CONTENTS
- 1. Tax Evasion Allegations | Summary of the Facts in the Cha Eun-woo Controversy
- - Distinguishing a Notice of Additional Tax Collection From the Establishment of Tax Evasion
- 2. Tax Evasion Allegations | Subjects and Procedures of a Tax Investigation
- - Types of Tax Investigation
- - Tax Investigation Procedure
- - The Focus of the National Tax Service's Assessment Criteria
- - Appeal Procedures Following a Tax Investigation
- 3. Tax Evasion Allegations | The Permissible Scope of Using a Corporation
- - Problems With Changing the Corporate Form
- 4. Tax Evasion Allegations | The Criteria for Escalation Into Criminal Liability
- - Level of Punishment and Administrative Dispositions
- 5. Tax Evasion Allegations | Points the General Public Must Be Sure to Distinguish
- - Tax Evasion Allegations, the Limits of Response and Structural Risks
1. Tax Evasion Allegations | Summary of the Facts in the Cha Eun-woo Controversy
Actor Cha Eun-woo, who has become embroiled in tax evasion allegations, is reported to have been notified by the National Tax Service of an additional tax collection relating to income tax and other matters.
The Fourth Investigation Bureau of the Seoul Regional Tax Office is reported to have conducted an intensive tax investigation into the single-person agency corporation operated by Cha Eun-woo's mother and to have taken issue with circumstances indicating that the corporation had a structure through which Cha Eun-woo's income was transferred to it, thereby being subjected to a tax rate lower than the statutory income tax rate.
During the investigation, the National Tax Service is reported to have focused on whether the corporation functioned as a substantive provider of management and other services.
In particular, after reports emerged that the corporation's registered address was connected to a restaurant in the Ganghwa-do area, suspicions arose as to whether it was a paper company without substance, and the question of whether the address had been set for the purpose of tax avoidance by using an area with a relatively lower tax burden under the Seoul Metropolitan Area Readjustment Planning Act came to the fore as an issue.
However, there has been no official confirmation to date that a tax offense investigation or a criminal accusation has been initiated, and this matter remains at the stage of an administrative tax investigation and notification of additional tax collection.
Cha Eun-woo's side explained the circumstances under which his mother came to establish and operate the management corporation directly amid the confusion caused by the change of management at Fantagio, and stated its position that the corporation is a company with substance, formally registered as a popular culture and arts planning business.
It also emphasized that a request for pre-assessment review (a Korea-specific procedure allowing a taxpayer to contest a tax assessment before it is formally issued) has currently been filed and that the results of the tax investigation have not yet been finalized, and it expressed its intention to provide a full explanation.
Distinguishing a Notice of Additional Tax Collection From the Establishment of Tax Evasion
A notice of additional tax collection by the National Tax Service is not, in itself, a determination that confirms the establishment of a crime such as a violation of the Punishment of Tax Evaders Act.
The additional tax notified as a result of a tax investigation generally includes not only the unpaid tax but also a penalty tax for unjustified underreporting and a penalty tax for late payment.
Accordingly, it is not appropriate to conclude, merely on the ground that the amount of additional tax collection is large, that “tax evasion has been confirmed” or that “there was income of that amount.”
In tax evasion allegation cases, the scale of additional tax collection is merely an indicator of the outcome, and it is not the starting point for the legal assessment.
2. Tax Evasion Allegations | Subjects and Procedures of a Tax Investigation
A National Tax Service tax investigation is an administrative investigation conducted to verify whether a taxpayer has faithfully reported and paid taxes in accordance with the tax laws.
Based on account books and various materials, it verifies the attribution of income, sales, and assets, as well as the appropriateness of the reporting, and its scope includes not only direct taxes such as corporate tax, income tax, inheritance tax, and gift tax, but also indirect taxes such as value-added tax.
A tax investigation is not limited to large corporations or well-known figures, and anyone with a tax obligation, including individual and corporate business operators, the self-employed, freelancers, and high-income professionals, may become a subject.
In particular, the likelihood of being selected as a subject of investigation increases where a person holds income or assets above a certain level, or where a possibility of omission is detected in the reported contents.
In addition, a tax investigation may also be initiated where a specific report of tax evasion is received.
Types of Tax Investigation
National Tax Service tax investigations are broadly divided into regular tax investigations and irregular tax investigations (special tax investigations).
This is a procedure for periodically reviewing the appropriateness of reporting on the basis of the Framework Act on National Taxes, and a subject is selected where the taxpayer has not been subject to a tax investigation for a long period, where suspicions of unfaithful reporting have been detected, or by means of random selection.
2. Irregular Tax Investigation (Special Tax Investigation)
This is conducted where there is a clear suspicion of omission or where specific grounds exist, such as false transactions, a borrowed-name structure, or a report of tax evasion, and it is characterized by being carried out without prior notice.
Tax Investigation Procedure
In the case of a regular tax investigation, prior notice is, in principle, given 15 days before the commencement of the investigation.
At the outset of the investigation, the identity of the investigating official is confirmed and an explanation of the taxpayer's rights is provided, and the tax items subject to the investigation, the taxable period, and the scope of the investigation are explained.
After the investigation concludes, notification of the investigation results is generally given within 20 days, and the taxpayer may proceed with an objection or other appeal procedure in response.
By contrast, an irregular tax investigation begins with an on-site visit without prior notice.
During the investigation, the organizational structure, the flow of funds, transaction records, corporate accounts, and transactions with specially related parties are intensively examined, and necessary materials are taken to the National Tax Service for in-depth analysis.
In this process, along with the calculation of the additional tax to be collected, whether to convert the matter into a tax offense investigation may be considered, depending on the case.
The Focus of the National Tax Service's Assessment Criteria
In a tax investigation, what the National Tax Service examines most intensively is not the amount of income but the structure through which the income is attributed.
That is, even where a corporation exists in form, it makes a comprehensive assessment of whether the corporation actually functioned as an independent business entity.
The National Tax Service examines the following factors together.
2. Whether the party to the contracts was the corporation rather than the individual
3. Whether the corporation substantively bore the business risks and responsibilities
4. Whether the income-dispersing structure was the result of normal business operations
In this process, where a corporation is found to have form alone, that is, a so-called “paper company,” the income may be reclassified as that of the individual under the principle of substantive taxation.
Appeal Procedures Following a Tax Investigation
Where a taxation disposition has been issued as a result of a tax investigation but the taxpayer does not agree with it, the taxpayer may apply for relief through the following procedures.
2. Request for review (a Korea-specific pre-litigation administrative remedy, such as a tax objection raised before resorting to the courts) (filed with the Commissioner of the National Tax Service)
3. Appeal to the Tax Tribunal (a request contesting an administrative action before an agency prior to court litigation, comparable to seeking administrative review) (filed with the President of the Tax Tribunal)
4. Filing of administrative litigation (filed with the administrative court)
Administrative litigation must be filed within 90 days from the date of the decision on the request for review or the appeal to the Tax Tribunal, or within one year from the date on which the taxation disposition was directly received.
3. Tax Evasion Allegations | The Permissible Scope of Using a Corporation
The act of a high-income earner or entertainer establishing a corporation through which to carry out activities is not, in itself, unlawful.
Tax savings through a corporation may likewise be a legitimate choice within the scope permitted by law.
The issue lies in the substance of the business. If a corporation does not actually carry on business and functions only as a means of dispersing income, then from that point it may be assessed not as tax savings but as a tax evasion allegation.
In the recently controversial Cha Eun-woo case as well, the core issue that the National Tax Service took up was not the size of the income but whether the corporation was a substantive provider of services.
Problems With Changing the Corporate Form
The act of changing the corporate form from a stock company to a limited liability company (LLC) is, in itself, lawful.
In a tax investigation, however, the questions of “why this structure was chosen, and why at this point in time” are always examined together.
Where a conversion into a form that is not subject to external audit obligations and whose internal structure is relatively less exposed appears to be combined with the purpose of concealing income or evading tax oversight, this may serve as a circumstance supporting the existence of intent behind the tax evasion allegation.
4. Tax Evasion Allegations | The Criteria for Escalation Into Criminal Liability
The conclusion of a tax evasion allegation case turns on whether intent is recognized.
→ The matter may be concluded through administrative procedures, such as additional tax collection and the imposition of penalty taxes.
2. Where intent is recognized
→ Criminal liability for a violation of the Punishment of Tax Evaders Act comes into question, and the possibility that it may lead to an accusation by the National Tax Service to the prosecution cannot be ruled out.
Level of Punishment and Administrative Dispositions
Category | Applicable Requirements | Key Contents |
Simple Underreporting or Error | Misinterpretation of the tax law, calculation error, no intent | Collection of the principal tax + general penalty tax (unfaithful reporting and payment) |
Unjustified Underreporting | False reporting and circumstances of income concealment, but insufficient proof of intent | Principal tax + penalty tax for unjustified underreporting (up to 40% of the principal tax) + penalty tax for late payment |
Tax Evasion by Fraudulent or Improper Means | Intentional concealment, such as false contracts, a paper company, or a borrowed-name structure | High-amount additional tax collection + possible accusation by the National Tax Service |
Violation of the Punishment of Tax Evaders Act | Clear intent, organized and deliberate tax evasion | Imprisonment for up to two years or a fine of up to twice the amount of the evaded tax (may be imposed concurrently; aggravated punishment where the evaded tax amount is 300 million won or more) |
Commencement Stage of a Tax Offense Investigation | The National Tax Service assesses the need for criminal punishment | Tax investigation → conversion into a tax offense investigation |
After Accusation to the Prosecution | Resolution by the National Tax Service to file an accusation | Investigation by the investigative authorities, assessment of whether to indict |
5. Tax Evasion Allegations | Points the General Public Must Be Sure to Distinguish
From an attorney's perspective, this matter is not an issue confined to a particular occupational group or to well-known figures.
Not only high-income earners, the self-employed, freelancers, and professionals, but also anyone operating a single-person corporation, a corporation in a family member's name, or a corporation for the purpose of real estate or asset management may face similar issues.
If even one of the items below applies, a review of the structure is needed, bearing in mind the possibility that it may expand into a tax investigation or a tax evasion allegation.
□ Where personal income is being transferred to and processed through a corporation in a family member's name
□ Where a single-person corporation is operated, but the staffing, organization, and division of duties are not clearly defined
□ Where the corporation's registered address is a residence, restaurant, or commercial unit rather than an actual workplace
□ Where the purpose of the corporation's establishment does not match the work actually performed
□ Where a corporation for the purpose of real estate or asset management has been designed with a focus on tax benefits
□ Where there is a history of changing the corporate form from a stock company to a limited liability company (LLC) or the like
□ Where there is an effect of lowering the tax rate through the corporation, but the individual bears the business risk
Even if such a structure does not reveal any problem under ordinary circumstances, once a tax investigation is initiated, it may become subject to the principle of substantive taxation and to an assessment of intent.
A tax evasion allegation is an area that is difficult to resolve through after-the-fact explanation.
You should bear in mind that reviewing and reorganizing the structure at the stage before an investigation is the most practical and safest response.
Tax Evasion Allegations, the Limits of Response and Structural Risks
In tax evasion allegation cases, the most dangerous point in time is not after the tax investigation but the structure-design stage before the investigation.
The boundary between tax savings and tax evasion is not a matter that can be overcome by explaining it after the fact.
A structure that lacks the substance of a business is, with the passage of time, likely to come to light as a problem in the end.
If you have received a tax investigation or a notice of high-amount additional tax collection on a tax evasion allegation, a response that reviews the entire structure from the early stage and takes into account even the criminal risk is needed.
Daeryun, drawing on attorneys handling tax matters and on tax accountants, provides a one-stop response system linking responses to tax investigations, tax-related criminal cases, and advisory work on the corporate structures of high-income earners, and through this it systematically manages legal risks that may expand into a tax evasion allegation.
If you need assistance, you are welcome to arrange a 🔗legal consultation with Daeryun Law Firm LLP.
