Supreme Court: "Settlement Payment for Invalid Dismissal Not Subject to Taxation... Comprehensive Judgment Required"

Settlement Money, Taxability of 'Reward Money' in Question... 1st and 2nd Trials "Different in Nature from Reward Money"
Supreme Court "Cannot Unconditionally Decide Settlement Money Is or Is Not Subject to Taxation"

[Asia Economy Reporter Heo Kyung-jun] A retiree who received a ‘settlement payment’ from the company following a court-recommended settlement decision during an unfair dismissal lawsuit will be refunded the income tax withheld from the settlement payment.

It cannot be assumed that a settlement payment is always subject to taxation or always exempt; in this case, the court determined that the settlement payment is difficult to classify as a gratuity.

The Supreme Court’s 3rd Division (Presiding Justice Noh Jeong-hee) announced on the 27th that it upheld the lower court’s ruling partially in favor of wireless communication development company A in the final appeal of a claim objection lawsuit filed against retiree B.

B joined company A in 2006 and worked as a director in charge of government relations (handling matters with government agencies for the benefit of the company) until being dismissed in 2015. The reason for dismissal was allegedly passing information related to a Fair Trade Commission investigation to external organizations or speaking with reporters without company approval.

In response, B filed a lawsuit to confirm the invalidity of the disciplinary dismissal, and both parties accepted the court’s recommended settlement decision of 500 million KRW.

The issue arose when company A paid B the 500 million KRW settlement payment but withheld 100 million KRW in income tax and 10 million KRW in local income tax, considering the settlement payment as ‘other income without necessary expenses,’ and remitted only 390 million KRW to B.

B claimed that the withholding was improper and applied to the court for seizure of the company’s bank deposits and collection orders, which the court accepted. The company promptly filed a claim objection lawsuit.

The trial focused on whether the settlement payment made according to the court’s recommended settlement decision qualifies as ‘gratuity classified as other taxable income.’

The first and second trials ruled that the settlement payment in this case is non-taxable. They found that the settlement payment B received differs in nature from gratuities, which are payments made as a token of appreciation related to office work or services rendered.

The Supreme Court also agreed with the lower courts’ judgment. The bench stated, “Whether a certain payment qualifies as a taxable gratuity should be judged comprehensively by considering the motive and purpose of receiving the payment, the relationship with the other party, the amount, and other factors. In this case, considering the motive and purpose of receiving the settlement payment, the relationship with the other party, and the amount, it is difficult to recognize the settlement payment as a taxable gratuity, and it can be seen as a dispute resolution payment received in exchange for waiving the claim to confirm invalidity of dismissal.”

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