Supreme Court Confirms Cancellation of 10 Billion KRW Corporate Tax Imposition on Celltrion Pharm

[Asia Economy Reporter Choi Seok-jin, Legal Affairs Specialist] Celltrion Pharm has won the final victory in a six-year-long lawsuit against the tax authorities over a 10 billion KRW corporate tax imposition.

According to the court on the 10th, the Supreme Court's 2nd Division (Presiding Justice Min Yoo-sook) upheld the first-instance ruling that ruled in favor of the plaintiff, Celltrion Pharm, in the appeal trial of the corporate tax imposition cancellation lawsuit filed in 2016 against the Yeoksam Tax Office chief, stating, "The defendant's imposition of 9,991,555,400 KRW in corporate tax for the 2009 fiscal year on March 24, 2015, against the plaintiff is canceled."

The court explained the reason for dismissing the appeal, stating, "There is no error in the legal interpretation regarding goodwill under tax law or the principle of good faith and trust as claimed in the grounds for appeal in the lower court's judgment."

Celltrion Pharm recorded 28.2 billion KRW as goodwill in its accounting books, which was the difference between the fair value of Hanseo Pharm's net assets of approximately 35.3 billion KRW and the merger consideration of 63.5 billion KRW, when it acquired and merged Hanseo Pharm in 2009 according to the corporate accounting standards at that time.

Celltrion Pharm neither included this amount in income nor treated it as depreciation loss when filing corporate tax later. This was because it considered goodwill to be only for accounting purposes and not included in "goodwill under tax law" that recognizes property value.

However, the tax authorities regarded goodwill as merger evaluation gains and imposed corporate tax of 9,991,555,400 KRW on Celltrion Pharm in 2015, including an underreporting penalty of 611,054,410 KRW and a late payment penalty of 3,321,625,419 KRW.

In response, Celltrion Pharm filed a lawsuit in October 2016.

Goodwill refers to intangible property value such as a company's brand value or business know-how. The issue in this case was whether goodwill could be regarded as merger evaluation gains.

Previously, the Supreme Court stated about goodwill, "Goodwill means intangible property value that allows a company to earn excess profits higher than the ordinary profits of other companies in the same business due to special technology, social trust, and business relationships or other business functions or characteristics."

It also stated, "If a company absorbs another company through a merger and thereby acquires business functions or characteristics that enable it to earn excess profits higher than ordinary profits before the merger, the intangible value of the absorbed company that can bring higher profitability after the merger may be regarded as goodwill."

The Supreme Court has also taken the position that "In the case of corporate mergers, to tax the goodwill value as merger evaluation gains, the merging company must recognize the absorbed company's trade name, etc., as intangible property value capable of generating future excess profits and evaluate its business value to pay the consideration."

The Seoul Administrative Court, which handled the first trial, ruled in August 2018 that the tax authorities' corporate tax imposition should be canceled, ruling in favor of the plaintiff.

The court pointed out, "The 28,188,718,600 KRW recorded as the value of goodwill in the plaintiff's accounting books appears to be based on corporate accounting standards, but it is difficult to conclude that the plaintiff recognized Hanseo Pharm's trade name, business relationships, or other business secrets as intangible property value with excess profit-making ability and evaluated its business value to pay the consideration, so it does not meet the asset recognition requirements for goodwill under tax law."

It added, "Therefore, unless it is recognized that the asset recognition requirements for goodwill prescribed by law are met in this merger, it is not permissible to tax the accounting amount of goodwill as merger evaluation gains."

The court also stated, "Generally, in lawsuits to cancel tax imposition, the burden of proof regarding the facts of the taxation requirements lies with the tax authorities. In this case, where the plaintiff has never recorded goodwill as a depreciable asset, it is not possible to infer that the taxation requirements are met solely based on the fact that the merger consideration exceeds the fair value of Hanseo Pharm's net assets."

It concluded, "Therefore, the defendant's imposition based on the premise that this goodwill is merger evaluation gains subject to taxation under the Corporate Tax Act is illegal and must be canceled."

Displeased with this first-instance ruling, the tax authorities appealed, but the Seoul High Court dismissed the appeal in June last year.

The Supreme Court also found no problem with the lower court's ruling.

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