Registration and License Tax | A Supreme Court Judgment Finding That a Capital Increase by Debt-to-Equity Conversion Constitutes a Taxable Object

This is a case in which whether a taxable object for the registration and license tax existed was at issue.

The outline of the case is as follows.

The Rehabilitation Proceedings and the Course of the Debt-to-Equity Conversion

The plaintiff company had rehabilitation proceedings commenced in 2018 and obtained approval of its rehabilitation plan in 2019.

Thereafter, it converted approximately 4.8 billion won of debt into 968,413 shares, but all of the newly issued shares were retired without consideration the following day.

However, the registration of the capital increase was completed in April 2019 upon the court's commission, and the rehabilitation proceedings were closed in September of the same year.

The Tax Disposition

The head of Gangnam-gu Office (the defendant) treated this debt-to-equity conversion registration as a taxable object in 2023 and imposed registration and license tax of approximately 58.1 million won and local education tax of approximately 11.62 million won.

The plaintiff stock company sought revocation of the disposition.

The Supreme Court's determination, however, was different.

The Supreme Court's determination with respect to whether the registration and license tax applied is as follows.

1) The Statute Applicable to the Registration and License Tax

Where statutes conflict, they must be interpreted in accordance with the principle that the later statute and the special statute prevail.

The Court held that, with respect to the registration of a capital increase related to rehabilitation, it accords with the legislative intent that the proviso of the Local Tax Act amended in 2015, rather than the former Debtor Rehabilitation and Bankruptcy Act, applies preferentially.

The Court held that, because this case involved an issuance of new shares without new payment (Article 265), the exemption provision did not apply.

2) Retirement Without Consideration and Taxability

The taxable object of the registration and license tax is ‘the fact of registration or recording itself.’

Therefore, even if the new shares are subsequently retired without consideration, the requirements for taxation are satisfied so long as the registration has already been made.

Tax statutes must, as a rule, be interpreted strictly according to their text, and exemption provisions in particular must be applied even more strictly.

Accordingly, the Supreme Court held that the lower court had erred by misapprehending the legal principles when it revoked the tax disposition on the ground that “there was no substantive change in property rights,” and it reversed the lower judgment and remanded the case for further proceedings.

The registration and license tax takes as its taxable object the fact of registration itself, not the substance of the right.

Therefore, even if the new shares are subsequently retired, this does not affect a tax liability that has already arisen.

In rehabilitation proceedings, the issuance of new shares is divided into two types, which may be summarized as follows.

-Article 266 of the former Debtor Rehabilitation and Bankruptcy Act: where there is new payment or a contribution in kind → exemption may apply
-Article 265 of the former Debtor Rehabilitation and Bankruptcy Act: where there is no new payment → not subject to exemption

This case fell under the Article 265 type, so the exemption did not apply.

The Significance of the Statutory Amendments
-2015 amendment: excluded debt-to-equity conversion and capital increase registrations from non-taxation (shifting them to taxation)
-2023 amendment (enforced in 2024): adjusted them back to exemption, but applied only to rehabilitation proceedings pending at the time of enforcement
-2024 amendment: deleted the exemption provision of the Debtor Rehabilitation and Bankruptcy Act, regulating the matter solely under the Local Tax Act

In other words, the registration at the time of the case (2019) became a taxable object under the 2015 amended provisions.

When structuring a debt-to-equity conversion in rehabilitation proceedings, one must consider that a registration and license tax burden may arise at the registration stage.

This judgment also made clear that the argument that ‘there is no substantive change in assets’ is not accepted as a line of defense.

At Daeryun Law Firm LLP, attorneys experienced in insolvency matters, attorneys experienced in corporate bankruptcy, and attorneys experienced in corporate rehabilitation work together with certified public accountants and tax accountants within the firm to provide the following services.

►Strengthened Advisory at the Rehabilitation Plan Stage

From the stage of drafting a rehabilitation plan that includes a debt-to-equity conversion or a capital increase, we review whether a registration and license tax burden may arise, so that the company can avoid unexpected tax risks.

►Analysis of Advantages and Disadvantages Based on the Timing of Statutory Amendments

We analyze in detail the differences among the 2015, 2023, and 2024 amendments and present the most appropriate direction for legal response according to the timing of the company's case.

►Development of a Dispute Response Strategy

In matters such as litigation to revoke a tax disposition, we build a substantive line of argument grounded in the applicable statute, addenda, and the timing of the case, rather than simply arguing that “there is no substantive change.”

►Preventive Consulting

For companies preparing for or undergoing rehabilitation proceedings, we diagnose the registration and license tax assessment risk in advance and present a prevention-focused strategy so that disputes do not arise.