Supreme Court: "Establishment of Emart after Shinsegae's Walmart Acquisition Constitutes Reason to End Tax Deferral"

Shinsegae ultimately lost the lawsuit seeking to cancel the 85 billion KRW corporate tax imposed during the process of splitting Emart.

The ruling stated that Shinsegae's establishment of Emart, after receiving deferred tax benefits when acquiring Walmart in 2006, constitutes a "cessation of business," which is a reason for terminating the deferred tax benefit.

Supreme Court, Seocho-dong, Seoul.

According to the legal community on the 21st, the Supreme Court's 2nd Division (Presiding Justice Min Yu-sook) upheld the lower court's ruling that dismissed Shinsegae's lawsuit against the Seoul Jungbu Tax Office seeking to cancel the corporate tax imposition.

The court explained the reason for dismissing the appeal, stating, "There is no error in the lower court's judgment regarding the interpretation of 'cessation of business' as defined in the pre-amendment Corporate Tax Act, 'disposition' as defined in the pre-amendment Enforcement Decree of the Corporate Tax Act, and the prohibition of retroactive taxation contrary to the non-taxation practices under the Framework Act on National Taxes." The court also ordered Shinsegae to bear all litigation costs.

After acquiring Walmart in September 2006, Shinsegae changed its company name to Shinsegae Mart and merged it by absorption with a deadline of December 2008. This merger was recognized as a "qualified merger" under the Corporate Tax Act, allowing Shinsegae to receive deferred tax benefits on approximately 259.6 billion KRW of capital gains from the fixed assets inherited through the merger. Deferred taxation is a system that postpones tax payments.

In 2011, Shinsegae restructured by separating the large mart business segment and establishing Emart. At that time, Shinsegae transferred a provision of 246 billion KRW related to the Walmart acquisition to the newly established Emart.

The tax authorities judged that the deferred taxation ended due to the split and deemed it improper for Emart to inherit the remaining balance. Consequently, in January 2016, they imposed 85.3 billion KRW in corporate tax on Shinsegae.

Shinsegae filed an administrative lawsuit seeking to cancel the corporate tax imposition, arguing that the Emart split did not constitute a "cessation of business" or "disposition of assets," which would terminate the deferred taxation.

However, the first-instance court dismissed Shinsegae's claim, ruling that the split constituted a "cessation of business," a reason for terminating deferred taxation at that time, and that the corporate tax imposition was lawful.

The court concluded that since the split occurred in 2011, within three years from the start of the business year following the merger registration date in 2008 (i.e., January 2009), it fell under the reasons for terminating deferred taxation as stipulated in the Corporate Tax Act at that time.

The court stated, "Unless there is an explicit provision in the pre-amendment Corporate Tax Act and its Enforcement Decree that excludes qualified splits following qualified mergers from being considered 'cessation of business,' it is difficult to interpret this split as excluded from 'cessation of business.'"

It added, "Even if there is a policy necessity to grant deferred tax benefits for qualified splits occurring during the post-management period of a qualified merger, considering the promotion of corporate restructuring and ensuring tax neutrality, it is difficult to interpret the pre-amendment Corporate Tax Act and its Enforcement Decree in a way that contradicts the principle of legality in taxation based solely on such policy needs."

Shinsegae appealed, but the second-instance court reached the same conclusion.

The Supreme Court also found no problem with the lower courts' judgments.

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