Court: Profits from Multi-Level 'Ponzi Scheme' Are Interest Income... Comprehensive Income Tax Imposition Justified

"Simple Fund Providers Without Bearing Sales Risks
Not Recognized as Business Income"

Yonhap News

A court has ruled that profits earned by investing in multi-level pseudo-deposit-taking companies constitute interest income rather than business income. Therefore, the tax authorities’ decision to impose comprehensive income tax on such profits was deemed lawful.

According to the legal community on May 10, the Seoul Administrative Court’s Administrative Division 4 (Presiding Judge Kim Youngmin) recently dismissed the claims of three plaintiffs, including Mr. A, in their lawsuit against the heads of Gangseo, Banpo, and Seongbuk tax offices seeking to cancel the imposition of comprehensive income tax.

The three plaintiffs, including Mr. A, were investors who handed over investment funds to a pseudo-deposit-taking company and received returns. This company operated a Ponzi scheme, paying profits to existing investors with funds from new investors. The company’s chairman was sentenced to 20 years in prison for fraud and other charges by the Supreme Court in 2022.

The tax authorities determined that the profits the plaintiffs earned through this company constituted "interest income" from non-business lending, and thus imposed comprehensive income tax. In response, the plaintiffs filed an administrative lawsuit, arguing, “We gained profits by jointly purchasing cosmetics and consigning their sale, so the income should be classified as ‘business income’ rather than interest income.”

However, the court did not accept the plaintiffs’ argument. The panel stated, “The plaintiffs merely received a predetermined amount without bearing any risks associated with consignment sales, and thus were, in substance, simple providers of funds.”

The court further pointed out, “The company in question engaged only in pseudo-deposit-taking activities without any actual cosmetics transactions, and the plaintiffs were promised a fixed proportion of profits regardless of how the company was operated. Therefore, it is difficult to regard them as having actually run a cosmetics sales business.”

The claim that there was a tax practice of treating pseudo-deposit-taking profits as business income was also rejected. The panel ruled, “Based solely on the submitted evidence, it is difficult to conclude that such a practice existed in national tax administration. Even if the plaintiffs subjectively trusted in such a practice, it cannot be regarded as legally protected trust with legal justification.”

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