In a civil lawsuit filed by Korea Development Bank seeking a refund of taxes after the tax authorities wrongly deemed deposits accounts to be borrowed-name accounts, the Supreme Court sided with the government. The court held that even if taxes were overcollected by mistake, the dispute must be pursued through an administrative lawsuit, not a civil one.
According to legal sources on the 1st, the Supreme Court's First Division (Presiding Justice Seo Kyung-hwan) on Mar. 6 overturned the lower court and remanded to the Seoul Central District Court in the appeal of Korea Development Bank's lawsuit for the return of unjust enrichment against the Republic of Korea (National Tax Service), the Seoul Metropolitan Government, Anyang, Gyeonggi Province, and Yeosu, South Jeolla Province. The lower court had found that the excess taxes should be refunded, but the Supreme Court did not accept that.
Generally, when interest arises from bank deposits, a total of 15.4%—interest income tax (14%) and local income tax (1.4%)—is paid as taxes to the central and local governments. When the bank pays interest to the depositor, it withholds 15.4% and remits it (withholding at source).
If the depositor's name and the actual owner of the funds differ, 99% of the interest (90% interest income tax, 9% local income tax) must be paid as taxes under the Real Name Financial Transactions Act. Under that law, this applies to "financial assets transacted without using a real name."
In the past, the Financial Services Commission (FSC) broadly interpreted that even if an account was a borrowed-name account, as long as the real name of the deposits holder was verified, the assets in that account were real-name property. Examples include a passbook a mother uses to deposit an allowance for a minor child and a dues account managed by a group treasurer.
However, in 2017, the Financial Services Commission (FSC) changed its position, saying that if a prosecution investigation, National Tax Service probe, or Financial Supervisory Service (FSS) examination revealed facts enabling a financial institution to know the account was a borrowed-name account, then it was a borrowed-name account requiring 99% of the interest to be paid as taxes. Accordingly, since 2018 the tax authorities have notified financial companies to withhold 99% tax at source on interest income generated from each borrowed-name account.
After paying the assessed taxes, Korea Development Bank filed a lawsuit for the return of unjust enrichment, arguing that the accounts at issue identified by the tax office were not borrowed-name accounts. The excess amount collected by the central and local governments totaled 79.07 million won—73.27 million won by the government, and 3.64 million won by Seoul, 990,000 won by Anyang, and 1.16 million won by Yeosu.
The first-instance court ruled that the central and local governments had obtained unjust enrichment from Korea Development Bank and ordered them to return the excess taxes collected. The reasoning was that there was no clear evidence of an agreement between Korea Development Bank and the actual owner of the funds who opened the deposits account that "this deposit belongs to the owner of the funds, not the named holder." The central and local governments appealed, but the appellate court reached the same conclusion.
However, the Supreme Court held that even if taxes were excessively imposed by mistake, it constitutes unjust enrichment only if the tax disposition violates an important part of the legal provisions. If there is room for dispute in interpreting the law and the tax authorities misinterpreted it, the defect cannot be deemed obvious.
It also said of Korea Development Bank, "If its view differs from that of the taxing authority, it should not file a lawsuit for the return of unjust enrichment, but should pursue a pretrial procedure (administrative appeal) and an administrative lawsuit against the collection disposition."