【Holding】
[1] Meaning of "generally accepted ordinary expenses" under Article 19(2) of the former Corporate Tax Act and the method of determining whether expenses fall thereunder / Whether expenses disbursed in violation of social order constitute "generally accepted ordinary expenses" or expenses directly related to revenue (negative, in principle) / Method of determining whether expenses were disbursed in violation of social order
[2] Where accounting fraud is committed under the leadership of the representative, etc. of a corporation and the payment of performance bonuses based thereon is evaluated as constituting breach of trust, whether such performance bonuses are expenses disbursed in violation of social order (affirmative), and whether such performance bonuses constitute "generally accepted ordinary expenses or expenses directly related to revenue" under Article 19(2) of the former Corporate Tax Act so as to be included in deductible expenses (negative)
[3] Meaning of "the determination of gross income" under Article 40(1) of the Corporate Tax Act / Method of determining income from interest claims under the Corporate Tax Act
[4] In a case where A company concluded repayment deferral agreements regarding accounts receivable with four ship-owning companies and agreed to receive interest for the period during which payment of shipbuilding prices was deferred, and the timing of attribution of the resulting interest income was at issue, the Court upheld the lower court's judgment that the interest income should be attributed to the gross income of the business year to which the interest payment date belongs
[5] In a case where A company treated as deductible expenses under the Corporate Tax Act the advisory fees paid to retired executives, etc. appointed as advisors, and after a tax audit by the competent regional commissioner of the National Tax Service, the competent head of the tax office excluded the advisory fees from deductible expenses and, unlike the "bonus" stated in the notice of the tax audit results, disposed of the income as "other income" and issued a notice of change in amount of income, the Court upheld the lower court's judgment that there was no procedural defect in the notice of change in amount of income and that the head of the tax office's exclusion of the advisory fees from deductible expenses for the relevant business years was lawful
[6] Meaning of the denial of wrongful calculation under Article 52 of the former Corporate Tax Act and criteria for determining the existence of economic rationality / Party bearing the burden of proving that a transaction between a corporation and a specially related person constitutes grounds for the denial of wrongful calculation under the Corporate Tax Act (= the tax authority)
【Summary of Decision】
[1] "Generally accepted ordinary expenses" under Article 19(2) of the former Corporate Tax Act (before being amended by Act No. 16008, Dec. 24, 2018) means expenses that other corporations engaged in the same kind of business as the taxpayer would be recognized as having disbursed under the same circumstances. Whether expenses fall thereunder should be determined objectively by comprehensively considering the circumstances and purpose, form, amount, effect, etc. of the disbursement, and absent special circumstances, expenses disbursed in violation of social order are excluded therefrom and cannot be regarded as expenses directly related to revenue either. Whether expenses were disbursed in violation of social order should be reasonably determined according to social norms by comprehensively considering various circumstances, such as the side effects that would be caused if such disbursement were permitted, the effect of such disbursement on transactions, the degree of social condemnation thereof, the need for regulation and the possibility of future statutory prohibition, commercial practices, and good morals.
[2] Accounting fraud is an act that distorts the decision-making of counterparties by providing false information on the financial condition of a company and further deceives investors, creditors, etc. and undermines the foundation of trust in the market, and the degree of harm it causes to society is grave. Therefore, it is not only subject to criminal punishment in itself under certain requirements (Articles 444 subparag. 13 and 448 of the Financial Investment Services and Capital Markets Act (the “Capital Markets Act”, 자본시장법); Articles 39 and 46 of the Act on External Audit of Stock Companies, Etc., etc.), but is also abused as a means for other crimes such as fraud. In particular, where the representative of a corporation or a person who substantially manages and de facto represents the corporation (hereinafter "representative, etc.") inflates the business performance of the corporation through accounting fraud and then, on that basis, pays executives and employees, etc. performance bonuses premised on achieving a certain level of targets, such act lacks relevance to business and rationality, etc. and may constitute the crime of breach of trust. Furthermore, even though the property damage itself resulting from the act of breach of trust is attributed to the corporation to which the representative, etc. who led the accounting fraud belongs, the acts of the representative, etc. of a corporation can be evaluated as the acts of the corporation itself, which is the taxpayer; accordingly, allowing the inclusion in deductible expenses of performance bonuses paid as a result of such act of breach of trust would be unjust, as it would effectively result in the State subsidizing that amount or mitigating the disadvantage for accounting fraud. Considering these points comprehensively, as long as accounting fraud was committed under the leadership of the representative, etc. of the corporation and the payment of performance bonuses based thereon is evaluated as constituting breach of trust, regardless of whether the individual executives and employees who received the performance bonuses were at fault for or aware of the accounting fraud, and regardless of whether the payment of the performance bonuses to such executives and employees is itself valid under private law, such performance bonuses are expenses disbursed in violation of social order and cannot be regarded as "generally accepted ordinary expenses or expenses directly related to revenue" under Article 19(2) of the former Corporate Tax Act (before being amended by Act No. 16008, Dec. 24, 2018), and therefore cannot be included in deductible expenses.
[3] Article 40(1) of the Corporate Tax Act provides that the business year to which the gross income and deductible expenses of a domestic corporation for each business year belong shall be the business year that includes the date on which such gross income and deductible expenses are determined. Here, the determination of gross income means that the taxable income has matured to the extent that the likelihood of its realization is considerably high. Under the Corporate Tax Act, unlike interest income under the Income Tax Act, claims that are uncollectible due to the debtor's insolvency are included, as bad debts, in deductible expenses deducted from gross income in calculating the income of a corporation for each business year. Considering this, the determination of income from interest claims under the Corporate Tax Act should properly depend on whether the likelihood of its realization has matured to a considerably high degree, and the circumstance that there is no realistic possibility that the interest claims will be repaid due to the debtor's lack of assets is merely a ground for treating them as bad debts when they are determined to be uncollectible.
[4] In a case where A company concluded repayment deferral agreements regarding accounts receivable with four ship-owning companies and agreed to receive interest for the period during which payment of shipbuilding prices was deferred, and the timing of attribution of the resulting interest income was at issue, the Court upheld the lower court's judgment that the interest income should be attributed to the gross income of the business year to which the interest payment date belongs, on the grounds that the interest income may be regarded as having matured and been determined to the extent that the likelihood of its realization was considerably high in the business year to which the interest payment date set in the agreements belongs, and that the deterioration of the ship-owning companies' business conditions is merely a ground for treating the interest claims as bad debts when they are determined to be uncollectible and does not change the timing of attribution of the interest income.
[5] In a case where A company treated as deductible expenses under the Corporate Tax Act the advisory fees paid to retired executives, etc. appointed as advisors, and after a tax audit by the competent regional commissioner of the National Tax Service, the competent head of the tax office excluded the advisory fees from deductible expenses and, unlike the "bonus" stated in the notice of the tax audit results, disposed of the income as "other income" and issued a notice of change in amount of income, the Court upheld the lower court's judgment on the following grounds: ① A company could sufficiently have recognized that the advisory fees would in fact be disposed of as other income in the future, and A company cannot be regarded as having faced any particular difficulty or disadvantage in filing a request for pre-assessment review regarding the notice of change in amount of income and disputing its propriety upon the notice of the tax audit results; therefore, there was no procedural defect in the notice of change in amount of income; and ② A company had not properly established rules governing the appointment and operation of advisors, etc., and its representative director had appointed advisors at his or her discretion without any particular verification, and A company regularly paid large advisory fees to the advisors without following specific remuneration standards, while the specific business activities actually performed by the advisors were not properly confirmed; thus, it is difficult to find reasonable grounds or circumstances to regard the advisory fees as money disbursed within an ordinary range according to A company's business needs so as to satisfy the requirements for deductible expenses; therefore, the head of the tax office's exclusion of the advisory fees from deductible expenses for the relevant business years was lawful.
[6] The denial of wrongful calculation under Article 52 of the former Corporate Tax Act (before being amended by Act No. 16008, Dec. 24, 2018) is a system whereby, where a corporation, in transacting with a specially related person, has unjustly avoided or reduced its tax burden by abusing, under the pretext of, the various forms of transactions enumerated in the subparagraphs of Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (before being amended by Presidential Decree No. 26981, Feb. 12, 2016) rather than by the reasonable methods of a normal economic actor, the taxing authority denies it and deems that there is income considered objective and appropriate according to the methods prescribed by law. It applies only where the corporation is found to have disregarded economic rationality by engaging in calculations of transactions that are unnatural and unreasonable from the standpoint of an economic actor. Whether economic rationality exists should be determined, by specifically considering the various circumstances of the transaction, according to whether the transaction is abnormal and lacking in economic rationality in light of sound social norms or commercial practices. In this regard, the tax authority bears the burden of proving that a transaction between a corporation and a specially related person constitutes grounds for the denial of wrongful calculation under the Corporate Tax Act.
【Referenced Statutes】
[1] Article 19(1) and (2) of the former Corporate Tax Act (before being amended by Act No. 16008, Dec. 24, 2018) [2] Articles 444 subparag. 13 and 448 of the Capital Markets Act; Articles 39 and 46 of the Act on External Audit of Stock Companies, Etc.; Article 19(2) of the former Corporate Tax Act (before being amended by Act No. 16008, Dec. 24, 2018) [3] Article 40(1) of the Corporate Tax Act [4] Article 40(1) of the Corporate Tax Act [5] Article 81-12 of the former Framework Act on National Taxes (before being amended by Act No. 15220, Dec. 19, 2017); Article 37 [Attached Form 56] of the former Enforcement Rule of the Framework Act on National Taxes (before being amended by Ordinance of the Ministry of Economy and Finance No. 665, Mar. 19, 2018); Article 19(1) and (2) of the former Corporate Tax Act (before being amended by Act No. 16008, Dec. 24, 2018) [6] Article 52 of the former Corporate Tax Act (before being amended by Act No. 16008, Dec. 24, 2018); Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (before being amended by Presidential Decree No. 26981, Feb. 12, 2016); Article 26 of the Administrative Litigation Act [burden of proof]
【Referenced Precedents】
[1] Supreme Court Decision 2012Du7608, January 15, 2015 (Gong2015Sang, 254)
Supreme Court Decision 2017Du51310, October 26, 2017 (Gong2017Ha, 2211)
Supreme Court Decision 2025Du36013, April 30, 2026 (Gong2026Sang, 1270)
[3] Supreme Court Decision 2003Du797, May 26, 2005 (Gong2005Ha, 1062)
[6] Supreme Court Decision 95Nu3589, December 26, 1995 (Gong1996Sang, 609)
Supreme Court Decision 2006Du13909, February 22, 2007
Supreme Court Decision 2016Du54213, May 30, 2019 (Gong2019Ha, 1327)
(Source: Supreme Court Decision 2022Du42020, August 12, 2026 | Judicial Information Disclosure Portal, Precedents)
2026. 10. 14. · By Attorney Dongwoo Shin
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