[Plaintiffs, Appellees] Plaintiff 1 and 2 others (Law Firm Doohyun, Attorneys Kim Su-kyung and 2 others, for the plaintiffs)
[Defendant, Appellant] Head of Jeju Tax Office
[Judgment Below] Gwangju High Court Judgment (Jeju), 2024Nu1650, dated July 9, 2025
[Order]
All appeals are dismissed. The costs of the appeal shall be borne by the Defendant.
[Reasoning]
The grounds of appeal are examined.
1. Outline of the Case
A. ○○○ Co., Ltd. (hereinafter “○○○”) is a corporation whose principal business includes controlling domestic and overseas subsidiaries, and it relocated its head office from Seoul to Jeju Island on March 24, 2009. Because ○○○ relocated its head office outside the Seoul metropolitan area and commenced business there, it received, pursuant to Article 63-2, Paragraphs 1 and 2 of the former Restriction of Special Taxation Act (조세특례제한법) (before its amendment by Act No. 9921 of January 1, 2010; hereinafter the same), full exemption from corporate tax from 2009 to 2013, and a 50% reduction in corporate tax from 2014 to 2015.
B. The non-party and his spouse and children, who are the Plaintiffs (hereinafter collectively referred to as “the non-party et al.”), were shareholders of ○○○. At its ordinary general meeting of shareholders held on March 31, 2017, ○○○ resolved to pay an ordinary dividend of KRW 11,634,000,000 for the fiscal year 2016, and at a board of directors meeting held on August 1, 2017, it resolved to pay an interim dividend of KRW 8,725,500,000 with a record date of July 1, 2017, to its shareholders, respectively. Accordingly, the non-party et al. received the dividends (hereinafter “the instant dividends”).
C. Around May 2018, when the non-party et al. reported and paid the global income tax for the year 2017 attributable income to the Defendant, they calculated, pursuant to Article 27-3, Paragraph 2, Item 2 of the former Enforcement Decree of the Income Tax Act (소득세법 시행령) (before its amendment by Presidential Decree No. 31442 of February 17, 2021; hereinafter the same), the dividend tax credit exclusion ratio (approximately 28%) based on the 2015 and 2016 business years, computed the amount to be added to the total dividend amount pursuant to the proviso of Article 17, Paragraph 3 of the former Income Tax Act (소득세법) (before its amendment by Act No. 15225 of December 19, 2017; hereinafter the same), and, based on this, deducted the corresponding amount from the calculated amount of global income tax pursuant to Article 56, Paragraph 1 of the former Income Tax Act.
D. Upon receiving a corrective instruction from the National Tax Service to recalculate the dividend tax credit exclusion ratio based solely on the income amount for the 2015 business year and to correct the global income tax of the non-party et al., the Defendant, on July 16, 2022, recalculated the exclusion ratio as 50% and issued a correction and notice of the 2017 attributable global income tax (including additional tax) to the Plaintiffs (hereinafter “the instant disposition”).
E. The Plaintiffs filed the instant lawsuit seeking revocation of the instant disposition, arguing, among other things, that “a corporation receiving a reduction or exemption of corporate tax,” which is excluded from the subject of the dividend tax credit, must be one that is receiving a corporate tax reduction or exemption in the business year serving as the basis for the profit dividend, and since ○○○ did not receive a corporate tax reduction or exemption in 2016, the business year serving as the basis for the profit dividend, the instant dividends cannot be regarded as dividend income excluded from the subject of the dividend tax credit.
2. Relevant Provisions and Legal Principles
A. Article 17, Paragraph 1 of the former Income Tax Act provides that dividend income shall be the income falling under each of the following subparagraphs arising in the relevant taxable period, listing as one type of dividend income: “profits or dividends or distributions of surplus received from a domestic corporation” (Item 1), “dividends or distributions received from an organization deemed a corporation” (Item 2), “deemed dividends” (Item 3), and “amounts disposed of as dividends pursuant to the Corporate Tax Act (법인세법)” (Item 4). Article 17, Paragraph 3 of the former Income Tax Act provides, in its main text, that the amount of dividend income shall be the gross income for the relevant taxable period, while its proviso provides that, with respect to the portion of dividend income under Items 1 through 4 of Paragraph 1, excluding dividends falling under any of the subparagraphs of Paragraph 3, the amount shall be the gross income for the relevant taxable period plus an amount equivalent to 11/100 of such dividend income. Article 17, Paragraph 3, Item 4 of the former Income Tax Act (hereinafter “the instant exclusion provision”) lists, as one of the dividends excluded from the application of the proviso of the same paragraph, “where there is dividend income received from a corporation prescribed by Presidential Decree among corporations that have received tax exemption, reduction, exemption, or income deduction of corporate tax to which the minimum tax amount under Article 132 of the Restriction of Special Taxation Act does not apply (including tax exemption, reduction, exemption, or income deduction under laws other than the Restriction of Special Taxation Act), the amount calculated by multiplying the amount of such dividend income by a rate prescribed by Presidential Decree.” Article 56 of the former Income Tax Act provides that, where the dividend income amount to which the proviso, other than each subparagraph, of Article 17, Paragraph 3 of the same Act applies is included in the resident’s global income amount, the amount corresponding to the amount added to the gross income of the relevant taxable period pursuant to the proviso, other than each subparagraph, of the same paragraph, shall be deducted from the calculated amount of global income tax (Paragraph 1), and refers to such deduction as “dividend tax credit” (Paragraph 2). Considering the content of these related provisions, the dividend tax credit under Article 56, Paragraph 1 of the former Income Tax Act, which presupposes the application of the proviso, other than each subparagraph, of Article 17, Paragraph 3 of the former Income Tax Act, does not apply to dividends to which the instant exclusion provision applies.
Meanwhile, pursuant to the delegation under Article 17, Paragraph 6 of the former Income Tax Act, Article 27-3, Paragraph 1 of the former Enforcement Decree of the Income Tax Act lists, as “corporations prescribed by Presidential Decree” under the instant exclusion provision, “corporations to which Article 51-2 of the Corporate Tax Act or Article 100-16 of the Restriction of Special Taxation Act applies” (Item 1), and “corporations to which the provisions of Article 63-2, Article 121-2, Article 121-4, Article 121-8, or Article 121-9 of the Restriction of Special Taxation Act apply” (Item 2). Furthermore, Article 27-3, Paragraph 2, Item 2 of the former Enforcement Decree of the Income Tax Act provides that, with respect to “the rate prescribed by Presidential Decree” under the instant exclusion provision, in the case of a corporation falling under Article 27-3, Paragraph 1, Item 2 of the former Enforcement Decree of the Income Tax Act, it shall refer to “the sum of the income amounts subject to reduction or exemption for the immediately preceding two business years × the reduction/exemption ratio ÷ the sum of the total income amounts for the immediately preceding two business years,” while in the parenthetical portion thereof, it provides that “where the business year to which Article 27-3, Paragraph 1, Item 2 of the former Enforcement Decree of the Income Tax Act applies is a single business year, the calculation shall be made based on the income amount for that business year.”
B. Considering comprehensively the language, structure, and purpose of the instant exclusion provision and related provisions, it is reasonable to interpret the dividend income excluded from the subject of the dividend tax credit under the instant exclusion provision as meaning dividend income received from a corporation that has received tax exemption, reduction, exemption, or income deduction of corporate tax (hereinafter “reduction, exemption, etc.”) pursuant to the provisions of the Corporate Tax Act and the Restriction of Special Taxation Act set forth in each subparagraph of Article 27-3, Paragraph 1 of the former Enforcement Decree of the Income Tax Act (hereinafter “corporate tax reduction, exemption, etc. provisions”) in the business year serving as the basis for the profit dividend. The specific reasons are as follows.
1) Where a corporation pays a dividend to an individual shareholder, since the dividend does not constitute a deductible expense of the corporation, corporate tax is imposed on the corporation’s income corresponding thereto; and if income tax were also imposed as is on the individual shareholder receiving the dividend, this could result in the problem of double taxation, i.e., imposing tax twice on a single source of tax-bearing capacity.
Accordingly, the Income Tax Act, taking into account the fact that the dividend income received by an individual shareholder is funded by the corporation’s income on which corporate tax has already been paid, resolves the double taxation problem by introducing the so-called “dividend tax credit system,” whereby the already-paid corporate tax is reverted to the shareholder’s income, income tax is calculated based on the dividend income amount including such reverted amount, and then the amount added for the purpose of reverting the income is deducted from the tax amount so calculated. Article 17, Paragraph 1 of the former Income Tax Act defines dividend income as, among other things, profits or dividends of surplus received from a domestic corporation arising in the relevant taxable period, and the dividend income amount is, in principle, the gross income for the relevant taxable period; however, for dividend income satisfying certain requirements, the dividend income amount is calculated by adding an amount equal to 11/100 of such dividend income to the gross income for the relevant taxable period (the so-called “gross-up”) (Paragraph 3 of the same Article), and double taxation is adjusted by deducting the amount corresponding to the gross-up amount from the calculated amount of global income tax (Article 56, Paragraph 1 of the same Act).
2) However, since the double taxation problem does not arise with respect to a corporation that has not paid corporate tax, there is no need to apply the dividend tax credit system in such a case. In this situation, since the dividend income received by the shareholder is funded by the corporation’s income on which corporate tax has not been paid, imposing income tax as is on such dividend income does not create the problem of double taxation being imposed on both the corporation and the shareholder; rather, if the dividend tax credit were recognized even in such a case, an unreasonable result would occur whereby such dividend income portion is ultimately never taxed at all.
Accordingly, when the Income Tax Act was amended by Act No. 6051 of December 28, 1999, a basis was established in Article 17, Paragraph 3, Item 4 for restricting the application of the dividend tax credit to dividends paid by a corporation receiving corporate tax reduction, exemption, etc., which led to the instant exclusion provision. In this manner, where there is dividend income received from a corporation prescribed by Presidential Decree among corporations that have received corporate tax reduction, exemption, etc., the application of the dividend tax credit to such dividend income is restricted by excluding, from the dividend income itself used for calculating the gross-up amount, an amount calculated by multiplying the dividend income amount by the rate under each subparagraph of Article 27-3, Paragraph 2 of the former Enforcement Decree of the Income Tax Act.
3) In interpreting the statutes concerning the dividend tax credit system, including the instant exclusion provision, it must be considered that the dividend tax credit system under the former Income Tax Act was introduced for the purpose of resolving the double taxation problem arising at the corporate level and the shareholder level, and that the instant exclusion provision, as part of the dividend tax credit system, was established to restrict the application of the dividend tax credit in cases where the double taxation problem does not arise in the first place due to the corporate tax reduction, exemption, etc. granted to the corporation.
Therefore, the scope of dividend income for which the application of the dividend tax credit is restricted under the instant exclusion provision must be construed as limited to dividends paid by “a corporation to which the corporate tax reduction, exemption, etc. provisions apply in the relevant business year serving as the basis for the profit dividend,” and it must be interpreted that the instant exclusion provision does not apply where the corporation that paid the dividend did not receive corporate tax reduction, exemption, etc. under the corporate tax reduction, exemption, etc. provisions in the business year serving as the basis for the profit dividend.
If, contrary to this, it were held that the instant exclusion provision applies even to dividend income received from a corporation that was subject to the corporate tax reduction, exemption, etc. provisions in a business year prior to, rather than in, the business year serving as the basis for the profit dividend, merely because of the possibility that the corporation could pay dividends, after the corporate tax reduction, exemption, etc. has ended, using profits earned during the period when it received the corporate tax reduction, exemption, etc., then, contrary to the original legislative purpose of the dividend tax credit system, the risk of double taxation could materialize with respect to dividends for which, in fact, no corporate tax reduction, exemption, etc. was granted in the business year serving as the basis for the profit dividend itself, even though the profits earned in that business year also constitute the source of funds for the dividend, and the dividend tax credit would nonetheless be restricted for such dividends.
4) Statutory interpretation must, at all times, be conducted in the direction of seeking concrete reasonableness within a scope that does not undermine legal stability. To this end, in principle, interpretation must be faithful, as far as possible, to the ordinary meaning of the language used in the statute (see Supreme Court Decision 2006Da81035, decided April 23, 2009; Supreme Court en banc Decision 2011Da83431, decided January 17, 2013, etc.). In particular, in interpreting tax statutes, in light of the principle of statutory taxation (조세법률주의), whether it be a taxation requirement, a non-taxation requirement, or a tax reduction/exemption requirement, absent special circumstances, interpretation must be made according to the language of the statute, and expansive or analogical interpretation without reasonable grounds is not permitted (see Supreme Court Decision 2008Du11372, decided August 20, 2009, etc.).
The instant exclusion provision designates dividend income received from a “corporation prescribed by Presidential Decree” among corporations that have received corporate tax reduction, exemption, etc., as the subject of restriction on the application of the dividend tax credit. Article 27-3 of the former Enforcement Decree of the Income Tax Act, which concerns this matter, is titled “Corporations, etc. Receiving Exemption, etc. of Corporate Tax,” and in each subparagraph of Paragraph 1, in specifying “corporations prescribed by Presidential Decree” under the instant exclusion provision, uses the present-tense expression “corporations to which [the corporate tax reduction, exemption, etc. provisions] apply.” It is an interpretation faithful to the statutory language to construe this as meaning that the corporate tax reduction, exemption, etc. provisions are currently being applied to the relevant corporation. In light of the meaning objectively derived from the statutory language itself in this manner, it is consistent with the principle of strict interpretation required by the principle of statutory taxation to interpret the instant exclusion provision not as intending to restrict the application of the dividend tax credit to dividends of a corporation that has received corporate tax reduction, exemption, etc. in the past even if it did not receive corporate tax reduction, exemption, etc. in the business year serving as the basis for the profit dividend, but rather as intending to restrict the application of the dividend tax credit only to dividends of “a corporation to which the corporate tax reduction, exemption, etc. provisions apply in the relevant business year serving as the basis for the profit dividend.”
5) With respect to the calculation of the amount to be excluded from the dividend tax credit under the instant exclusion provision, Article 27-3, Paragraph 2, Item 2 of the former Enforcement Decree of the Income Tax Act provides, in principle, that the income amount subject to reduction/exemption and the total income amount for the immediately preceding two business years shall be reflected in the formula; however, this provision is meaningful only in the sense of prescribing the method of calculating the dividend tax credit exclusion ratio on the premise that the requirements for application of the instant exclusion provision have already been satisfied, and must be regarded as not directly related to the requirements for application of the instant exclusion provision itself, which precede such application. This holds true even if the purpose of requiring consideration of the immediately preceding two business years is to prevent a phenomenon whereby, if the dividend tax credit exclusion ratio were calculated based solely on the income amount for the business year serving as the basis for the profit dividend, a corporation could arbitrarily choose to pay dividends in a year in which it received a smaller amount of corporate tax reduction, exemption, etc., thereby allowing shareholders to receive a dividend tax credit on a larger amount.
3. Determination
Having found the facts as indicated in its reasoning, the court below determined that ○○○ fell under a corporation receiving corporate tax reduction, exemption, etc. pursuant to Article 63-2, Paragraph 1 of the former Restriction of Special Taxation Act from the 2009 business year through the 2015 business year, but ceased to fall under such category from the 2016 business year onward, and therefore, the Plaintiffs’ dividend income (the ordinary dividend for the 2016 business year and the interim dividend for the 2017 business year) does not constitute “dividend income received from a corporation that received corporate tax reduction, exemption, etc. under the corporate tax reduction, exemption, etc. provisions in the business year serving as the basis for the profit dividend,” and thus cannot be regarded as subject to the instant exclusion provision. Accordingly, the court below determined that the instant disposition, which was premised on the application of the instant exclusion provision to the Plaintiffs’ dividend income, was unlawful.
Examining the reasoning of the judgment below in light of the relevant provisions and legal principles set forth above, as well as the record, the determination of the court below is justified. There is no error in the judgment below, as alleged in the grounds of appeal, that misapprehends the legal principles concerning the instant exclusion provision and thereby affects the judgment.
4. Conclusion
All appeals are dismissed, and the costs of the appeal are to be borne by the losing party. This judgment is rendered by unanimous opinion of the participating Justices as set forth in the Order.
Justice Lee Heung-gu (Presiding Justice), Oh Seok-jun, Roh Kyung-pil (Justice in Charge), Lee Suk-yeon