The cost of merger paid in excess of the net asset value at the time of merger is reasonable to include the cost of merger in the calculation of earnings under Article 17 (1) 3 of the former Corporate Tax Act as the goodwill

In the case of a merger of corporations, the merged corporation recognizes the trade name, etc. of the merged corporation as an intangible asset value that can obtain excess profits from the merger evaluation marginal profits, and pays compensation for the business value after evaluating the business value. The merger cost paid by the plaintiff is a business right with assets, so the inclusion in gross income is reasonable.

Article 12 of the Enforcement Decree of Corporate Tax Act

2014Guhap9238

GISTGGGGGG Co., Ltd.

AA Head of the Tax Office

December 18, 2018

on October 08, 2019

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s disposition of imposition of KRW 0,00,000,000 for the business year of 2009 against the Plaintiff on August 1, 2013 is revoked.

1. Details of the disposition;

A. On December 1, 2009, the Plaintiff merged BBGGGG,CCGG, and DGGG Co., Ltd. (hereinafter collectively referred to as “each of the instant corporations”). In the process, the Plaintiff issued 0,000,000 new shares (the face value of KRW 100 per share) to 0,000,000 (the face value of KRW 1,556 per share) and paid to the shareholders of each of the instant corporations as the price for the merger.

B. The Plaintiff succeeded to the assets and liabilities of each of the instant corporations based on the fair value and depreciated (five years) in accordance with the straight-line method after reflecting the difference between KRW 0,000,000,000 (the difference between the operating rights (merger loss) as listed below and the deferred corporate tax on the assets of derivatives; hereinafter referred to as “the instant operating rights”) in the accounting books as follows.

C. In relation to the above merger, the Plaintiff included KRW 0,00,000,000 of the instant goodwill in the gross income and deductible expenses (such as disposal of income and other losses), and the relevant depreciation amount was included in deductible expenses (Reservation of disposition of income) and reported corporate tax for the business year 2009.

D. After undergoing a follow-up verification of the corporate tax against the Plaintiff, the director of AAA Regional Tax Office notified the Defendant of taxation data, such as that the instant goodwill constitutes a merger evaluation marginal profit (business rights) and should be excluded from deductible expenses. On August 1, 2013, the Defendant: (a) included the instant business right in the gross income in the business year 2009 and estimated the depreciation cost of the business right to KRW 00,000,000 in deductible expenses; and (b) notified the Plaintiff of the rectification and notification of the corporate tax amount of KRW 0,00,000 in the business year 209 (hereinafter “instant disposition”).

[Ground of recognition] Facts without dispute, Gap evidence 1, 2, Eul evidence 1 and 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

In order to taxable the value of goodwill as a merger evaluation marginal profit, the merged corporation recognizes the trade name, etc. of the merged corporation as intangible property value that can obtain excess profits from the merged corporation and can be deemed to have paid the sales price by evaluating its business value. The pertinent business right has no business value due to the occurrence of losses, etc. by each of the pertinent corporations. The Plaintiff issued stocks following the merger to the shareholders of each of the instant corporations without succession by separately evaluating the business rights of each of the instant corporations. The instant business right is merely a business right generated in the course of treating the difference between the succeeded assets and the merger price following the issuance of the instant stocks as the accounts, and thus, the instant business right does not constitute a merger evaluation marginal profit, which

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Relevant legal doctrine (see Supreme Court Decision 2017Du54791 decided May 11, 2018)

A) Where a merged corporation succeeds to the evaluation of assets from a merged corporation, the former Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009; hereinafter referred to as the “former Corporate Tax Act”) imposes tax on the portion in excess of the book value of the merged corporation as a merger evaluation marginal profit [Article 17(1)3 proviso, Articles 15(2) and 12(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22184, Jun. 8, 2010; hereinafter referred to as the “former Enforcement Decree of the Corporate Tax Act”)]. In addition, in the case of a merger, the business right appropriated by the merged corporation shall be deemed as depreciable assets only where the merged corporation evaluates the assets of the merged corporation and succeeds to the business value of the merged corporation as the trade name, transaction relationship, and other trade secrets of the merged corporation (hereinafter referred to as “trade name, etc.”).

B) According to the relevant Acts and subordinate statutes, in order to impose the value of business rights as a merger evaluation marginal profit in the case of a corporate merger, the merged corporation is deemed to have paid the consideration by evaluating its business value by recognizing the trade name, etc. of the merged corporation as intangible property value that can obtain excess profits from the merged corporation. In this case, the determination of business value should be objectively determined by comprehensively taking into account various circumstances, such as the process and motive of the merger, the current business status of the merged corporation and the merged corporation, and the details of the tax return after the merger, etc., which are difficult to merge.

2) Determination

A) We need to examine whether the merged corporation’s value of business rights at the time of the merger can be assessed as a merger evaluation marginal profit under the former Corporate Tax Act, and whether the merged corporation’s value of business of intangible assets of the merged corporation can be considered to have been paid for.

B) In full view of the purport of the entire pleadings, the following facts can be acknowledged in each of the aforementioned evidence and the evidence set forth in Nos. 3 through 6 (including each number):

(1) The Plaintiff, while running a private teaching institute business for elementary and middle school students in AA, was merged with each of the instant corporations to newly operate a private teaching institute business in the heated private teaching institute market.

(2) Among each of the instant legal entities, the net income per books as of the end of 2009 of the BBGGGG as of the end of 2009 is stated in the account books in the amount of KRW -00,000,000, and the DGGG as of KRW -00,000.

However, among each of the respective corporations of this case, ① Company BBGGGG reached KRW 0,000,000,000 as of the end of 2009, and generated KRW 0,000,000,000, operating income, ② The earned surplus as of the end of 2009 as of the date of 2009 reaches KRW 0,000,000,000,000, operating income, and KRW 0,000,000,000,000, for net income as of the end of 2009. ③ DGGGGG as of the end of 2009 has generated KRW 0,000,000,000,000,000 in operating income as of the end of 200,000,000,000.

(3) After evaluating the net asset value succeeded from each of the instant corporations as fair value as follows, the Plaintiff appropriated the difference between the cost of merger and the cost of merger as business rights in the account book. In 2009, the Plaintiff recognized that the right of business generated by acquiring a private teaching institute operated by the private business was an asset subject to depreciation and processed as depreciation costs in deductible expenses.

(4) From 2006 to 2008 all earned surplus, sales, and operating profits of each of the instant corporations. In particular, for the net income of DGG, the net income of DGG as of the end of 2006, as of the end of 2007, the net income of DGG was KRW 00,000,000 as of the end of 2007, KRW 000,000 as of the end of 2008, KRW 000,000 as of the end of 2006, KRW 00,000 as of the end of 2007, KRW 00,000 as of the end of 200,000 as of the end of 207, KRW 00,000 as of the end of 200, KRW 2000, KRW 2000 as of the end of 200, KRW 2000 as of the end of 2000.

C) Comprehensively taking account of the following circumstances acknowledged by the evidence duly admitted as above, even if the Plaintiff did not separately evaluate the business rights of each of the instant corporations, it is reasonable to deem that the Plaintiff recognized and merged the value of intangible assets held by each of the instant corporations, and therefore, the instant business rights constitute a merger evaluation marginal profit that should be included in the gross income under the Corporate Tax Act. Therefore, the Plaintiff’s assertion is without merit.

(1) As seen earlier, each of the corporations of this case appears to have been in full of earned surplus, sales, and operating income for the business year 2009 of each of the corporations of this case at the time of the merger. However, among each of the corporations of this case, the BBGGG and DGGGG were in net loss as of the end of 2009, but it seems that the actual net loss of the BBGGG and DGGG were incurred temporarily due to the sudden increase of operating expenses in 2009 from 2006 to 2008 in comparison with the operating expenses of the company from 2008. On the other hand, the net income of each of the corporations of this case from 2006 to 2008 as well as the continuous decrease of the net income.

(2) Unlike a general company, a private teaching institute seems to have assessed the business value of a private teaching institute based on intangible factors such as the number of students, the size of the relevant private teaching institute, not only the external factors such as the quality and personality map, teaching method, and the entrance result of the private teaching institute. In addition, it appears that the above intangible value is reflected as of the determination of the transfer value of the private teaching institute. On the other hand, each of the instant corporations appears to have been in a location as one of the specialized driving schools at the time of the merger with outstanding and representative special characteristics. The Plaintiff appears to have calculated the price for mergers by reflecting not only such intangible factors as earned surplus, sales, operating profit, and net income from 206 to 209 of each of the instant corporations, but also such intangible values as above.

(3) The Plaintiff acquired a private teaching institute operated by an individual entrepreneur in 2009 and recognized the business value of the said private teaching institute as depreciable assets at the time of filing a corporate tax return. On the contrary, the Plaintiff’s failure to recognize the business value of each of the instant corporations, which appears to have good management status and intangible value, cannot be easily acquired.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.