Tax Attorney | Supreme Court Judgment Holding That Operating Fees for a Refund Counter Cannot Be Treated as VAT-Exempt Financial Services

Focusing on the structure and settlement method of the refund-counter operating business conducted by the plaintiff, the lower court determined that the service in question constituted a financial service similar to a money-lending business, an item exempt from value-added tax under the Value-Added Tax Act.

In particular, citing the structure in which the operator of the refund counter first paid an amount equivalent to value-added tax to foreign tourists and then received settlement from the duty-free seller after a certain period had elapsed, the lower court found that the plaintiff stood in a relationship in which it advanced funds to the duty-free seller for a certain period and received a fee as consideration therefor.

The lower court also reasoned that, because the "Public Notice on Matters to Be Observed by Operators" provides that "interest cost" is to be considered in calculating the fee received by the operator of the refund counter, that fee was, in substance, consideration in the nature of interest on the advanced funds.

On this basis, the lower court found that the service provided by the plaintiff went beyond mere refund agency and constituted a financial service similar to a money-lending business that was included among the items exempt from value-added tax under the Value-Added Tax Act.

The Supreme Court first made clear that, under the principle of no taxation without law, not only the requirements for taxation but also the requirements for exemption from taxation must be strictly construed.

It held that, because the Value-Added Tax Act enumerates the items exempt from taxation in a limited manner, the "money-lending business" provided in the Enforcement Decree should likewise be recognized only where its essential elements are satisfied.

The Supreme Court found that the essential elements of a money-lending business must necessarily include the act of providing credit to the counterparty by delivering money on the premise that a certain amount will be returned in the future after a certain period.

This reflects the view that the provision should be construed consistently with the concept of money lending under the Credit Business Act.

Examining the overall refund structure in this case, the Supreme Court determined that it was difficult to find that the plaintiff had provided credit by delivering money to the duty-free seller on the premise of future return.

The court found that the plaintiff was a refund-agency operator that performed the work of refunding value-added tax to foreign tourists on behalf of the duty-free seller, and that it had merely advanced the costs necessary in the course of performing the refund work and received settlement thereof afterward.

This reflects the determination that the arrangement was closer to a relationship of settling costs arising in the course of handling entrusted affairs than to a loan of money.

The court also found that it was difficult to regard the intent of the parties to the transaction as premised on money lending.

The court found that the duty-free seller had merely expected the efficient handling of the value-added tax refund work, and that it was difficult to find that the seller had any intent to borrow money from the plaintiff, and it was likewise difficult to assess the plaintiff as having lent money for the purpose of receiving interest.

The Supreme Court also drew a clear line regarding the point that the relevant public notice provided for "interest cost" to be considered in calculating the fee.

The court determined that the purpose of that provision was merely to require the operator of the refund counter to comprehensively reflect cost factors incurred in operating the business, such as the cost of raising funds, in calculating the fee, and that the fee itself could not be construed on that basis as interest arising from money lending.

In other words, the court reversed the lower judgment and remanded the case to the Seoul High Court, holding that the fee in this case was not consideration for the use of money but that it was reasonable to regard it as comprehensive consideration for handling affairs such as refund-work agency, the operation of computer equipment, and the performance of management tasks.

This judgment offers important implications for various operators whose businesses have an advance-payment and subsequent-settlement structure, such as refund agencies.

This is because it showed that, where the tax authority determines the applicability of a financial service on the basis of only part of a transaction structure, taxation may be imposed in a manner divorced from the substance of the business.

Whether VAT exemption applies is an area that requires a comprehensive analysis of the business structure, contractual relationships, flow of funds, and the nature of the fee, and without professional review by a tax attorney from the early stages, it can be difficult to anticipate the risk of taxation.

In particular, because the application of an exemption may give rise to several years of tax collection and additional taxes, legal and tax review should proceed in parallel from the stage of designing the business structure.

Daeryun Law Firm LLP reviews the unlawfulness of a tax disposition from multiple angles and establishes a stage-by-stage response strategy through a one-stop response system.

While legally reviewing whether the transaction structure challenged by the tax authority satisfies the requirements for taxation under tax law, the firm conducts a parallel tax analysis of the actual flow of funds, the settlement structure, and the nature of the fee, employing a strategy that unsettles the very premise of the taxation reasoning.

In addition, the tax accountants and attorneys experienced in tax matters do not stop at asserting the conclusion that an item falls within the scope of exemption; they present a structural explanation that the court can accept by comprehensively considering the course of taxation at the administrative stage, the interpretation of relevant public notices and practical customs, and the line of precedents on similar matters.

It is also an important strength that the tax accountants conduct a consistent response from preliminary procedures, such as responding to tax investigations, pre-assessment review (a Korea-specific procedure allowing a taxpayer to contest a tax assessment before it is formally issued), objections, and appeals to the Tax Tribunal (a request contesting an administrative action before an agency prior to court litigation, comparable to seeking administrative review), through to the litigation stage.

Further, in matters such as this case, where the duty-free sales and refund structure for foreign tourists is at issue, an understanding of customs practice, including Korea Customs Service public notices, special provisions, and customs verification procedures, is indispensable in addition to the interpretation of the Value-Added Tax Act.

To persuade a court that a refund-counter operating business is refund-agency work rather than a financial service, it is necessary to explain accurately the legal nature of the refund procedure and its role at the customs stage.

A customs specialist at Daeryun who holds a licensed customs broker qualification plays an important role in practically organizing whether the refund requirements are met, the structure of customs verification, and the administrative nature of the refund flow.

If you need the firm's assistance in a related matter, you are welcome to make a 🔗legal consultation reservation at any time.