Company S spent research and human resource development expenses ("research expenses") that are eligible for corporate tax credits or carryforward deductions, but was unable to receive tax credits or carryforward deductions from its corporate tax for the relevant business year due to failure to meet the minimum tax threshold

In relation to the research expenses, Company S filed and paid corporate taxes for the 2014 and 2017 business years by applying the carryforward deduction under Article 144(1) of the former Act on Restriction on Special Cases Concerning Taxation (the “Act”). However, when Company S filed and paid local income tax for the same period, it did not apply the carryforward deduction under Article 144(1) of the Act due to the change in the taxation system to an independent tax system.

Subsequently, based on the transitional provisions of the supplementary regulations to the revised Local Tax Act (the “transitional provisions”), Company S claimed that the effect of the corporate tax carryforward deduction for the 2014 and 2017 business years related to the research expenses also applied to the local income tax for the same period, and on October 5, 2018, it filed a claim seeking a partial refund of the local income tax originally declared and paid, but the administrative agency rejected it.

In order to protect Company S’s vested rights and trust in the provisions of the old Local Tax Act and the Act, the district court held that the tax base and tax rate of the old Local Tax Act should be applied to the local income tax for the 2014 and 2017 business years based on the transitional provisions. Whether the interpretation of the transitional provisions was correct was an issue in this case.

​3. Our role

On behalf of the administrative agency, we argued that the trial court’s decision contained a legal misunderstanding regarding the scope of the “former regulations” in the transitional provisions, a legal misunderstanding regarding the requirements for applying the transitional provisions, and a legal misunderstanding regarding the need to protect trust.

​4. The Supreme Court's judgment

The Supreme Court quashed the trial court's judgment and remanded the case to the trial court for a new trial for the following reasons:

(1) Since the transitional provisions in this case established the relationship between the application of the new and old statutes following the amendment of the act, it should be considered that the “former regulations” refer only to the main provisions of the former Local Tax Act, which were the subject of amendment. Therefore, Article 144(1) of the former Act, which was not in the main provisions of the former Local Tax Act and was not the subject of amendment, could not be considered to fall under the above “former regulations.”

(2) Furthermore, Article 144(1) of the former Act is only applicable to tax credits and carryforward deductions for corporate taxes, not to tax reductions for the corporate portion of local income tax.

(3) Articles 89(1) and 94(1) of the former Local Tax Act, which were the subject of amendment in this case, only stipulate the calculation method for the corporate portion of local income tax, but it cannot be said that the regulations directly specify tax reductions for the corporate portion of local income tax.

(4) In the end, it cannot be said that there is a “former regulation that explicitly stipulates a tax reduction for a limited period of time in the future” in this case, so the tax base and tax rate of the old Local Tax Act cannot be applied to the local income tax for business years 2014 and 2017 based on the transitional regulations.

​5. Implications

This is a significant decision that once again confirms the principle of tax jurisprudence that the interpretation of tax laws and regulations, regardless of whether they are regarding taxation, non-taxation or tax reduction requirements, will be interpreted according to the text of the law unless there are special circumstances, that it is not permissible to make an extension or inference without reasonable reasons, and that the scope of the relevant transitional regulations, namely the supplementary regulations, will not be unreasonably extended in the interpretation of the supplementary regulations unless the supplementary regulations to the amended law expressly stipulate that the old regulations will be applied retroactively.

□ Attorneys in charge: Park Chang-ryul, Kim Kyeong-yeon