Clothing company K2 Korea ultimately lost a suit for a cut in acquisition tax it filed against a local government. K2 Korea claimed it was a manufacturer, but the Supreme Court found that a company is not a manufacturer unless it directly operates a factory, so it cannot receive an acquisition tax reduction.
The Supreme Court's Third Division (presiding Justice Lee Suk-yeon) said on May 14 that on Apr. 30 it overturned a lower court ruling that ordered Seoul's Gangnam District to refund acquisition tax in a final appeal over a suit by K2 Korea seeking to cancel Gangnam's refusal to revise its acquisition tax, and sent the case back to the Seoul High Court.
In Nov. 2015 and Mar. 2016, K2 Korea purchased 5,750.8㎡ (about 1,742 pyeong) of land in Jagok-dong, Gangnam District, Seoul, in two transactions. K2 Korea newly built a nine-story-aboveground, one-story-underground Knowledge Industry Complex on the site and transferred its headquarters to the building in 2019.
When purchasing the land, K2 Korea paid 1.4734 billion won in acquisition tax, local education tax, and The Special Tax for Rural Development to Gangnam District. Acquisition tax, local education tax, and The Special Tax for Rural Development related to the new building amounted to 3.33311 billion won.
In Oct. 2019, K2 Korea filed a request for correction with Gangnam District, saying that the headquarters area and other spaces were used to operate manufacturing and that local government tax should be reduced under the Act on Restriction on Special Cases Concerning Local Taxation. Gangnam District rejected the request to correct the headquarters and leased areas, saying the company did not have manufacturing facilities.
K2 Korea objected, but the Tax Tribunal accepted only the claim regarding vacant space on the second floor of the building and dismissed the rest. K2 Korea then filed an administrative lawsuit.
The issue is whether a company like K2 Korea, which directly handles only product planning, design, and marketing while outsourcing production to external firms, qualifies as a manufacturer eligible for a local government tax reduction.
The first and second trials sided with K2 Korea. The appellate court said, "Considering the legislative purpose of the Industrial Cluster Development and Factory Establishment Act to systematically manage industrial complexes, and the background behind changing the name from apartment-type factories to Knowledge Industry Complexes to attract high-tech industries, we cannot agree with Gangnam District's argument that acquisition tax and similar reductions can be granted only if manufacturing facilities are in place."
However, the Supreme Court said, "It is hard to accept the lower court's judgment as is," quashed and remanded the case, and ordered the Seoul High Court to rehear it. The Supreme Court said, "If we were to find that there is no need to have manufacturing facilities to qualify for a local government tax reduction, the scope of manufacturers eligible for such reductions would become excessively broad or unclear," adding, "This would cause considerable difficulties in managing Knowledge Industry Complexes and imposing local government taxes."