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Winning a Tax Tribunal case involving the issue of deemed interests for related-party loans

2021-01-22

January 22, 2021, Lee & Ko Tax Practice Group successfully represented its client, a Korean flag carrier airline, and led the Tax Tribunal to cancel a corporate income tax assessed by the National Tax Service (the “NTS”) based on “deemed interests.”

 

This case involves a complicated tax issue of whether a taxpayer should be considered to receive an interest income in relation to the related-party loans even when the repayment of the loans have become objectively impossible due to the insolvency of the debtor under the provision of Rejection of Unfair Act and Calculation of the Corporate Income Tax Act (the “RUAC” rule). The NTS applied the RUAC rule to take the position that the client should be deemed to receive the interest and assess the corporate income tax on such “deemed interests.” In order to do so, the NTS maintained that i) even after the debtor’s declaration of insolvency, the  debtor, as a related party of the taxpayer, still enjoys the profits from the interest-free loans from the taxpayer to the debtor, and ii) under the RUAC rule, the taxpayer should be deemed to receive the interests regardless of whether the interests have been actually paid or not.

 

Our experienced tax experts successfully refuted the NTS’ arguments by presenting that i) it is not reasonable to require the taxpayer to recognize the interests that the taxpayer would have received from its related party debtor as taxable income even after the debts have become non-recoverable, and ii) the conditions for applying the RUAC rule were not satisfied.

 

This case will stand as a seminal case and establish the principle that the recoverability of debts should be considered in determining whether interests for a related-party loan should be deemed to be received and recognized as taxable income under the RUAC rule.

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