A court has ruled that special bonuses and loans totaling billions of won paid to a company's CEO are subject to taxation if they are deemed to be profit distribution rather than compensation for normal job performance.
On August 2, the Seoul Administrative Court's Administrative Division 5, led by Judge Lee Jeong-won, issued a partial loss ruling in a lawsuit filed by solar power company A against the tax office regarding the imposition of corporate taxes.
The court canceled the tax on performance bonuses for general employees amounting to over 210 million won but upheld the legality of the corporate tax assessment of 3.62 billion won against the CEO.
In 2022, Company A reported revenues of 35.5 billion won from service fees and paid a total of 11.75 billion won in special bonuses, including 8 billion won to the CEO and 3.75 billion won to employees. Additionally, the CEO received 7.1 billion won in loans, 400 million won in salary, and 3 billion won in dividends that same year.
The National Tax Service, following an investigation, classified the bonuses and loans received by the CEO as taxable income, imposing over 3.83 billion won in corporate taxes. However, Company A argued that these payments were legitimate compensation and part of a normal borrowing relationship, leading to the lawsuit against the tax authority, which the court ultimately sided with.
The court determined that the amounts in question could not be recognized as deductible expenses under tax law.
The ruling noted, "The CEO, as the sole member and representative of the company, had virtually unrestricted authority to determine the amount of compensation. It acknowledged that the company considered ways to maximize cash payments while minimizing tax burdens through legal and accounting advice."
Furthermore, the court classified the 7.1 billion won loan as effectively a bonus, citing its unsecured and interest-free nature and the CEO's use of the funds for high-value asset acquisitions.
However, the court ruled that the special bonuses paid to general employees, excluding the CEO, could be considered compensation for job performance, justifying the cancellation of the corporate tax assessment on that portion.
* This article has been translated by AI.
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