[Exclusive] Dongwon Industries Loses Suit to Revoke 3.5 Billion Won Dividend Tax; Supreme Court Upholds Ruling

Lost final appeal over 3.5 billion won in dividend income tax
Supreme Court: "Bonus issues also constitute deemed dividends; tax assessment justified"

Dongwon Industries has been confirmed to have finally lost its legal battle against tax authorities, which imposed dividend income tax on money the company earned through a share swap with an affiliate and distributed to the owner family in the form of free shares (a bonus issue). As a result, Dongwon Industries will not be able to recover the more than 3.5 billion won in dividend income tax it has already paid.

According to legal sources on November 3, the Supreme Court's Second Division, with Justice Kwon Youngjun presiding, last month upheld a second-instance ruling against Dongwon Industries in its lawsuit seeking to revoke the imposition of dividend income tax and other measures against the head of the Seocho Tax Office.

In 2010, Dongwon Enterprise, then the holding company of Dongwon Group, transferred its 100% stake in Dongwon Dairy Foods to listed company Dongwon F&B through a share swap. As a result, Dongwon Enterprise's stake in Dongwon F&B increased from 50.25% (1,574,890 shares) to 59.6% (2,299,863 shares). Dongwon F&B issued 724,973 new common shares and allotted them to Dongwon Enterprise, the largest shareholder of Dongwon Dairy Foods.

In the process, Dongwon Group recorded more than 27.7 billion won in gains as the company's "capital surplus." In 2015, Dongwon Enterprise carried out a bonus issue of more than 24 billion won from its capital surplus, through which the owner family and shareholders acquired 6,377,000 bonus shares.

Tax authorities determined that the bonus issue had been funded by the company's retained earnings and imposed more than 3.5 billion won in dividend income tax. Dongwon Industries, however, filed a lawsuit challenging the assessment, arguing that a bonus issue funded by capital surplus did not constitute a "deemed dividend" under the Income Tax Act. A deemed dividend is the return to shareholders or investors of profits retained within a company from its business activities. Although it is not formally a cash dividend, it is treated as an economic benefit equivalent to one and taxed as a dividend under tax law.

The first- and second-instance courts ruled in favor of the tax authorities. They found that the value of the shares acquired by Dongwon Industries' owner family and shareholders through the transfer of retained earnings generated from business activities into capital constituted a deemed dividend. The courts ruled that taxing shares distributed as dividends was consistent with tax equity, just as it was appropriate to impose dividend income tax on cash dividends paid on shares.

The Supreme Court reached the same conclusion as the lower courts. The panel ruled, "The purpose of treating deemed dividends as dividend income is to tax, in accordance with the principle of tax equity, profits retained within a company when they are returned to and accrue to shareholders or investors. Although the form of the return may not be cash, it provides an economic benefit substantially equivalent to receiving a cash dividend, and is therefore deemed a dividend under tax law." It added, "The lower court made no error that affected its ruling, such as misconstruing the legal principles concerning retained earnings."

Dongwon Group said, "We raised the issue because it stemmed from differing interpretations of deemed dividends, but our position was not accepted, and we respect the court's decision. However, since this was an administrative lawsuit concerning taxes already paid, there is no additional amount to pay."

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