법무법인(유한) 율촌 | Yulchon LLC

Yulchon's Tax Group successfully represented plaintiff Hana Bank at the Seoul Administrative Court in a dispute over the deductibility of compensation expenses associated with stock options.
 

When Hana Bank was delisted and became a wholly-owned subsidiary of Hana Financial Group Inc. in 2005, it granted stock option in the parent company to its officers and employees. Hana Financial Group paid KRW 23.2 billion to Hana Bank's officers and employees who exercised their stock options in the parent company over the three years from 2006 to 2008. Hana Bank fully compensated Hana Financial Group for these payments. At that time, and in accordance with the tax authority's policy, Hana Bank filed corporate tax returns without deducting these compensation expenses associated with the Hana Financial Group stock options. Hana Bank later applied for corporate tax adjustment, claiming that such compensation expenses should be deductible. The Namdaemun District Tax Office rejected Hana Bank's application for a corporate tax adjustment. Yulchon, representing Hana Bank, filed a lawsuit at the Seoul Administrative Court seeking revocation of the rejection of the application for corporate tax adjustment, claiming that the compensation expenses are a type of labor cost.
 

The tax authority maintained that Hana Bank could not deduct the compensation expenses because it was not the party making payments based on the exercise of the stock options. Hana Financial Group made those payments. Yulchon argued that as long as Hana Bank granted the stock options to maximize work performance, such stock options are characterized as labor costs relating to the bank's business activities. Further, determining whether labor costs are attributable to Hana Bank or Hana Financial Group should be made on the basis of the party substantially compensating for the labor costs, rather than the party making the payments.
 

The Tax Group's arguments were based on the legal character of the compensation expenses and the legislative purpose of Article 19.19 of the Enforcement Decree of the Corporate Tax Act. In ruling for the plaintiff, the Seoul Administrative Court accepted Yulchon's argument and held that the compensation expenses paid by Hana Bank are the bank's labor costs, and nullified the rejection of the application for corporate tax adjustment.
 

This ruling is the first case regarding compensation expenses associated with stock options between a bank and a financial holding company and is significant because it clarified the legal character and nature of compensation expenses as deductible.
 

Partners Soon Moo Soh, Dong Soo Kim and Seok Hoon Kang and associate Beom June Kim from Yulchon's Tax Group handled this case.