[Invest&Law]Venture Shares Received Instead of Land Payment... Court: "No Venture Investment Tax Credit"

Corporation Received Venture Company Shares for Land Sale
Tax Authorities: "Only Cash Payment Qualifies... No Deduction"
First Trial Rules Against Corporation: "Not an Inflow of Risk Capital"

A company that received part of the payment for a land sale in venture company shares requested tax benefits for its investment in the venture company, but the court did not accept the claim. In the first trial, the court ruled, "Only actual cash payments can be considered investments," and determined that converting an existing claim (receivable) into shares does not qualify as an "investment" eligible for venture investment tax credits under the tax law.

According to the legal community on October 22, the Cheongju District Court Administrative Division 1 (Presiding Judge Kim Seongryul) recently dismissed Company A's claim in the first trial of an administrative lawsuit filed by Company A, which sought to overturn the tax authority's decision to reject its request for a correction of corporate tax.

Previously, at the end of 2021, Company A sold a total of 97,000 square meters (worth about 27.7 billion won) of factory land in the Chungnam area to venture company B. In this process, Company A agreed to receive 12 billion won of the sale price in the form of 400,000 shares of Company B, and Company B held a board meeting to approve the issuance of 400,000 new shares. As a result, part of the land sale payment was converted into shares.

Afterward, in 2023, Company A requested a correction of its corporate tax from the tax authorities, asking for a 600 million won tax reduction on the grounds that it had invested in a venture company. The government offers a benefit that allows 5% of the investment amount in a venture company to be deducted from corporate tax. However, the tax authorities refused, stating, "Since this was not a cash investment, it is not eligible for the deduction."

The first trial sided with the tax authorities. The court found that Company A merely received shares as payment for the land, and did not make a new investment in the venture company. First, the court compared Article 13 of the Restriction of Special Taxation Act with Article 13-2 of the same law. These articles respectively address non-taxation of capital gains on venture investment company shares and special taxation for domestic corporations investing in venture companies.

The court stated, "Article 13 of the Restriction of Special Taxation Act recognizes 'conversion of debt into capital' as an investment, but Article 13-2, which applies in this case, does not include such language," adding, "It should be viewed as intentionally excluded by the legislature." The legislative intent behind the special tax treatment for venture companies is to encourage the supply of risk capital involving actual monetary outlays, and the relevant provisions added to the Restriction of Special Taxation Act in 2016 were also intended to promote venture company investments by domestic corporations.

The court further stated, "The 'investment' referred to in the tax law means an actual monetary contribution, such as payment of capital," and"Company A only appeared to make an investment by converting its claim into capital for the purpose of receiving payment for the land sale. Converting an existing debt into shares does not constitute an investment as defined by law," the court ruled.

Additionally,"Special tax treatment is an exception to general legal provisions and therefore cannot be broadly interpreted in favor of the taxpayer,"emphasizing that the requirements for tax credits must be strictly interpreted.Company A has appealed the first trial decision.

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