KEPCO Sues Pyeongtaek City Over Undergrounding VAT...Final Defeat in Supreme Court

Supreme Court: "Undergrounding Contributions Are Not Consideration for Services"

KEPCO's Appeal Dismissed... Only Actual VAT Expenditures Recognized

The Supreme Court has issued a final ruling that, in the case of underground power line construction projects carried out by Korea Electric Power Corporation (KEPCO) at the request of local governments, the construction cost contributions paid by the municipalities are not subject to value-added tax (VAT).

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

According to the legal community on August 2, the Supreme Court’s Third Division (Presiding Justice Park Youngjae) recently upheld the previous court decision in favor of KEPCO in the appeal trial of a construction payment lawsuit filed by KEPCO against Pyeongtaek City, confirming a partial victory for the plaintiff.

KEPCO and Pyeongtaek City signed an implementation agreement in March 2017 to relocate overhead power distribution lines underground in the Seojeong-dong area of Pyeongtaek. Under the Electric Utility Act and related regulations, Pyeongtaek City agreed to cover 50% of the undergrounding construction costs and 100% of the road restoration costs.

After the project was completed, KEPCO demanded that the total amount of the cost sharing contributions include VAT, but Pyeongtaek City rejected the payment, arguing that the contributions themselves were not subject to VAT. In response, KEPCO filed a lawsuit seeking payment of the outstanding contributions and VAT.

In the first trial, the court did not accept KEPCO’s argument to add VAT and ruled that Pyeongtaek City should only pay the construction cost share of approximately 89.81 million won, excluding VAT.

The second trial also determined that the contribution itself does not constitute “consideration for the supply of services” under the Value-Added Tax Act. However, it held that the VAT of about 190 million won actually paid by KEPCO to subcontractors during the project should be counted as an actual construction cost and that Pyeongtaek City should bear its share accordingly. As a result, the amount Pyeongtaek City must pay KEPCO was increased to about 93.64 million won.

The Supreme Court reached the same conclusion. The court stated, “Under electricity regulations, underground relocation projects are fundamentally carried out by electric utility operators under their own authority and responsibility. Even if there is a cost-sharing agreement with a local government, the funds received from the municipality cannot, absent special circumstances, be regarded as consideration for services provided and therefore are not included in the VAT tax base.” The court dismissed the appeal.

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