'100 Billion Won Corporate Tax Lawsuit' Celltrion Pharm Wins Again in Appeal Court

Court: "Taxation on Goodwill is Illegal"
Tax Authorities' Appeal Dismissed

[Asia Economy Reporter Seongpil Cho] Celltrion Pharm has won the appeal in a 10 billion KRW corporate tax lawsuit against the tax authorities.

According to the legal community on the 6th, the Seoul High Court Administrative Division 1-1 (Presiding Judge Go Eui-young) ruled in favor of Celltrion Pharm in the lawsuit to cancel the corporate tax imposition filed against the Seoul Yeoksam Tax Office chief. If the ruling is finalized, the tax authorities must cancel the corporate tax imposition of approximately 9.991 billion KRW levied on Celltrion Pharm. As of the morning of the same day, the tax authorities had not submitted an appeal.

Previously, in August 2009, Celltrion Pharm acquired and merged Hanseo Pharm. At that time, Celltrion Pharm recorded 28.2 billion KRW as goodwill on its accounting books, calculated by subtracting Hanseo Pharm’s net asset value of 35.3 billion KRW from the acquisition price of 63.5 billion KRW. Goodwill refers to the growth potential accumulated through long-term business operations, such as a company’s brand value or reputation. To use a real estate analogy, if you buy an 800 million KRW apartment for 900 million KRW because of its good school district, the 100 million KRW premium paid is considered the 'goodwill' asset.

However, the tax authorities imposed corporate tax, claiming that this goodwill corresponds to merger gains. Celltrion Pharm filed a tax appeal against this imposition, but the Tax Tribunal dismissed the appeal. Consequently, Celltrion Pharm filed an administrative lawsuit. Celltrion Pharm argued, "The difference with Hanseo Pharm’s net asset value was calculated as goodwill in accounting and not included as taxable income for tax purposes," and "It does not correspond to merger evaluation gains, so the tax imposition is illegal."

The first trial court accepted Celltrion Pharm’s argument, stating that it is difficult to conclude that the accounting goodwill is an asset-type goodwill. The appellate court also judged that the original ruling was appropriate. The court stated, "It is difficult to see that Hanseo Pharm at the time of the merger had intangible property value capable of generating excess profits higher than the ordinary profits of other companies engaged in the same business." The fact that Hanseo Pharm’s sales in the year before the merger did not reach the average or median of other small and medium pharmaceutical companies and that its operating profit margin was not high served as the basis for this judgment.

The court also focused on the fact that the stock price of Hanseo Pharm, an unlisted pharmaceutical company, was on a downward trend. The court stated, "At the time of the merger, Celltrion’s merger price was 11,089 KRW, while Hanseo Pharm’s was 3,367 KRW, a difference of about three times, and the merger ratio was calculated as 1 to 0.3 based on this," adding, "It is difficult to see that the business valuation of Hanseo Pharm’s goodwill was highly evaluated."

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