법무법인(유한) 율촌 | Yulchon LLC

Yulchon's tax group earned a Supreme Court victory in a suit seeking the cancellation of a denial of a refund of taxes paid on dividends that were anticipated but never distributed.

After Hyunjin Co.Ltd and Hyunjin Construction Co. Ltd passed a resolution to make a cash dividend to its shareholders, the companies withheld and paid tax on the entire amount of dividends. Shareholders then treated the dividends as dividend income attributable to 2007 and 2008, and paid comprehensive income tax for those years. In September 2009, however, the Hyunjin Construction went bankrupt before the shareholders received the entire amount of dividends. Consequently, the shareholders requested a refund seeking a downward adjustment of the comprehensive tax related to the dividends thatcould no longerbe realized, but the tax authority denied therequest.

The issue in this case is whether a taxpayer may avoid tax liability on dividends where such dividends could not be realized due to changes in economic circumstances aftera resolution authorizing payment of the dividends. In support of the position that taxpayers may avoid tax liability in this case, Yulchon put forth the general tax lawprinciple of “no income, no tax” while arguing that the principle of recognition of determined income and expenses cannot serve as a basis for the claim that justifies taxation of unrealizable income. Through these arguments, Yulchon persuaded the appellate court to reverse the trial court's decision favoring the tax authority, and also succeeded in obtaining a Supreme Court affirmation of the appellate court's decision.

Although courts had previously denied the establishment of tax liability in connection with interest income based on the rationale that such interest had no possibility of collection, no court had reached a decision on similar issues with respect to dividends. This case is significant as the Supreme Court ruled for the first time that a taxpayer may also avoid tax liability with respect to unrealizable dividend income.

Soon Moo Soh, Seok Hoon Kang, Kun Jai Kim and Hwan Jin Jun participated in the case.