“The Supreme Court ruled that if a land seller faces an additional tax of 100 million won because the property was not eligible for tax reduction, despite an agreement that the buyer would cover the capital gains tax, the seller can claim the additional tax from the buyer.
The Supreme Court’s second division (with Justice Oh Kyung-mi presiding) overturned a lower court’s ruling, which had dismissed a claim by plaintiff A against defendants B and C, and sent the case back to Incheon District Court on the 12th.
In 2021, A entered into a contract to sell land in Jincheon County, Chungcheongbuk Province, to B and C for 940 million won, with the contract including a special clause stating that ‘the buyer shall bear the capital gains tax.’ Consequently, B and C, with the help of a tax firm, reported a total of 90.15 million won for capital gains tax and local income tax on the assumption that the land was eligible for tax reductions as a self-cultivated farmland under the Restriction of Special Taxation Act. They paid this amount to A.
However, tax authorities informed A on September 27 of the same year that the land was not eligible for tax reductions and requested an additional payment of 175.25 million won, including capital gains tax and penalties. A conveyed the additional tax to B and C, but they refused to comply. Ultimately, A paid a total of 193.23 million won, including additional local income tax on capital gains and penalties. A then filed a lawsuit against B and C. The main issue was how to interpret the special agreement if the land was not eligible for tax reduction.
The first trial ruled in A’s favor, stating that since there was a contract that the buyers would bear the capital gains tax, they were obligated to pay it. However, the appellate court ruled against A, reasoning that it was difficult to recognize that B and C agreed to or confirmed their intention to bear the capital gains tax imposed if the land did not qualify for a tax reduction.
The Supreme Court stated that ‘the special clause in this case that ‘the buyer shall bear the capital gains tax’ has a clear objective meaning that the defendants bear all the capital gains tax imposed on the plaintiff due to the land sale.’ It was further noted that the contract did not specify that the tax borne by the defendants was contingent on the plaintiff being eligible for a tax reduction. The Supreme Court also said, ‘The special agreement should be interpreted as meaning that the defendants bear all capital gains tax imposed on the plaintiff due to the sale, regardless of the tax reduction eligibility under special provisions.’
The Supreme Court found that the appellate court erred by interpreting the special clause in the contract contrary to its objective meaning, which affected the ruling. Thus, the plaintiff’s appeal was deemed valid, and the case was sent back to the appellate court.”