Supplying Works of Art Mistakenly Treated as VAT-Exempt... "Legitimacy of Additional Tax Penalty Must Be Examined"

[Judgment Result]

The Supreme Court has ruled that if someone mistakenly believes that a contract to supply works of art is exempt from value-added tax (VAT), it is necessary to examine whether there was a legitimate reason for exempting the additional tax penalty.

The Supreme Court Special Division 1 (Presiding Justice Noh Taeak) overturned the lower court's ruling, which had found entirely against the plaintiff in the appeal case (2024Du66181) filed by artist Cho against the tax authorities seeking cancellation of the tax disposition, and remanded the case to the Seoul High Court on June 12.

Supreme Court. Asia Economy DB.

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[Facts]

Mr. A entered into a contract with a construction company to create and install an artwork in an apartment building. The contract included not only the creation and installation of the artwork, but also the process of obtaining approval from the relevant authorities for installing the artwork in the building.

However, Mr. A determined that what he was supplying qualified as a pure work of art, and therefore believed it was exempt from VAT, so he issued an electronic invoice for tax exemption purposes.

Nevertheless, the tax authorities regarded the contract as a comprehensive service contract rather than a simple supply of artwork, and imposed an additional tax penalty on Mr. A for failing to issue a tax invoice. Mr. A filed a lawsuit seeking to cancel the tax disposition.

[Lower Courts]

The court of first instance partially ruled in favor of Mr. A. While it acknowledged that the service in question constituted a comprehensive service for the completion of a building, rather than a simple supply of artwork, and was therefore subject to VAT, it found that Mr. A had a legitimate reason for not issuing a tax invoice and canceled the additional tax penalty.

In contrast, the appellate court ruled against the plaintiff. The appellate court held that the main purpose of the contract was to provide taxable services such as obtaining approval from the tax authorities, and that the creation and installation of the artwork was merely a means to that end. Therefore, even if Mr. A misunderstood the contract as being VAT-exempt, the court found there was no legitimate reason to exempt the additional tax penalty.

[Issue]

Whether there is a legitimate reason to exempt the additional tax penalty when the supply of services including works of art is mistakenly regarded as VAT-exempt.

[Supreme Court Decision]

The Supreme Court overturned and remanded the case, stating that the lower court had misunderstood the legal principles. The Supreme Court explained, "It is difficult to conclude that, at the time of the contract, it was clearly possible to determine whether the contract constituted a comprehensive and unified service, including both the creation and installation of the artwork and obtaining approval, or whether these could be considered independent supplies of goods or services."

The Court further noted, "Approximately 73% or 86% of the contract payment pertained to the artwork itself, which is a significantly higher proportion than the part related to obtaining approval from the relevant authorities. Therefore, it cannot be ruled out that the plaintiff may have perceived the creation and installation of the artwork as the main content of the contract and mistakenly regarded the entire contract as VAT-exempt."

The Supreme Court also pointed out, "In determining whether there was a legitimate reason to exempt the additional tax penalty, the lower court should have examined the circumstances under which the plaintiff and the counterparty entered into the contract and, based on the intent and context at the time the contract and related documents were drawn up, how the parties actually understood the relationship between the artwork and the approval process."

The Court concluded, "Nevertheless, the lower court simply determined from the outset that there was no possibility of VAT exemption, and regarded the plaintiff's misunderstanding as mere ignorance or misinterpretation of the law, finding no legitimate reason for exemption. This constitutes a misunderstanding of the legal principles regarding legitimate reasons for exemption from additional tax penalties and a failure to conduct the necessary examination, which affected the outcome of the judgment."

Reporter: Ahn Jaemyung, Law Times

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