[Jeondaegyu's 7 Attempts and 8 Failures] Are Taxes Also Discharged in Rehabilitation Proceedings?

Company A, which produced clothing products and supplied them to large corporations, is considering filing for rehabilitation proceedings due to the economic downturn. Although it has many commercial claims and bank loans, its biggest concern is the 1 billion KRW in overdue taxes (corporate tax). Since the company's annual sales are about 5 billion KRW, the unpaid taxes pose a significant burden unless they are reduced. Most debtors who apply for rehabilitation proceedings, like Company A, often have substantial unpaid taxes at the time of application.

In rehabilitation proceedings, tax claims are treated as two main types of claims. One is a rehabilitation claim. A rehabilitation claim means that once the rehabilitation proceedings begin, the creditor cannot exercise their rights and will be repaid according to the rehabilitation plan. Tax claims are, in principle, rehabilitation claims. Therefore, even if the debtor has unpaid taxes, once the rehabilitation proceedings start, the tax authorities (the state or local governments) cannot enforce collection actions (compulsory collection) against the debtor’s assets. The other type is a public interest claim. A public interest claim means that even after the rehabilitation proceedings begin, the creditor can exercise their rights without any restrictions and can be repaid preferentially at any time. Whether a tax claim is a rehabilitation claim or a public interest claim depends on whether the tax obligation was established before or after the start of the rehabilitation proceedings. If the tax obligation was established before the start of the rehabilitation proceedings, it is a rehabilitation claim; if after, it is a public interest claim. However, some tax claims, such as withholding taxes established before the start of the rehabilitation proceedings, are considered public interest claims.

Public interest tax claims in rehabilitation proceedings must be paid preferentially and promptly, and discharge is not recognized. Ultimately, only rehabilitation tax claims have the possibility of discharge in rehabilitation proceedings. So, can rehabilitation tax claims be discharged? Due to their special nature, tax claims are treated differently from other rehabilitation claims. Other rehabilitation claims can be reduced (discharged) by majority vote. However, tax claims are different. To pay taxes in installments for more than three years or to receive any reduction, the consent of the tax authorities is required. For installment payments under three years, only the opinion of the tax authorities is needed. In practice, it is rare for tax authorities to agree to installment payments exceeding three years or to tax reductions on overdue taxes. Therefore, most rehabilitation plans are prepared with a three-year installment payment for taxes. Recently, cases where tax authorities agree to installment payments exceeding three years have increased, but agreements on reductions remain rare.

Ultimately, rehabilitation tax claims are discharged only if the tax authorities agree to the reduction; if they do not agree, discharge is not granted. For this reason, debtors with excessive unpaid taxes find it difficult to gain a chance for rehabilitation through the proceedings. The 1 billion KRW in unpaid taxes of Company A is a rehabilitation claim because the tax obligation was established before the start of the rehabilitation proceedings. Therefore, whether discharge is granted depends on the stance of the tax authorities. If the tax authorities agree to reduce part of the taxes, that portion will be discharged. However, in reality, obtaining such consent is difficult. Consequently, Company A has no choice but to prepare a rehabilitation plan to pay the 1 billion KRW in installments over three years. This type of rehabilitation plan does not require the consent of the tax authorities. If the unpaid taxes were public interest claims, discharge would not be possible.

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court