Lotte Chemical Loses Corporate Tax Imposition Cancellation Lawsuit

"Shin Dong-ju Claims Legitimate Compensation"
Court Rules "It's Just Corporate Profit Sharing
Cannot Be Included as Expense"

Shin Dong-ju, Chairman of SDJ Corporation (Former Vice Chairman of Lotte Holdings Japan)

[Asia Economy Reporter Seongpil Cho] Lotte Chemical lost a lawsuit after disputing the tax authorities' judgment that the compensation paid to Shin Dong-joo, the eldest son of the late Shin Kyung-ho, chairman of Lotte Group, was unjustified. The court ruled that the tax authorities' decision to classify the compensation paid by Lotte Chemical to Mr. Shin as a 'bonus' rather than an 'expense' and tax it accordingly was lawful.

According to the legal community on the 7th, the Seoul Administrative Court Administrative Division 6 (Chief Judge Lee Sung-yong) ruled against the plaintiff in the corporate tax imposition cancellation lawsuit filed by Lotte Chemical against the Jamsil Tax Office chief and the Seoul Regional Tax Office chief. The court stated, "It is the plaintiff's burden to prove that the compensation paid to Mr. Shin partially included remuneration for performing duties, but Lotte Chemical failed to submit evidence to support this."

In 2009, when Lotte Chemical merged its subsidiary Company A, it appointed Mr. Shin, who was an unregistered director, as a non-executive advisor. The company paid him compensation until the board dismissed him in 2015. From October 2017 to April of the following year, the Seoul Regional Tax Office conducted a corporate tax audit on Lotte Chemical and determined that the approximately 1 billion KRW paid to Mr. Shin was unrelated to business activities, thus disallowing it as a deductible expense when calculating corporate tax. Subsequently, the Jamsil Tax Office increased and reassessed the corporate tax and additional tax by about 400 million KRW for that portion. The Seoul Regional Tax Office also notified a change in income amount, classifying the income type as 'bonus' and the income recipient as Mr. Shin. Lotte Chemical filed an appeal with the Tax Tribunal against this decision, but after it was dismissed, the company filed an administrative lawsuit.

During the trial, Lotte Chemical argued, "Mr. Shin played a substantial role and contributed to business expansion and profit increase, performing typical duties appropriate to the position of 'advisor,'" and claimed, "The tax imposition based on the premise that the compensation was unrelated to business expenses is illegal." However, the court rejected the company's argument, stating, "Rather than being normal remuneration for duty execution, it merely took the form of compensation externally to distribute retained earnings of the corporation, constituting a substantive distribution of profits, and therefore cannot be included as deductible expenses."

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