity swap by comprehensively taking into account various factors, such as these circumstances. Therefore, it is difficult to deem that it is unreasonable to recognize the change of rehabilitation claims according

7) Under the principle of no taxation without law, the requirements for taxation, non-taxation, or tax reduction or exemption should be avoided, and the interpretation of tax laws should be made in accordance with the provisions of the law, barring any special circumstance, and it is not permitted to expand or analogically interpret without reasonable grounds (see Supreme Court Decision 2001Du5521, Jul. 26, 2002). In a case where a rehabilitation plan is formulated and approved as a substitute for the repayment of rehabilitation claims, the repayment takes effect as prescribed in the rehabilitation plan, and thus, it cannot be deemed as a "claim that is confirmed as impossible to be recovered by the decision to authorize the rehabilitation plan." Unlike the content of the rehabilitation plan, there is no provision to the effect that the amount of sales claims to substitute for the repayment of a debt-to-equity swap shall be only the actual market price and the remainder shall

3) We look back to the instant case, as seen earlier, the instant rehabilitation plan provides that 89.1802% of the principal amount among the claims against the Plaintiff of each creditor company against the Plaintiff shall be converted into equity in lieu of repayment, and the issue value per share issued pursuant to a debt-to-equity swap shall be 10,000 won equal to the face value of each creditor company’s rehabilitation claim to be extinguished due to a debt-to-equity swap. As such, the instant rehabilitation plan sets the value of each creditor company’s rehabilitation claim to be extinguished due to a debt-to-equity swap as KRW 10,000 per share, it shall be deemed that a claim equivalent to the value of each creditor company’s rehabilitation claim is extinguished on the effective date of issuance of new shares, and it shall not be deemed that a claim to the amount of capital reduced due to

Therefore, since the deduction amount in this case is a bad debt tax amount under Article 45(1) of the Value-Added Tax Act, it cannot be deemed that it should be deducted from the output tax amount of each company in this case, without considering the remainder of the plaintiff's assertion, the disposition in this case, which was made by deducting the deduction amount in this case from the input tax amount of the first quarter of 2016 pursuant to Article 45(3) of the Value-Added Tax

3. Conclusion

Therefore, the plaintiff's claim of this case is reasonable, and it is so decided as per Disposition.