Law: "Stock option gains must pay additional tax if paid as capital gains tax instead of earned income tax"

"Even Following Tax Office Staff Guidance, Reporting and Payment Negligence Recognized"

Seoul Administrative Court, Seocho-gu, Seoul. / Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Kim Daehyun] A court ruling has affirmed that imposing additional tax penalties on a taxpayer who paid capital gains tax instead of earned income tax on approximately 1 billion KRW of profits gained from exercising stock options is justified.

According to the court on the 11th, the Seoul Administrative Court Administrative Division 2 (Presiding Judge Lee Jeongmin) recently ruled against Mr. A in the first trial of his lawsuit seeking cancellation of the additional tax penalty imposed by the Dongjak Tax Office chief.

Previously, Mr. A worked as a CEO at the Korean branch of a multinational corporation and received stock options and restricted stock units (RSU?a performance reward system where shares are granted upon achieving company-set goals within a specific period) from the parent company before resigning in 2019.

He exercised stock options for 40,523 shares of the parent company’s stock in 2014 and separately acquired and transferred 3,116 shares, reporting and paying 232.54 million KRW in capital gains tax for the 2014 tax year.

The tax authorities imposed a total tax of 619.15 million KRW on Mr. A in 2019, including 399.75 million KRW in comprehensive income tax for the 2014 tax year, 38.24 million KRW in underreporting penalty tax, and 181.15 million KRW in late payment penalty tax. This followed a tax audit of comprehensive income tax for 2013?2017, which uncovered approximately 1.07344 billion KRW in stock option exercise profits that Mr. A had not reported as earned income. However, 219.7 million KRW already paid was refunded.

Mr. A filed an administrative lawsuit contesting this decision. During the trial, he emphasized, "There was no intent to evade taxes, and I lacked tax information," adding, "I consulted with tax office staff accompanied by a bank employee and filed the report according to their guidance." He argued that as a layperson, it was difficult to determine whether the profits from exercising stock options should be reported as capital gains or as earned income subject to comprehensive income tax.

However, the first trial court did not accept Mr. A’s claims. The court stated, "The profits from exercising stock options granted during employment clearly constitute earned income under relevant regulations and are subject to comprehensive income tax," and pointed out, "The statements from the plaintiff and the bank employee do not clearly indicate the content of consultations with the tax office staff."

The court further explained, "Even if the tax office staff provided incorrect explanations, it is evident that this was due to a misunderstanding of facts or a violation of related laws," adding, "Following such guidance does not constitute a justifiable reason to excuse neglecting the obligation to report and pay comprehensive income tax."

Mr. A has appealed this ruling.