Constitutional Court Rules Welfare Points Are Taxable Income

The Constitutional Court has ruled that a legal provision requiring companies to include welfare points provided to employees as taxable income does not violate the constitution.

According to legal sources on June 30, the court issued a unanimous decision on June 24 regarding a constitutional complaint against Article 20, Section 1, Clause 1 of the Income Tax Act, which defines the scope of earned income.

Many companies have implemented systems that allow employees to choose from various pre-designed welfare benefits within a set limit, providing them with a certain number of welfare points each year.

These companies considered welfare points as earned income and withheld income tax from their employees, reporting and paying it to the relevant tax office. However, they later argued that welfare points should not be classified as taxable earned income under the Income Tax Act, requesting refunds for the difference between the withheld tax and the recalculated amount excluding welfare points.

The tax office rejected their refund requests, leading the companies to file a lawsuit seeking to overturn this decision after going through the tax tribunal process. While the lawsuit was ongoing, they applied for a constitutional review of Article 20, Section 1, Clause 1 of the Income Tax Act, but the request was dismissed, prompting them to file a constitutional complaint.

Article 20, Section 1, Clause 1 of the Income Tax Act defines earned income as "salaries, wages, bonuses, allowances, and similar payments received in exchange for providing labor."

The Constitutional Court stated, "The term 'similar payments' in the contested provision refers to all forms of compensation related to the provision of labor in a dependent relationship, regardless of periodicity, form of payment, or name. Therefore, it cannot be deemed excessively abstract or unclear, nor can it be considered a vague concept subject to arbitrary interpretation by tax authorities, thus complying with the principle of clear tax conditions."

The court further explained, "While the term 'compensation' generally refers to all money or goods provided, which can make its scope difficult to define, the contested provision limits the definition of earned income to compensation received for providing labor, thereby clarifying its scope."

Additionally, the court emphasized the need for comprehensive tax coverage to prevent tax evasion and ensure equitable treatment of taxpayers in similar situations. It noted that the legislature structured the contested provision in a non-exhaustive manner to include all forms of compensation received for labor, regardless of their name, to prevent tax evasion through nominal differences.

A court official remarked, "In a previous decision in September 2002, the Constitutional Court ruled that the provision defining 'salaries, wages, bonuses, and similar payments received for providing labor' did not violate the principle of clear tax conditions. This recent ruling reaffirms that the provisions defining earned income in the Income Tax Act also comply with this principle."