When a corporation head running a solar power generation business stood to make 35 billion won in a year, the person took 15 billion won as bonuses and loans. Tax authorities saw it as an attempt to reduce taxes and ordered the payment of more than 3 billion won in corporate tax, and a court ruled that the decision was justified.
According to legal sources on the 2nd, the 5th Division of the Seoul Administrative Court (Presiding Judge Lee Jeong-won) ruled on May 28 against A, the head of a corporation that pushed a large-scale solar power project in areas around Taean County, South Chungcheong Province, in a suit seeking to cancel the imposition of corporate tax and other levies against the head of the Samsung Tax Office.
In September 2021, A signed an agreement allowing a private equity fund to invest with A's company in Korea's renewable energy business. Under the contract, A's company received 1.5 billion won in 2021 and 10.5 billion won in 2022. A also signed a pre-development service contract with the corporation implementing the renewable energy project and received 25 billion won in 2022.
Until then, A's company had not generated any particular revenue, but it received a total of 35.5 billion won in 2021 and 2022.
A owns 100% equity in the company. When a large sum came in during 2022, A paid 8 billion won as a bonus to themself. The deputy head received 3.1 billion won, and three other employees split 650 million won. When a company pays bonuses to executives and employees to distribute profits, it is not recognized as an expense and corporate tax must be paid. However, the company booked the 11.75 billion won in bonuses as an expense.
A also received a total of 7.1 billion won from the company in 2022 under the name of lending. The interest rate was 0%. In 2023, A also received 3 billion won in dividends. While bonuses or dividends are subject to income tax, lending is "borrowed money" and is not subject to income tax.
This came to light as the Board of Audit and Inspection conducted an audit into the implementation of renewable energy projects. In June 2023, the Board requested an investigation by prosecutors, and police, seeing that A may have committed tax evasion, asked the Seoul Regional Tax Service to file a complaint.
The Seoul Regional Tax Service conducted a tax audit of A. It concluded that the bonuses and lending were intended to distribute profits, so corporate tax and earned income tax had to be paid. The Samsung Tax Office notified A to pay 3,832.99 million won in corporate tax and 319.49 million won in earned income tax.
A then filed an administrative suit seeking to cancel the corporate and income tax assessments, saying, "The bonuses were paid as fair compensation for executives' and employees' performance of their duties and constitute an expense, and the lending does not constitute income."
The court did not accept these arguments. The court noted, "After joining in February 2022, the deputy head consulted a law firm and an accounting firm and devised a plan to pay A as much cash as possible while reducing A's and their own tax burdens." However, it found that the 650 million won in bonuses paid to the three employees constituted an expense, and set A's corporate tax due at 3,621.94 million won.
The court also said of the lending A received, "It only appears that, after consulting law firms and others, they fixed the proportions of dividends, lending, and other items that could reduce the company's tax burden while paying A as much cash as possible, and treated 7.1 billion won in the form of lending including money already paid."