Plaintiff Co., Ltd. (Law Firm Yang & Yang, Attorneys Quota-jin et al.)

Head of Ansan Tax Office

September 22, 2006

Suwon District Court Decision 2005Guhap2620 Decided October 12, 2005

1. The part of the judgment of the first instance against the plaintiff falling under the subsequent part of the order of revocation shall be revoked.

The defendant imposed corporate tax on the plaintiff on June 2, 2003, the amount in excess of 6,739,047 won (the amount in excess of 3,837,103 won) in the imposition of corporate tax for the business year of 1998, the amount in excess of 39,776,140 won (the amount in excess of 36,358,660 won) in the imposition of corporate tax for the business year of 1999, the amount in excess of 39,776,140 won in the imposition of corporate tax for the business year of 1999, the amount in excess of 266,760,160 won in the imposition of corporate tax for the business year of 200, the amount in excess of 127,859,165 won (the amount in excess of 138,90,995 won), the amount in excess of 145,360,360 won in the imposition of corporate tax for the business year.

2. The plaintiff's remaining appeal is dismissed.

3. The costs of lawsuit are assessed against the plaintiff, and the remainder is assessed against the defendant, respectively, by combining the first and second instances.

The decision of the court of first instance is revoked. The disposition of imposition of KRW 10,576,150 for the plaintiff on June 2, 2003, corporate tax of KRW 10,576,150 for the business year of 1998, corporate tax of KRW 76,134,80 for the business year of 1999, corporate tax of KRW 266,760,160 for the business year of 200, corporate tax of KRW 145,938,360 for the business year of 2001, and corporate tax of KRW 33,868,90 for the business year of 202 shall be revoked

1. Details of the disposition;

A. The Plaintiff is a corporation established to engage in the manufacture and sales business of Paint, and Nonparty 1, Nonparty 2, and Nonparty 3 are companies having special relations under the Corporate Tax Act with the Plaintiff (hereinafter “special relations corporations”).

B. During the period from September 30, 1998 to May 21, 2001, the Plaintiff deposited a total of KRW 8.76 billion as stated in the deposit details (hereinafter “the term deposit in this case”) in the attached Form [the details of deposit, loan, and security] (hereinafter “the term deposit in this case”), and the related corporations received loans of KRW 6.74 billion in total as security for the term deposit in this case as stated in the loan details (hereinafter “the loan in this case”).

C. The Defendant: (a) determined that the Plaintiff’s offering of the instant term deposit as security was substantially the same as the lending of funds directly to the specially related corporations; and (b) deemed that the amount equivalent to the instant term deposit as corporate tax is “the provisional payment without business office” under Article 18-3(1)3 of the former Corporate Tax Act (amended by Act No. 5581, Dec. 28, 1998; hereinafter the same shall apply) and Article 28(1)4(b) of the Corporate Tax Act as “the provisional payment without business office”; (b) Article 43-2(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 15970, Dec. 31, 1998; hereinafter the same shall apply); (c) Article 43-2(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 15970, Dec. 31, 1998; hereinafter the same shall apply for each business year, including corporate tax loss for each business year; and (b)

[Ground of recognition] Facts without dispute, Gap evidence 1 to 5, Gap evidence 2-1, 2, Eul evidence 1 to 8, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The parties' assertion

As to the defendant's assertion that the disposition of this case is lawful on the grounds of the above disposition grounds and relevant statutes, the plaintiff asserts that the disposition of this case is unlawful on the following grounds.

(1) The Plaintiff’s act of depositing the instant term deposit in one bank, etc. and offering the instant term deposit as security is related to the Plaintiff’s business, and it is practically conducted at the request of the banks making a loan to related corporations. Under the principle of no taxation without law, the term deposit offered as security cannot be deemed as a “loan” immediately, and thus, does not constitute the “provisional payment made without relation to the corporation’s business.” Thus, the Defendant erred by deeming the instant term deposit offered as security to related corporations as the provisional payment, and by not including the loan interest in deductible expenses.

(2) At the time of providing the instant term deposit as security, the Plaintiff offered a security to a related corporation for business without any intention to unfairly reduce the tax burden, and it cannot be deemed as a lending at an interest rate lower than the appropriate interest rate because there was no money lending or interest payment between the said corporation and the said corporation. As such, the Plaintiff did not cause any unfair reduction in the tax burden, and thus, it cannot be deemed that the Plaintiff’s act of offering the security was an abnormal act that lacks economic rationality. However, the Defendant erred by applying the wrongful calculation rules by deeming it as an unfair transaction without economic rationality.

(3) Where the Defendant provided a term deposit which the Defendant had already subscribed as security, corporate tax should be imposed on the case where the Defendant subscribed to a new term deposit as the Plaintiff and offered it as security would be contrary to the principle of fair taxation.

(b) Related statutes;

It is as shown in the attached Table related statutes.

(c) Fact of recognition;

The following facts do not conflict between the parties, or can be acknowledged in full view of the purport of the whole pleadings in the entries in Gap evidence 3-1 through 6, evidence 4-1 through 9, evidence 6, evidence 7-1, 2, 3, evidence 8-1 through 15, evidence 17-1 through 12, evidence 18-1 through 7, evidence 18-1 through 9, and evidence 1 through 9.

(1) The non-party 3 corporation is a company that vicariously carries on the transportation and product management of the paint products produced by the plaintiff and owns 100% of its shares. The non-party 2 corporation is a processing company that is supplied with raw materials from the plaintiff and supplies low-price paint products to the plaintiff, and is the plaintiff's related company that the plaintiff owned 29% of its shares by 1998. The non-party 1 corporation has established a separate corporation with the plaintiff's plastic business division around 1989, and the plaintiff owns 10% of its shares. The non-party 3 corporation and the non-party 1 corporation leased and used the real estate owned by the plaintiff.

(2) Of the term deposits in this case deposited by the Plaintiff, the deposit Nos. 1 was deposited with the bank bank bank account terminated, and the deposit No. 3 was deposited with some of 1.4 billion won which terminated the current account of the new bank and the new bank bank, and the deposit No. 4 was deposited with the money that terminated the current account of the Korea Bank Development Trust Account. The deposit No. 5 was deposited with some of 2.5 billion won which terminated the periodical deposit account of the Korea Exchange Bank, and the deposit amount was adjusted to be in accordance with the size of the security for loans granted by the related corporations.

(3) The interest rate on the instant term deposit was 6.8% per annum, but the highest interest rate on the Plaintiff’s loan was 41.27-34.35% per annum in 1998, 19.8-18.36% per annum in 1999, 15% per annum in 2000, and 11.5-10.61% per annum in 201.

(4) The half-yearly ratio of the term deposit in this case to the Plaintiff’s financial assets is 0.96% minimum from 25.77%, and the ratio of the deposit amount in this case to the total deposit amount by business year is 1.04% to 25.7%.

(5) The capital of the non-party 3 corporation is KRW 60 million in 199, KRW 1 billion in 2000, the capital of the non-party 1 corporation is KRW 1 billion in 1998, KRW 2 billion in 1999, and KRW 400 million in the capital of the non-party 2 corporation in 1999.

(6) The Plaintiff is providing the fixed term deposit as security even before the date of closing argument in the trial room.

D. Determination

(1) Article 18-3 (1) 3 of the former Corporate Tax Act, Article 28 (1) 4 (b) of the Corporate Tax Act, Article 43-2 (2) 2 of the former Enforcement Decree of the Corporate Tax Act, and Article 53 (1) of the Enforcement Decree of the Corporate Tax Act, concerning provisional payments related to business affairs, provide that related persons shall be allowed to deduct the interest paid on the loan corresponding to the amount of the loan "where funds not related to the business of the relevant corporation are leased regardless of the title, regardless of the title, from deductible expenses. This includes not only pure meaning, but also pure meaning, but also cases where the loan is included in the nature of the loan, and where the provisional payments are paid at an appropriate interest rate from the person with a special relationship. Whether the provisional payments are related to this case shall be objectively determined on the basis of the purpose of the relevant corporation's business or its business contents (see Supreme Court Decision 91Nu8302, Nov. 10,

In this case, the Plaintiff borrowed money from a third party; the Plaintiff borrowed money from a bank; the Plaintiff borrowed money from a bank; and the bank borrowed money from a third party to a non-party 1 corporation, non-party 2 corporation, and non-party 3 corporation exist as an independent legal act. Among them, the Plaintiff’s act of borrowing money from a third party constitutes a legal act that serves as the basis for calculating the amount of interest paid; and the issue of non-deductible of interest actually paid depends on how the Plaintiff’s act of depositing money in the bank and

As to this point, the defendant asserts that the plaintiff's provision of time deposit as security and the provision of a loan to the related corporations is the same as the plaintiff's lending of the above amount of loan to the above corporations without regard to their business affairs. The defendant's argument above is a matter of whether the deposit and the loan can be evaluated as falling under the provisional payment without denying the legal effect of each juristic act in the provision of convenience of loan through the provision of security.

In principle, a provisional payment in office refers to a direct loan, and furthermore, it includes a loan claim corresponding to a loan claim, for example, the company in question directly pays the debt of a related party. However, in this case, it is difficult to see that the Plaintiff’s deposit act is more than a simple deposit act, and even if the bank extended a loan to the above company as security for the Plaintiff’s term deposit, it cannot be deemed as a direct loan act by the Plaintiff. In other words, the Plaintiff’s deposit and the bank’s loan are separate juristic acts and cannot be deemed as a single juristic act by deeming them as a loan act by the Plaintiff. [i.e., bank is not deemed as the same as a simple conduit in that it bears different rights and obligations against the Plaintiff and the above companies, and thus, it cannot be deemed as a mere Docit which has no real substance in that it bears the interest of the related juristic person

Therefore, the judgment of the court below that the act that the plaintiff provided a term deposit as collateral and borrowed the amount equivalent to the above loan to the above company through the above bank, etc. is in violation of the principle of no taxation without law since it goes beyond the limit of the principle of no taxation without law because it is in violation of the principle of no taxation without law since the plaintiff's deposit (or plaintiff's deposit and loan of bank) during the disposition of this case is regarded as a temporary payment outside of business, and the part that excluded the interest paid by the plaintiff to the third party is unlawful.

(2) On the other hand, in a case where a corporation trades with a specially related party, where it is recognized that the tax burden arising from the abuse of or bypassing, multi-stage act, and other abnormal transaction forms under the subparagraphs of Article 46(2) of the former Enforcement Decree of the Corporate Tax Act and the subparagraphs of Article 88(1) of the Enforcement Decree of the Corporate Tax Act have been unjustly avoided or reduced by taking advantage of the transaction forms, such as an abuse of or bypassing, multi-stage act, and other abnormal transaction forms, the tax authority shall be deemed to have the income objectively and appropriately shown in accordance with the methods and regulations, thereby ensuring fairness in taxation and preventing tax avoidance, and it is a system to prevent tax avoidance without a reasonable method by a normal economic person (see Supreme Court Decision 95Nu18697 delivered on May 28, 1997, etc.).

In the instant case, the Plaintiff’s act of offering convenience for loans to be made available to the companies with a special relationship with a low interest rate without repaying such loans despite the Plaintiff’s high interest on loans. The Plaintiff’s act of offering convenience after opening the term deposit of this case at an interest rate lower than the Plaintiff’s interest rate is obviously different between the interest and the interest income, which is expected to cause a decrease in the Plaintiff’s income, and the term deposit offered as security is lost liquidity as it is impossible for the corporations with a special relationship to withdraw the loan until the repayment is made by the related parties. Furthermore, if the related corporations fail to repay the loan, they should bear the risk that the deposit would be lost due to the exercise of security right. In reality, the loan in this case is not repaid, and the amount of the loan in comparison with the amount of the above companies’ capital, which is larger than the amount of the loan in light of sound social norms and commercial practice, and the act of distributing corporate profits to other investors, etc. under Article 46(2)9 of the former Enforcement Decree of the Corporate Tax Act, and the Defendant’s act of Article 88(1)9 of the Enforcement Decree of the Corporate Tax Act is lawful.

(3) On the other hand, the principle of equality under the Constitution is premised on the same "two comparative groups". The case where a new term deposit is deposited for the purpose of providing security to the related corporations and the security is provided to the existing term deposit with the purpose of providing security is essentially the same as two comparative groups. The case where a new term deposit is provided as security and a new term deposit is provided as security with the existing term deposit, it is merely one of the various factors to determine the denial of wrongful calculation, such as the time interval between deposit and the act of providing security and the act of providing security, and the case where a new term deposit is provided as security with the existing term deposit. Thus, the Plaintiff’s assertion that the instant disposition violates the principle of equity cannot be accepted.

(4) 따라서, 이 사건 처분 중 원고의 예금(또는 원고의 예금과 은행의 대출금)을 업무무관 가지급금으로 보아 위 예금 상당의 차입금에 대하여 원고가 제3자에게 지급한 이자를 손금불산입한 부분만 위법하므로 위 지급이자 상당액을 손금산입한 후 산정한 정당한 법인세는 별지 계산서 ㉣항 기재와 같다.

3. Conclusion

Therefore, since the claim for the value of the attached sheet is to be revoked in an unlawful manner, the plaintiff's claim of this case shall be accepted as to the amount stated in the value of the above claim for the value of the equivalent value, and the remainder shall be dismissed as it is without merit. Since the judgment of the court of first instance is partially unfair, the plaintiff's appeal as to the part cited above is accepted, and the disposition of this case shall be revoked, and the remaining appeal shall be dismissed as it is so decided as per Disposition

[Attachment Form 1] Details of deposits, loans, and provision of security and omission of invoices]

Judges Kim Jong-soo (Presiding Judge)