Court Rules "Public Enterprise Welfare Points Are Not Subject to Earned Income Tax"

Daejeon High Court: "Corresponds to Newly Introduced Corporate Welfare"

A court ruling has determined that 'welfare points' given by public enterprises or public institutions to their employees are not subject to income tax on earned income. The judgment was based on the conclusion that these points do not constitute 'earned income' under the Income Tax Act.

According to the legal community on the 21st, the Daejeon High Court Administrative Division 1 (Presiding Judge Lee Jun-myung) overturned the first trial ruling that dismissed Korea Railroad Corporation (KORAIL)'s lawsuit against the Daejeon Tax Office seeking cancellation of the refusal to amend the earned income tax return, and ruled in favor of the plaintiff.

KORAIL has been providing welfare points, which can effectively be used like cash, to all employees since 2007, and had been withholding taxes on them as earned income subject to taxation. However, the situation changed after the Supreme Court's final ruling in August 2019 in a lawsuit regarding the ordinary wages of Seoul Medical Center workers, which stated that 'welfare points do not constitute wages under the Labor Standards Act.'

In March 2021, KORAIL filed a correction claim with the Daejeon Tax Office, requesting a refund of 2,813,470,000 KRW, arguing that it had overpaid taxes by withholding income tax on welfare points for the 2015 tax year. A correction claim is an act by a taxpayer requesting the tax authorities to rectify an overpaid tax amount.

When the Daejeon Tax Office rejected the claim, stating that welfare points are also subject to taxation, KORAIL filed a lawsuit in February of last year. The key issue in the trial was whether welfare points qualify as 'earned income' under the Income Tax Act, since the scope of earned income under the Income Tax Act is broader than wages under the Labor Standards Act.

The first trial court dismissed KORAIL's claim, stating, "All compensation received for providing labor is taxable as earned income." It also ruled that welfare points, which were continuously and equally provided to all employees, could be considered remuneration for labor.

On the other hand, the appellate court judged that welfare points correspond to labor welfare rather than wages or working conditions that specify working hours, and thus are difficult to regard as remuneration for labor. The court explained, "Welfare points are a newly introduced corporate welfare benefit, distinct from various welfare allowances previously paid by KORAIL." It added, "Unlike cash, their usage and methods are restricted; if not used within one year, they do not carry over and expire, and they cannot be transferred." The court further noted, "The restrictions on the rights to use, benefit from, and dispose of welfare points differentiate them from other compensation that falls within the scope of earned income." It also pointed out that since the welfare points for public officials and KORAIL employees are effectively the same in form, applying different tax treatments would likely violate tax equity principles.

In response, the tax authorities filed an appeal to the Supreme Court on the 16th.

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