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"Tax Planning Failure" LINE Plus Loses Second Appeal Over 23 Billion Won Corporate Tax Dispute

[비즈한국] LINE Plus, the South Korean entity responsible for the global operations of the messenger app 'LINE', has lost its appeal in a lawsuit seeking to cancel 23.4 billion won in corporate taxes imposed by tax authorities. The company challenged both the corporate tax levied following a tax audit and the National Tax Service's decision to reduce an 80 billion won carry-forward loss (deficit) that could have provided future tax savings. However, the court ruled in favor of the tax authorities. Having suffered a near-total defeat from the initial tax tribunal to the second round of litigation, LINE Plus has now filed an appeal to the Supreme Court.

Why the Court Ruled the 20 Billion Won Tax Levy ‘Lawful’

It was recently confirmed that LINE Plus, which had filed an administrative lawsuit to challenge the corporate tax assessment, lost its second appeal after five years of legal battling. Last July, the 1st Administrative Division of the Suwon High Court ruled against the plaintiff in the lawsuit filed by LINE Plus against the Commissioner of the Bundang District Tax Office to cancel the corporate tax imposition.

In 2018, LINE Plus was audited by the National Tax Service after it was discovered that the company had recorded the issuance price of new shares far higher than the actual market value during a process of repaying debts owed to its Japanese parent company, 'LINE Corporation (LINE Japan)', through a debt-for-equity swap. At the time, the Bundang District Tax Office determined that LINE Plus had omitted 'debt waiver gains' in the process of capital injection, thereby underreporting its corporate tax.

In August 2014, LINE Plus borrowed 12 billion yen (approximately 109.3 billion won) from LINE Japan. Of this debt, 50 billion won was repaid by issuing 500,000 new shares for cash, while the remaining 109.3 billion won was swapped for 1,093,848 new shares (at 100,000 won per share). Although the par value of the stock was 5,000 won per share, 151.4 billion won was recorded on the books as 'capital surplus from share issuance'.

Authorities noted that the issue price was excessively higher than the market value (which was 19,863 won at the time). The Bundang District Tax Office determined that LINE Plus had gained the effect of partial debt forgiveness while omitting the gain from its books to its advantage. The judgment was that the difference between the actual stock value and the inflated value represented an economic gain for the company, which should be subject to taxation. Consequently, in October 2018, LINE Plus was hit with a 23.8 billion won corporate tax bill and a reduction of 87.6 billion won in 2013-2014 deficit carry-forwards.

In court, LINE Plus argued, "This contradicts the Corporate Tax Act, which does not tax capital transactions, and even if net assets increased, no actual income was generated, nor did the tax-bearing capacity increase." However, the court ruled that because the debt was forgiven relative to the actual market value of the shares, a clear economic benefit was conferred upon the company, making the taxation lawful.

The Suwon High Court stated, "While such debt forgiveness does not increase the company's assets, the reduction in liabilities increases the net assets of the corporation, thereby increasing its income. Through this debt-for-equity swap, the company's financial structure was improved by the extinguishment of debt equivalent to the amount issued above market value, which signifies an increase in tax-bearing capacity." The court rejected the plaintiff's arguments, explaining that by issuing shares at a higher price than their actual value, the company effectively received debt relief, and that profit is not a simple capital transaction but equivalent to receiving a debt waiver.

Demands to Reflect Platform Value and Other Factors Rejected

LINE Plus argued that the reduction of its deficit and the corporate tax levy were illegal, putting forth various arguments regarding valuation methods such as market price calculation, discounted cash flow (DCF), recent profit performance, and the inclusion of IT platform value. Most of these arguments were dismissed.

LINE Plus contended that tax regulations regarding debt-for-equity swaps should not be universally applied but limited to cases under special laws related to corporate rehabilitation or restructuring. The company argued that the transaction did not fall under a general swap based on Commercial Law; however, the court held that, based on the intent of the legislation, tax regulations apply equally to swaps carried out under Commercial Law.

The logic that the value of the platform asset, 'LINE Messenger', should be reflected was also rejected. The company argued that, given the nature of IT platform companies, valuations should be based on the appraised value of core IT assets rather than book figures. LINE is a messenger app launched in Japan by Naver035420 in 2011 and has established itself as a leading platform in Japan, Taiwan, and Thailand. LINE Plus, headquartered in Korea, is a subsidiary of LY Corporation, which was formed through the merger of LINE Corporation (LINE Japan), a former Naver subsidiary, and Yahoo Japan, and handles LINE's overseas business. The parent company, LY Corporation, has A Holdings—jointly owned by Naver and SoftBank at 50% each—as its largest shareholder (64.4%).

If the arguments of LINE Plus were accepted, the addition of IT asset appraisals would raise the share price and change the tax interpretation, potentially cancelling part of the tax levy. However, this is viewed as conflicting with the legal principle that platform profit-sharing rights cannot be considered intangible assets defined by law, such as patents or copyrights.

The court ruled, "Companies cited by LINE Plus as examples, such as Kakao, Coupang, Yanolja, and Zigbang, are companies that build and operate their own platforms, so they cannot be viewed as identical to the plaintiff in terms of asset or operational structure." It added, "There is no legal basis to suggest that the value of intangible assets owned by a parent company should be reflected (in this matter), and it is difficult to see such a claim as reasonable."

As the deficit recognition decreased following the National Tax Service’s decision, the tax savings effect for LINE Plus vanished, and the 23.4 billion won in taxes (including penalties) has already been paid in full. It is understood that LINE Plus has submitted an appeal to the Supreme Court following its loss in the second trial. This is interpreted as an intention to have the final court determine various issues, including the legal interpretation of debt-for-equity swap taxation and the valuation of IT and platform assets. Should they win in the Supreme Court, they could receive a full or partial refund of the taxes paid, depending on the outcome.

A representative for LINE Plus stated, "The corporate tax imposed has already been paid," adding, "This matter is currently proceeding to the Supreme Court."