Lotte Group affiliates mostly lost in the first trial of a corporate tax lawsuit seeking recognition of attorney fees spent in responding to investigations involving Chairman Shin Dong-bin and other members of the owner family as a "corporate expense." The court found the expense was not directly related to company business and was largely for the owner's personal defense, ruling it could not be eligible for tax deduction.
According to legal sources on the 17th, the 6th Division of the Seoul Administrative Court (Presiding Judge Na Jin-yi) dismissed the claims of 13 plaintiffs in a lawsuit filed by 15 affiliates, including Korea Seven, seeking to overturn corporate tax and related assessments imposed by 10 district tax offices and the head of the Seoul Regional Tax Service.
Only one affiliate won in limited fashion on some issues, effectively resulting in a loss for Lotte. The additional tax burden from this assessment is said to be about 6.3 billion won.
The lawsuit stemmed from how to treat legal expense incurred during investigations by prosecutors and a special counsel in 2016.
From June to October 2016, prosecutors investigated alleged corporate privatization by the chairman and the owner family, illegal support to affiliates, tax evasion, and other management irregularities. Then from Oct. 2016 to Apr. 2017, the special counsel team led by Park Young-soo investigated Shin's alleged bribery in connection with former President Park Geun-hye's influence-peddling scandal.
At the time, Lotte affiliates made expenditure for legal expense such as attorney advisory fees to respond to the investigations and booked them as corporate expense when filing taxes. As a result, taxable income decreased and the corporate tax burden fell.
However, after conducting an integrated corporate tax audit, the Seoul Regional Tax Service decided on additional taxation, concluding the expense could not be recognized as corporate expense.
Tax authorities determined the investigations into management irregularities and alleged bribery targeted Shin personally, not the affiliates, and that the complaints and counter-complaints related to the management control dispute arose from a dispute between Shin and former Lotte Holdings Japan Vice Chairman Shin Dong-ju.
Therefore, the position is that the legal expense was not directly related to the company's business and thus was not eligible for expense treatment under the tax code.
Lotte Group argued during the trial, "Prosecutors conducted a wide-ranging investigation into the legality of management activities targeting affiliates and their officers and employees, creating a need for affiliates to defend themselves," adding, "It cannot be said that the legal expense incurred at the investigation stage was unrelated to the affiliates' business."
By contrast, the court found that the legal expense largely concerned responding to Shin's personal criminal cases, including the alleged offering of bribes. In particular, the fact that the special counsel indicted Shin personally—not the corporation—as the party offering the bribe also supported the decision.
Shin was indicted on charges including providing bribes to the side of former President Park Geun-hye, and the sentence of two years and six months in prison, suspended for four years, has been finalized.
However, the court did not accept part of the tax authorities' dispositions against some affiliates. Regarding a case in which one affiliate provided business sites free of charge to the Korean Federation of Community Credit Cooperatives (KFCC) and credit unions for employee welfare, the court found room to view it as part of legitimate management activities. It took into account that the facilities had massage chairs and vending machines, were operated at prices lower than market rates, and contributed to employee welfare.
A Lotte official said, "We will determine our next steps after reviewing the written judgment."