[비즈한국] It has been confirmed through Bizhankook’s reporting that the Korea Land and Housing Corporation (LH) recently lost a lawsuit it filed against Pyeongtaek City, Gyeonggi-do, demanding a refund of acquisition taxes paid during the construction of a US military base. LH had agreed to build the military base in Pyeongtaek and donate it to the government in exchange for taking over the US military base in Yongsan, Seoul. LH filed the lawsuit, arguing that the government should bear the acquisition taxes incurred during the construction process.
On the 11th of last month, the Suwon District Court’s 4th Administrative Division (Presiding Judge Im Soo-yeon) ruled against the plaintiff in the lawsuit filed by LH against the Mayor of Pyeongtaek, in which LH sought to cancel the refusal of its request for correction regarding acquisition taxes. The court stated, "The evidence submitted by the plaintiff is insufficient to prove that there are special circumstances suggesting the Republic of Korea is the substantive owner of the facilities, and there is no other evidence to support this." LH had filed the lawsuit in March of last year, demanding a refund of taxes imposed by Pyeongtaek City in relation to the acquisition of the US military base.
In November 2011, the government and LH signed an "Implementation Agreement for USFK Facility Projects" to swap the old US military base for a new one. The agreement stipulated that LH would construct facilities for the US military in the Pyeongtaek area and donate them to the government, and in exchange, the government would transfer four sites within the returned Yongsan base (Transport Corps, UNC, Camp Kim, and Niblo Barracks) to LH within the cost limits of the construction. Under this agreement, LH completed 10 facility buildings for US military use in Pyeongtaek, Gyeonggi-do, between February 2019 and March 2021.
The issue arose from the acquisition tax LH paid while building the Pyeongtaek US military base. In July 2022, LH reported and paid a total of 367.91 million KRW in taxes, including 331.37 million KRW in acquisition tax, 16.27 million KRW in local education tax, and 20.28 million KRW in special rural development tax. In October of that same year, LH filed a request for correction, seeking a full refund on the grounds that "LH is not the substantive owner of the facilities, and therefore, under the principle of substance over form, no acquisition tax should have been imposed." However, Pyeongtaek City rejected this request in November 2022.
LH argued for a tax refund based on the principle of substance over form. The principle of substance over form dictates that taxes should be levied based on economic reality rather than external appearance. According to the Framework Act on Local Taxes, if a person listed on paper as the owner is merely a nominal title holder while another person is the actual owner of the income, profit, property, act, or transaction subject to taxation, then the actual owner is considered the taxpayer. In this lawsuit, LH argued that because the Pyeongtaek military base project was substantively a government project, the government should be the taxpayer.
However, the court did not accept LH's argument. The court ruled, "Even if LH intended to donate the facilities it originally acquired to the Republic of Korea immediately upon completion per the agreement, it was set to receive corresponding land as consideration. From the perspective of the Republic of Korea, it was acquiring facilities by paying consideration; thus, the Republic of Korea cannot be viewed as the substantive acquirer of the facilities."
In fact, the Local Tax Act at the time stipulated that acquisition tax must be paid for donations involving consideration, while exemptions applied to donations without consideration. However, the Restriction of Special Local Taxation Act provided special provisions to reduce acquisition tax for donations involving consideration. Based on these regulations, the tax authority, Pyeongtaek City, calculated the acquisition tax by applying the reduction rates stipulated under the Restriction of Special Local Taxation Act.
The court added, "Given the format and wording of the laws, it is difficult to accept the argument that the Republic of Korea is the substantive owner of the facilities based on the principle of substance over form. The tax authority calculated the taxes by applying the reduction rates according to the former Restriction of Special Local Taxation Act, and there appears to be no illegality in that calculation process."
LH appealed the ruling on the 30th of last month. An LH official stated, "We filed the lawsuit because we believe the government is the substantive entity that acquired the Pyeongtaek US military base, especially considering the unique nature of 'land-for-facility' swap projects. We have appealed the first-instance ruling and are preparing for the second trial."
This is not the first time LH has engaged in legal disputes over US military bases. Previously, LH sued the government for the costs of cleaning up contamination on the Yongsan UNC site, which it received in exchange for building the Pyeongtaek base, and was awarded 11.9 billion KRW in damages last December. LH had sold the UNC site it received from the government to the private sector, but the responsibility for cleanup fell on LH after the contamination was discovered during private development (Related article: [Exclusive] "Government is responsible for UNC site cleanup," LH wins 11.9 billion KRW in damages).