If Corporate Illegal Acts Cause Damages... Court Rules "No Corporate Tax Reduction"

[Asia Economy Reporter Seongpil Cho] A court has ruled that damages paid due to illegal acts cannot be included as deductible expenses under the Corporate Tax Act. Deductible expenses refer to costs that are not recognized as expenses in corporate accounting but are accepted in tax accounting under tax law. The more deductible expenses increase, the more they are excluded from the taxable base, reducing the corporate tax amount.

According to the legal community on the 15th, the Seoul Administrative Court Administrative Division 5 (Presiding Judge Yangjun Park) ruled against Shinhan Financial Group in a lawsuit filed against the Namdaemun Tax Office seeking cancellation of a corporate tax imposition. The court stated, "The damages in this case do not recognize business relevance, normalcy, or profit relevance," and "damages paid due to illegal acts cannot be considered costs that meet the deductible expense recognition requirements stipulated by the Corporate Tax Act."

The origin of this case dates back to 2005 when Shinhan Bank participated in a hostile merger and acquisition (M&A) against A Paper Company. At that time, at the request of Mr. Lee, the CEO of a corporate restructuring specialist company, Shinhan Bank purchased a significant number of A Paper Company’s shares at prices higher than the market price. They intervened in the management rights dispute by exercising voting rights at the shareholders' meeting, helping A Paper Company to be acquired by B Paper Company.

Mr. Eom, who lost management rights, filed a lawsuit in 2009 against Mr. Lee and Shinhan Bank claiming damages worth approximately 90 billion KRW. He alleged that Mr. Lee used Shinhan Bank’s financial power to declare the M&A with Company B and took away his management rights. In 2016, the Supreme Court partially accepted Mr. Eom’s claim and finalized a ruling ordering Shinhan Bank to pay Mr. Eom over 15 billion KRW plus delayed damages.

Following the Supreme Court ruling, Shinhan Bank paid Mr. Eom the confirmed damages of about 20.7 billion KRW and included these damages as deductible expenses in the corporate tax filing for that fiscal year. However, the tax authorities disallowed the deduction of these damages and imposed additional corporate tax including penalties amounting to about 5.7 billion KRW on Shinhan Bank. Shinhan Financial Group filed an administrative lawsuit in response.

The court did not accept Shinhan Financial Group’s claims, defining the M&A between Company A and Company B as an illegal act. The court stated, "Acquiring shares of a company involved in a management rights dispute and siding with one party to exercise voting rights goes beyond the lawful scope of a bank’s business," and "this cannot be regarded as generally accepted normal business activities or directly related to profits."

This content was produced with the assistance of AI translation services.