1. Case Overview
A. Party Represented by Barun Law
The defendant, the head of a tax office.
B. Background of the Case
The plaintiff, a company engaged in construction and real estate sales, entered into management-type land trust contracts with trust companies. Under these agreements, the trust companies assumed ownership of business sites and the role of contractor for construction projects, becoming the implementers of housing projects like apartment developments. Meanwhile, the plaintiff, as the settlor, financed the projects. The trust companies carried out the construction projects and sold apartments in the first half of 2015 and the second half of 2016. The plaintiff, assuming it was liable for VAT, issued sales tax invoices based on the sale proceeds and deducted input tax related to construction services. Accordingly, it declared and paid VAT for the respective periods: KRW 1.604 billion for the first half of 2015 and KRW 2.722 billion for the second half of 2016. Following a Supreme Court en banc decision on May 18, 2017 (Decision No. 2012Du22485, hereafter "the En Banc Decision"), which held that the trustee, not the settlor, is liable for VAT on trust property, the plaintiff filed for tax refunds. It sought KRW 2.857 billion for the first half of 2015 and KRW 8.311 billion for the second half of 2016, excluding input tax deductions. However, the tax office refunded only the adjusted amounts of KRW 999 million and KRW 3.266 billion, respectively, while disallowing input tax deductions.
C. Litigation:
The plaintiff argued that before the En Banc Decision, VAT law presumed that the settlor was liable for VAT. Accordingly, the plaintiff received and paid invoices for input tax on construction services. It claimed that there was no legal basis under Article 39 of the VAT Act to disallow these deductions. Thus, it argued that when refunding already-paid VAT post-En Banc Decision, input tax deductions should remain valid, and only sales tax should be refunded. The plaintiff sought to overturn the tax office's partial denial of its correction claim.
2. Judgments
For the First Half of 2015: Seoul High Court Decision 2023Nu57373, dated November 13, 2024.
For the Second Half of 2016: Supreme Court Decision 2024Du44648, dated October 8, 2024.
3. Basis of the Judgment
The main reasoning behind the full-bench judgment in this case is as follows: "When a trustee manages or disposes of trust property received from the trustor and supplies goods, the trustee becomes the party to the contract as the subject to whom the rights and obligations related to the trust property are attributed and handles the trust affairs. Therefore, the trustee, who transfers the authority to use and consume the goods to the counterparty of the transaction through the act of supplying goods, must be considered the liable party for the payment of value-added tax (VAT)." Furthermore, the VAT Act taxes the transaction itself, which involves the "supply of goods or services" as a basis for value creation, rather than directly taxing the income or value added generated from the transaction. Considering this, regardless of who is ultimately entitled to the income or value added from the transaction, the outward supplier in the transaction is the trustee, who qualifies as the party eligible for the deduction of input tax. It was thus determined that the plaintiff (the trustor company) is not eligible for the deduction of input tax.
4. Our Argument and Role
This full-bench judgment considers the trustee as the liable party for VAT payment concerning trust property, not as argued by the plaintiff, where only the output tax liability is imposed on the trustee while the input tax deduction eligibility remains with the trustor. In addition, the European Court of Justice case cited by the plaintiff concerns the "transfer of business" of German limited liability companies and limited partnerships, making it unsuitable for interpreting VAT liability related to "trust" property in this case. After this full-bench judgment, the amended VAT law explicitly recognized that trustees, not trustors, are eligible for input tax deductions. The amendment even created exceptions to the principle that input tax deductions cannot be claimed for tax invoices with false information, allowing trustees to claim input tax deductions for invoices in the name of the trustor (the party who actually paid the input tax in the past). We successfully presented and proved these points, leading to the the tax office's victory.
5. Significance of the Judgment
Following this full-bench judgment, there have been numerous amendment requests by trustors aiming to avoid input tax denial while only seeking refunds for output tax. Moreover, internal guidelines of the National Tax Service inconsistently regarded the name on tax invoices related to trust property supply as that of the trustor, while also stating that input tax deductions cannot be claimed for such invoices by trustees. This judgment clarifies that even if the trustor had previously paid the input tax, the trustee, as the VAT payer, is the entity eligible for input tax deductions. It establishes consistency in processing amendment requests. For taxpayers, this judgment also provides clear guidance that resolving input tax already paid by the trustor lies within the internal relationship between the trustor and trustee, not through amendment requests to the tax authority.
