National High Court Decision 2008Da1056 (Law No. 86.30)

Whether a person with a special relationship is a person with a special relationship in any direction or in any manner;

In case where a person does not fall under a specially related person on the basis of one party, two corporations are deemed to fall under a specially related person on the basis of the other party.

The contents of the decision shall be the same as attached.

Article 87 (Scope of Person with Special Relationship)

1. The plaintiff's claim is dismissed.

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

The Defendant’s disposition of imposition of KRW 151,496,50 of corporate tax of 2004 against the Plaintiff on February 1, 2008, KRW 130,224,880 of corporate tax of 205, KRW 110,103,570 of corporate tax of 206 is revoked.

1. Details of the instant disposition

The following facts are not disputed between the parties, or acknowledged by the overall purport of the arguments in each entry in Gap evidence 1-1-2, 3, 1-2, 3-2, and 1-1, 2, and 3-1 of evidence 1-2, 3, and 1-3.

A. The Plaintiff is a corporation established on December 29, 1994 and engaged in the manufacture, manufacture, and sale of automobile parts. Around 2002, the Plaintiff extended 6.2 billion won to ○○○ Development Co., Ltd. (hereinafter “○○ Development”) that was running the business of purchasing and constructing and selling the main complex building at ○○○-dong, Seoul around 2002, and received 9% interest per annum from ○○ Development.

B. The Plaintiff reported and paid corporate tax for each business year from around 2002 to around 2003 constitutes a specially related person under Article 52(1) of the Corporate Tax Act and Article 87(1)4 of the Enforcement Decree of the Corporate Tax Act. The Plaintiff’s interest paid on the Plaintiff’s loan corresponding to the instant loan constitutes “interest paid on the loan corresponding to the provisional payment paid without connection with the corporation’s business” under Article 28(1)4(b) of the Corporate Tax Act and excluded the amount from deductible expenses. However, since the Plaintiff’s ○○○ Development’s ○○○ Development’s ○○○ Development’s ○○○ Development’s ○○○ Development’s ○○○ Development’s ○○○ Development’s ○○ Development’s ○○ Development’s ○○ Development was reduced from around 2004 to 20%, it reported and paid corporate tax for each business year from 2004 to 206.

C. Accordingly, the defendant, based on ○○ Development, constitutes a specially related person under Article 52(1) of the Corporate Tax Act and Article 87(1)4 of the Enforcement Decree of the Corporate Tax Act. Accordingly, the plaintiff and ○○ Development, based on the premise that the plaintiff and ○○ Development are specially related persons, excluded the plaintiff's interest on the loan corresponding to the loan of this case from deductible expenses, and notified the plaintiff on February 1, 2008 of KRW 151,496,50 of the corporate tax of 2004 and KRW 130,224,880 of the corporate tax of 205, KRW 110,103,570 of the corporate tax of 206 (hereinafter "the disposition of this case").

D. The ○○ and the ○○○ Development’s major shareholder (each 50% of the shares owned by each 50%) by the year 2003. Since 2004, five persons including the ○○○ were changed to hold shares of 20% each, and the ○○○ was a major shareholder of the Plaintiff, who owned the Plaintiff’s shares together with the ○○○○ Order, the spouse of the Plaintiff.

The shareholders status from January 1, 2004 to December 31, 2006 between the Plaintiff and ○○ Development shall be as listed below:

E. On March 14, 2008, the Plaintiff filed a tax appeal seeking revocation of the instant disposition with the Tax Tribunal, but the Tax Tribunal dismissed the Plaintiff’s claim on June 30, 2008.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The gist of the Plaintiff’s assertion is that ○○ Development does not correspond to the Plaintiff’s specially related person pursuant to Article 52(1) of the Corporate Tax Act and Article 87(1)4 of the Enforcement Decree of the Corporate Tax Act, so the instant disposition on the premise that ○○ Development is the Plaintiff’s specially related person should be revoked on the ground that it is unlawful.

B. Relevant statutes

Article 28 (Non-Inclusion of Paid Interest in Loss)

Article 87 (Scope of Person with Special Relationship)

C. Determination

(1) According to Article 28(1)4(b) of the Corporate Tax Act, interest on loans corresponding to the provisional payments, etc. paid to a person with a special relationship under Article 52(1) of the Corporate Tax Act in connection with the business of the corporation shall be deemed not to be included in deductible expenses in calculating the income amount of the domestic corporation for each business year. Article 52(1) of the Corporate Tax Act provides that where it is deemed that the act of the domestic corporation or the calculation of the income amount of the domestic corporation has unjustly reduced the tax burden on the corporation's income due to transactions with a person with a special relationship as prescribed by the Presidential Decree, the head of the district tax office having jurisdiction over the place of tax payment or the Commissioner of the competent Regional Tax Office having jurisdiction over the place of tax payment may calculate the income amount of the corporation for each business year, regardless of the amount of the corporation's act or the calculation of the income amount. Article 87(1) of the Enforcement Decree of the Corporate Tax Act provides that "a person with a special relationship as prescribed by the Presidential Decree" means a person with the corporation falling under each of the following subparagraphs:

(2) However, in comparison with the contents of the pertinent provision’s relevant laws and regulations, it may be interpreted that the Plaintiff’s shareholder owned 30% or more of the shares of ○○ Development until 2003 (50%) and that 20% of the shares of ○○ Development was owned from 2004, based on the Plaintiff’s basis, ○○ Development is not a specially related person under Article 87(1)4 of the Enforcement Decree of the Corporate Tax Act.

However, the purpose of the Corporate Tax Act is to prevent a corporation from appropriating interest on loans for the purpose of raising provisional payments paid by a corporation to a specially related person as its deductible expenses without connection with its business. It also prevents insolvency of a company due to reckless leakage of funds for personal needs, such as private capital. In addition, if a company becomes bankrupt, other affiliated companies were to be able to be linked with loans, etc. regardless of their business, and to prevent other companies from putting off or insolvent, and to strengthen the competitiveness of the company by improving the financial structure of the company and inducing sound economic activities through regulating companies with weak financial structure from dependent on outside capital. ② The above two corporations are deemed to be a specially related person under the Corporate Tax Act, Article 52(1) of the Corporate Tax Act, Article 87(1)4 of the Enforcement Decree of the Corporate Tax Act, Article 87(1)7 of the Corporate Tax Act, and Article 87(1)4 of the Enforcement Decree of the Corporate Tax Act, which appears to be a specially related person under the following subparagraphs.

In regard to this, the Plaintiff added the phrase “corporation” by stipulating that the Enforcement Decree of the Corporate Tax Act was “a person who has any of the following relations with the corporation” under Article 87(1) of the Enforcement Decree of the Corporate Tax Act, upon the amendment by Presidential Decree No. 15970 on December 31, 1998. The above Supreme Court decisions are merely a precedent prior to the amendment of the Enforcement Decree of the Corporate Tax Act, and in light of the strict interpretation principle, the Plaintiff asserts that the interest paid on the loan corresponding to the loan of this case should be included in deductible expenses unless ○○ Development is a related party under Article 87(1)4 of the Enforcement Decree of the Corporate Tax Act. However, in light of the purport of Article 28(1)4(b) of the Corporate Tax Act and Article 87(1) of the Enforcement Decree of the Corporate Tax Act and Article 87(1) of the Corporate Tax Act, it cannot be interpreted as alleged by the Plaintiff solely on the ground that the phrase “corporation” was added.

3. Conclusion

Therefore, the disposition of this case is legitimate, and the plaintiff's claim of this case is dismissed as it is without merit. It is so decided as per Disposition.