Supreme Court: Actual Manufacturing Facilities Required for Tax Reduction at Knowledge Industry Centers

"Tax Benefits Without Manufacturing Facilities Would Be Excessively Expanded"

The Supreme Court has ruled that for a manufacturing company located in a knowledge industry center to receive local tax reduction benefits, it must have a factory-type facility equipped for actual goods production processes, rather than simply office space.

Supreme Court, Seocho-gu, Seoul. Yonhap News Agency

According to the legal community on June 14, the Third Division of the Supreme Court (Presiding Justice Lee Sukyeon) overturned the previous ruling that had ruled in favor of the plaintiff in a lawsuit filed by Company A, a manufacturing and sales company, against the head of Gangnam District Office in Seoul over the cancellation of a refusal to correct the acquisition tax. The case has been remanded to the Seoul High Court.

In 2019, Company A constructed a knowledge industry center building with nine floors above ground in Gangnam-gu, Seoul. Company A used part of the building as its headquarters facility and engaged in 'manufacturing' by planning clothing and outsourcing the actual production to external companies. Based on this, it requested reductions in acquisition and property taxes under the Restriction of Special Local Taxation Act.

However, the Gangnam District Office denied the tax reduction, citing the absence of actual manufacturing facilities in the building, and Company A filed a lawsuit in response.

The lower courts (first and second instances) had previously ruled in favor of Company A, reasoning that, according to the Korean Standard Industrial Classification, even if a company does not have its own manufacturing facilities, 'indirect manufacturing methods (outsourcing)'—where products are planned and sold under the company’s own responsibility—also fall under the category of manufacturing.

The Supreme Court did not accept this view. The court stated, "Facilities for operating a manufacturing business under the Industrial Cluster Act should be interpreted as a 'factory,' meaning a facility equipped with manufacturing equipment and machinery that actually forms a goods production process."

The court added, "If tax reduction is recognized even without manufacturing facilities, the scope of benefits would be excessively expanded, which could significantly complicate the management and taxation of knowledge industry centers and result in outcomes contrary to the original purpose of the system."

This content was produced with the assistance of AI translation services.