Special Tax Investigation on Song Chi-hyung's Lawyer Fee Payment ... Possibility of Prosecution Investigation

Investigation into Unfair Gains from Unlisted Stock Transactions

Domestic No.1 virtual asset exchange ‘Upbit’ is facing the risk of paying tens of billions of won in additional taxes after it was revealed that it covered the litigation costs of Chairman Song Chi-hyung and the management team of Dunamu. Tax authorities view the litigation costs for individual executives as unrelated to business operations, and depending on the investigation results, there is a possibility of prosecution for embezzlement and breach of trust in the course of business. Tax authorities are also reportedly investigating allegations that Dunamu’s executives and related parties gained unfair profits through unlisted stock transactions. Dunamu is the company that operates Upbit.

Possibility of Tens of Billions in Tax Reclaims

The Seoul Regional Tax Office is conducting a special tax investigation, raising issues over Upbit’s use of company funds to cover litigation costs for Chairman Song and others. The amount paid by Upbit for Chairman Song’s criminal litigation costs is reported to be in the tens of billions of won. If these costs are deemed unrelated to business, tens of billions of won in taxes, including corporate tax, value-added tax, income tax, and additional penalties, could be reclaimed.

Upbit’s position is that “since the litigation costs were for lawful performance of duties, there is no problem in paying attorney fees with company funds.” However, legal experts believe that the actions of executives are unlikely to fall within the scope of legitimate business activities, and thus the costs are likely to be considered unrelated expenses under the Corporate Tax Act. A lawyer familiar with corporate cases said, “Since Chairman Song and the executives have been indicted on fraud charges, it is difficult to view this as a legal dispute arising from normal business operations,” adding, “Because the defendant is an individual, not the corporation, the costs are likely to be interpreted as personal expenses rather than business expenses.”

“Corporation Covering Personal Litigation Costs Constitutes Embezzlement”

There is also a Supreme Court precedent related to this. It ruled that when a corporate representative is a party in a case or the corporation is only a formal party, and attorney fees are paid with corporate funds, it constitutes embezzlement (2007Do9679). The corporation has no obligation to bear costs related to the representative’s personal legal issues, and such expenditures are considered acts that harm the corporation’s interests. If it involves personal crimes like self-dealing, the company covering the costs is likely to be interpreted as improper use of company funds,” the lawyer explained. He added, “If costs unrelated to business are paid with company funds, it can be sufficiently interpreted as using company funds for personal purposes, which may lead to embezzlement charges.”

Woo Bin, Legal Newspaper Reporter

※This article is based on content supplied by Law Times.