Supreme Court Overturns KDB Victory and Remands Case: "Further Review Needed on Nullification of Taxation for Accounts Under Borrowed Names"

Supreme Court: "A Simple Statutory Interpretation Error"
"Cannot Automatically Deem Tax Disposition Null and Void"
"Defect Must Be Significant and Objectively Obvious"
En Banc Legal Principle Reaffirmed

The Supreme Court has overturned a lower court ruling that ordered the return of unjust enrichment on the grounds that a local income tax withholding imposed on a borrowed-name account constituted “unlawful taxation.” The Supreme Court stated that such a tax disposition cannot be deemed automatically null and void solely because it was an incorrect imposition, citing insufficient review as to whether the defect in the tax disposition was both serious and obvious.

According to the legal community on December 1, the First Division of the Supreme Court (Presiding Justice Seo Kyunghwan) overturned the appellate court’s decision in favor of Korea Development Bank in its lawsuit against the Republic of Korea (National Tax Service), Seoul Metropolitan Government, Anyang City, and Yeosu City, and remanded the case to the Seoul High Court.

This case originated when tax authorities imposed local income tax on financial assets deposited in accounts that were later revealed, through a prosecution investigation and a National Tax Service audit, to be borrowed-name accounts. The authorities applied Article 5 of the Real Name Financial Transactions Act, which mandates a 90% withholding tax on income from non-real-name assets. Korea Development Bank filed a civil lawsuit seeking a refund, arguing that the accounts in question were merely borrowed-name accounts and thus not subject to withholding. Both the first and second instance courts sided with the plaintiff, ruling that the income was not subject to withholding and that the taxation had no legal basis, constituting unjust enrichment.

However, the Supreme Court reached a different conclusion. The court reaffirmed its 2018 en banc decision that, for a tax disposition to be automatically null and void, a mere error in legal interpretation is insufficient; the defect must be “serious and objectively obvious.” The court further noted that “whether the income from the accounts in question falls under Article 5 of the Real Name Financial Transactions Act is subject to interpretive dispute,” and criticized the lower court for recognizing unjust enrichment without examining whether the tax authority’s error was so serious and obvious as to render the disposition automatically void.

Accordingly, the Supreme Court set aside the lower court’s ruling and remanded the case, stating that “the necessary review was not sufficiently conducted.”

This ruling reconfirms that even if a tax has been incorrectly imposed, it does not automatically constitute “collection without legal grounds” justifying a civil claim for unjust enrichment. The validity of the administrative disposition-specifically, whether the defect is serious and obvious-must first be strictly examined.

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