E-Land Retail Loses Corporate Tax Cancellation Lawsuit Worth 1.2 Billion KRW

E-Land Retail filed a lawsuit against the tax authorities requesting a refund of approximately 1.2 billion KRW in corporate tax but lost the case.

According to the legal community on the 1st, the Seoul Administrative Court Administrative Division 2 (Chief Judge Shin Myung-hee) ruled against E-Land Retail in the lawsuit seeking cancellation of the refusal to revise corporate tax amounting to about 1.26 billion KRW filed against the head of the Banpo Tax Office in Seoul.

In 2014, E-Land Retail sold its fashion brand to E-Land World for 51.1 billion KRW. E-Land Retail was scheduled to receive the payment immediately, but due to E-Land World’s rapidly deteriorating financial situation from the second half of the year, it was decided to collect the payment once the financial difficulties eased. Of the sale proceeds, about 29.6 billion KRW was collected between 2014 and 2016, and the remaining approximately 21.4 billion KRW was collected in June 2017.

Additionally, when E-Land Construction was building the Cheonan logistics center and construction costs increased, E-Land Retail lent 8.5 billion KRW in 2015 and 29.8 billion KRW in 2016 at an interest rate of 4.41% to 5.62% per annum to enable completion of the construction. Furthermore, E-Land Retail paid an advance of 17 million KRW in 2015 to E-Land Construction under the pretext of providing construction payments in advance for department stores, outlets, logistics centers, and other projects.

The tax authorities viewed the delayed collection of receivables from E-Land World and the loans to E-Land Construction as temporary payments unrelated to business operations and imposed corporate tax of approximately 1.26 billion KRW.

During the trial, E-Land Retail argued that it was illegal to consider deemed interest (interest assumed to have been received even though it was not) as 'income' and not to include the interest on related borrowings as 'expenses.' However, the tax authorities rejected the corporate tax revision claim, and the request for adjudication at the Tax Tribunal was also dismissed.

The court sided with the tax authorities, stating that there was no justifiable reason for E-Land Retail to delay the collection of receivables and that it lacked economic rationality.

The court stated, “Although the receivables were collected late, no interest or delay damages were received, which strongly suggests that the plaintiff engaged in transactions with E-Land World, a related party, in a manner not consistent with the reasonable methods of a normal economic actor,” and ruled that “the receivables correspond to temporary payments unrelated to the plaintiff’s business operations.”

Regarding E-Land Construction, the court also ruled, “It is difficult to consider that the plaintiff’s lending of funds separate from construction payments to the construction company has an objective business-related connection,” and “there is sufficient reason to believe that the funds were provided due to the special relationship.”