Is a Wrongful Act Committed by an Employee the Taxpayer's Wrongful Act? Where the Extended Exclusion Period for Imposition and the Aggravated Penalty Tax Diverge

Question

The Framework Act on National Taxes treats a taxpayer's wrongful act severely in two places. The first is the period within which the tax authority may impose tax. Under current Article 26-2(2), subparagraph 2, where a taxpayer evades national taxes or obtains a refund or deduction by a wrongful act, the exclusion period for imposition is extended to 10 years (15 years for offshore transactions) from the date on which the national tax may be imposed. The second is penalty tax. Article 47-2(1), subparagraph 1 and Article 47-3(1), subparagraph 1 apply a rate of 40/100 (60/100 for offshore transactions), higher than in ordinary cases, where a return is not filed or tax is underreported by a wrongful act.

Because the same term is used in two institutions of different character, one concerning a time period and the other a sanction, two questions arise. First, whether a wrongful act committed not by the taxpayer personally but by an agent or employee may be regarded as the taxpayer's wrongful act, and whether this holds even where that employee committed a breach of trust against the taxpayer as victim. Second, how active conduct must be to be called a wrongful act, and whether the creation of an outward appearance through contracts and accounts that accompanies a title trust of shares reaches that level.

Under current law, the meaning of "wrongful act" is determined through several layers. Article 26-2(2), subparagraph 2 calls deceit or other wrongful acts prescribed by Presidential Decree a "wrongful act", and Article 12-2(1) of the Enforcement Decree of the Framework Act on National Taxes defines this as an act falling under Article 3(6) of the Punishment of Tax Evaders Act. Since this structure borrows the definition in a criminal provision setting out the elements of the offence of tax evasion and uses it as an element of both the time period and the penalty tax, the question of where the standards for criminal and administrative sanctions overlap and where they diverge arises at the same time.

This brief does not assess whether the tax amount or penalty tax in any individual case is correct. The two judgments applied the former Framework Act on National Taxes as it stood before its amendment of 31 December 2011 or 7 June 2013, and the provisions referred to in the judgments have changed in numbering and structure under current law. The judgments are therefore read on the basis of the legislation in force at the time of the conduct, and the current provisions are used only for comparison.

Material to check

First, the structure of current Article 26-2 of the Framework Act on National Taxes can be checked. Paragraph (1) sets the basic exclusion period for imposition at 5 years (7 years for offshore transactions), and paragraph (2) extends it separately for failure to file (subparagraph 1: 7 years, 10 years for offshore transactions) and for wrongful acts (subparagraph 2: 10 years, 15 years for offshore transactions). Paragraph (2), subparagraph 3 sets the exclusion period for imposition of certain penalty taxes at 10 years where the taxpayer becomes subject to those penalty taxes by committing a wrongful act. Paragraph (2) bears a notation that it was newly inserted on 31 December 2019, and the referenced provisions of 2017Du38959 indicate that former Article 26-2(1), subparagraph 1 corresponds to current Article 26-2(2), subparagraph 2.

Second, the special rules for inheritance tax and gift tax can be checked. Current Article 26-2(4) sets the exclusion period for imposition of inheritance tax and gift tax at 10 years, and at 15 years in cases such as where the taxpayer evades inheritance tax or gift tax or obtains a refund or deduction by a wrongful act. Paragraph (5) permits imposition within one year from the date on which the inheritance or gift of the property became known in cases such as where inheritance tax or gift tax is evaded by a wrongful act and the case falls under the deemed gift of title-trust property under Article 45-2 of the Inheritance Tax and Gift Tax Act (subparagraph 7), but excludes cases such as where the value of the property on which the evaded tax amount is calculated is KRW 5 billion or less.

Third, the penalty tax provisions can be checked. Current Article 47-2(1) sets the penalty tax for failure to file at 40/100 (60/100 for offshore transactions) of the tax payable not reported where the return was not filed by a wrongful act, and at 20/100 in other cases. Article 47-3(1) sets the penalty tax for underreporting as the sum of 40/100 (60/100 for offshore transactions) of the underreported tax payable, etc. attributable to the wrongful act and 10/100 of the remainder; paragraph (2), subparagraph 1 provides that, where a person obliged to keep double-entry books or a corporation underreports by a wrongful act, the penalty tax is the greater of an amount equal to 40/100 (60/100 for offshore transactions) of the underreported tax payable, etc. attributable to the wrongful act and an amount equal to 14/10,000 of the revenue amount related to the tax base underreported by the wrongful act, plus an amount equal to 10/100 of the underreported tax payable, etc. less the underreported tax payable, etc. attributable to the wrongful act. Both provisions bear a notation that they were wholly amended on 31 December 2011, and the "unjust method" in former Article 47-3(2), subparagraph 1 applied in 2017Du38959 is indicated in the referenced provisions as corresponding to current Article 47-3(1), subparagraph 1.

Fourth, the provision defining wrongful acts can be checked. Article 3(6) of the Punishment of Tax Evaders Act defines deceit or other wrongful acts as active conduct that makes the imposition and collection of taxes impossible or considerably difficult, among the following: false entries in books, such as the keeping of double books; the preparation or receipt of false evidentiary documents or false documents; the destruction of books and records; the concealment of property or the manipulation or concealment of income, revenue, acts or transactions; the intentional failure to prepare or keep books, or the manipulation of invoices, tax invoices and the like; the manipulation of enterprise resource planning systems or electronic tax invoices; and other acts by deceptive scheme or wrongful acts. The referenced provisions of the two judgments indicate that at the time of the cases this definition was located in the former Enforcement Decree of the Framework Act on National Taxes, and direct the reader to current Article 12-2(1) of the Enforcement Decree and Article 3(6) of the Punishment of Tax Evaders Act.

Fifth, the provision on deemed gifts of title-trust property can be checked. Article 45-2(1) of the Inheritance Tax and Gift Tax Act provides that, where the actual owner and the titleholder of property whose transfer or exercise of rights requires registration, etc. (excluding land and buildings) differ, the value of that property is deemed to have been given by the actual owner to the titleholder, but excludes cases such as where registration, etc. was made in another person's name without the purpose of tax avoidance; paragraph (3) presumes the purpose of tax avoidance. Article 4-2(2) of the same Act, newly inserted on 31 December 2018, provides that in this case the actual owner bears the obligation to pay the gift tax. The statement in the summary of 2017Du69977 referring to "gift tax to be borne by the title trustee" reads as presupposing the structure that existed before this provision was inserted.

Sixth, the materials in the case record that show the actor and the content of the conduct. Where a wrongful act by an employee or agent is at issue, materials can be gathered showing the scope of the duties entrusted to that person, internal control and audit records, criminal records concerning that employee, whether the counterparty to the transaction participated, and whether the taxpayer could easily have recognised or anticipated the conduct. Where a title trust is at issue, it is necessary to distinguish the sale contracts and flow of funds, the content of the returns filed, and materials showing whether there was a separate act of concealment going beyond the creation of an outward appearance that ordinarily accompanies a title trust.

Possible readings

One line of reading takes a broad view of who may commit the wrongful act. Because the taxpayer gains the benefit of extending the sphere of its activities by entrusting business to agents or employees, the wrongful acts committed by them are in principle regarded as the taxpayer's wrongful acts. The summary of 2017Du38959 adopted this starting point, while also setting a limit: if the taxpayer did not neglect due care or management and supervision, the exclusion period cannot be extended, nor the penalty tax aggravated, on the ground of that wrongful act.

The next line of reading divides the conclusion by institution. Where the employee's wrongful act forms part of fraud, breach of trust or the like with the taxpayer as victim, and the taxpayer could not easily have recognised or anticipated it, for instance because the counterparty to the transaction participated, the aggravated penalty tax is denied but the extended exclusion period for imposition still applies. This reading rests on the difference that penalty tax is a sanction imposed on the taxpayer and so the circumstances on the taxpayer's side are examined, whereas the exclusion period for imposition is based on the fact that the wrongful act made it difficult for the tax authority to exercise its power of imposition. The majority opinion in 2017Du38959 takes this reading, and explained it as the result of a constitutionally conforming interpretation of the statute.

The opposing line of reading treats the two institutions as one. Because the extended exclusion period for imposition and the penalty tax for wrongful underreporting are both governed by the Framework Act on National Taxes and the requirement of a wrongful act by the taxpayer is stipulated identically for both, if the penalty tax cannot be imposed, the extended exclusion period for imposition cannot apply either. The separate and dissenting opinion in 2017Du38959 takes this position; what separates the two lines is whether priority is given to the identity of the wording or to the difference in the purposes of the institutions.

Readings also diverge on how active the conduct must be. A strict reading confines wrongful acts to active conduct that makes the imposition and collection of taxes impossible or considerably difficult, and excludes merely failing to file or filing a false return without circumstances revealing an intention of active concealment. Applying this standard, 2017Du69977 regarded the creation of an outward appearance of a sale or the like in a title trust of shares, and the filing of returns in accordance with it, as an incidental act ordinarily accompanying the title trust. An argument in the opposite direction may point to the fact that the creation of the outward appearance made discovery by the tax authority difficult, but the summary of the judgment left room for this only in cases where there are special circumstances, such as the conduct having reached a level that makes the imposition and collection of gift tax impossible or considerably difficult.

The two judgments answer different questions, but they can overlap in a single case. 2017Du38959 addresses whose act it is, and 2017Du69977 addresses what kind of act it is. Whether an outward appearance created by an employee is at the level of an ordinary incidental act or amounts to active concealment beyond it, and whether that act can be attributed to the taxpayer, must be asked in separate stages and in turn; the conclusion at one stage does not substitute for the other.

Which reading to adopt is for the reader to decide after matching against the record the wording of the Framework Act on National Taxes and its Enforcement Decree at the time of the conduct, the relationship between the actor and the taxpayer, and the specific form of the outward appearance created. This brief does not determine whether any particular taxpayer committed a wrongful act.

What the decisions held

In Supreme Court en banc Judgment 2017Du38959 rendered on 18 February 2021, concerning the extended exclusion period for imposition and the penalty tax for wrongful underreporting under the former Framework Act on National Taxes as it stood before its amendment of 31 December 2011, the Court held that a wrongful act includes "not only a wrongful act by the taxpayer personally but also, absent special circumstances, a wrongful act by the taxpayer's agents, employees, and other workers (hereinafter 'employees, etc.') through whom the taxpayer, by entrusting to them the handling of the relevant business of its own accord, obtains the benefit of extending the sphere of its activities". However, the Court stated that "if the taxpayer personally did not neglect due care or management and supervision to prevent wrongful acts by employees, etc., the taxpayer personally may be regarded as bearing no fault whatsoever for such wrongful acts by employees, etc.", and held that in such a case it is not permissible to extend the exclusion period for imposition or to impose the penalty tax for wrongful underreporting at the aggravated rate.

The majority opinion in the same judgment held that the penalty tax for wrongful underreporting may not be aggravated where there are special circumstances in which the wrongful act of employees, etc. who are not the representative or de facto representative of a corporation was committed, against the interests or will of the taxpayer personally and for the purpose of pursuing their own or a third party's interests, as part of a crime such as fraud or breach of trust with the taxpayer as victim, and the taxpayer could not easily have recognised or anticipated it, for instance because the counterparty to the transaction participated. As to the extended exclusion period for imposition, however, it held that "absent special circumstances, such breach-of-trust wrongful acts by employees, etc. are included in the wrongful acts referred to in the extended exclusion period for imposition under Article 26-2(1), subparagraph 1 of the former Framework Act on National Taxes. Accordingly, the exclusion period for imposition is extended to 10 years with respect to the relevant national taxes of the taxpayer personally." The separate and dissenting opinion took the view that, because the requirements of the two institutions are stipulated identically, if the penalty tax cannot be imposed, the extended exclusion period for imposition cannot apply either. In the operative part, the part of the judgment below concerning value-added tax (including penalty tax) for certain periods was reversed, the first-instance judgment was revoked and the action in that part was dismissed; the part concerning the penalty tax for wrongful underreporting within each corporate tax was reversed and remanded to the Seoul High Court; and the remaining appeals by the plaintiff and the defendant were all dismissed.

Supreme Court Judgment 2017Du69977 rendered on 8 July 2021 held that deceit or other wrongful acts, or wrongful acts, under Article 47-2(2) and related provisions of the former Framework Act on National Taxes "mean active conduct by deceptive scheme or other wrongful means that makes the imposition and collection of taxes impossible or considerably difficult, and merely failing to file a return under the tax laws or filing a false return, without the addition of circumstances revealing an intention of active concealment, does not fall within this". It went on to hold that, in the deemed gift of title-trust property, creating an outward appearance as if a sale or the like of shares had taken place and filing returns on the basis of the resulting contracts, account transaction records and the like "may be regarded as no more than an incidental act ordinarily accompanying a title trust of shares", so that, absent special circumstances, it does not satisfy the requirements for the penalty tax for wrongful failure to file gift tax.

The same judgment also addressed the method of calculating the market price of real estate leasing services where a resident business operator leases real estate to a related party for unreasonably low consideration. In the operative part, the part of the judgment below against Plaintiff 1, and the part concerning the dispositions imposing penalty tax within the parts against the remaining plaintiffs, were reversed and remanded to the Seoul High Court, and the remaining appeals by Plaintiff 4, Plaintiff 5, Plaintiff 6 and Plaintiff 7 were dismissed.

Practical checklist

This section is not advice but a set of questions that may be asked when checking the record. First, the point in time of the applicable legislation may be asked. It can be checked by what article numbers and wording the Framework Act on National Taxes and its Enforcement Decree in force for the taxable periods and filing deadlines at issue provided for wrongful acts, the exclusion period for imposition and penalty taxes, and whether the definition was set out directly in the Enforcement Decree or took the form of drawing on the Punishment of Tax Evaders Act.

Second, the actor may be asked about. Whether the person who committed the wrongful act was the representative or de facto representative, or an agent or employee; how far the duties entrusted to that person extended; and what care the taxpayer exercised in appointing, managing and supervising that person can be checked against internal regulations, approval records and audit records.

Third, the interests of the actor and the taxpayer may be asked about. Whether the wrongful act was for the taxpayer's benefit or part of a breach of trust or the like with the taxpayer as victim, whether the counterparty to the transaction participated, and whether there are indications that the taxpayer could easily have recognised or anticipated the conduct can be matched against criminal records and accounting records.

Fourth, how active the conduct was may be asked about. It can be distinguished whether the conduct at issue amounts only to failing to file or filing a false return; whether active conduct making the imposition and collection of taxes impossible or considerably difficult, such as double books, false evidentiary documents, destruction of records, or manipulation or concealment of transactions, was added; and, in the case of a title trust, whether there was separate concealment going beyond the ordinary creation of an outward appearance. This is strictly a list of materials to check, and the conclusion is for the reader to draw.

Glossary

The exclusion period for imposition means the period within which national taxes may be imposed. Current Article 26-2(1) of the Framework Act on National Taxes defines the term, and it bears directly on the taxpayer's legal certainty in that, once the period has passed, the tax authority may not impose the national tax concerned.

"Wrongful act" is the short form for deceit or other wrongful acts prescribed by Presidential Decree under current Article 26-2(2), subparagraph 2 of the Framework Act on National Taxes. Through Article 12-2(1) of the Enforcement Decree, it links to the definition in Article 3(6) of the Punishment of Tax Evaders Act.

The penalty tax for wrongful failure to file and the penalty tax for wrongful underreporting are terms used in the judgments, referring to penalty taxes that apply a higher rate than ordinary penalty taxes where a return is not filed or tax is underreported by a wrongful act. The current provisions are Article 47-2(1), subparagraph 1 and Article 47-3(1), subparagraph 1.

The deemed gift of title-trust property is a system, provided for in Article 45-2 of the Inheritance Tax and Gift Tax Act, under which, where the actual owner and the titleholder of property whose transfer or exercise of rights requires registration, etc. (excluding land and buildings) differ, the value of that property is deemed to have been given by the actual owner to the titleholder. Under current law, Article 4-2(2) of the same Act places the obligation to pay on the actual owner.

Sources and limitations

The statutory sources are the current texts on the National Law Information Center. Articles 26-2, 47-2 and 47-3 of the Framework Act on National Taxes are as of Act No. 21987 [effective 2 October 2026]; Article 12-2 of the Enforcement Decree of the Framework Act on National Taxes as of Presidential Decree No. 36125 [effective 27 February 2026]; Article 3 of the Punishment of Tax Evaders Act as of Act No. 17761 [effective 1 January 2021]; and Articles 4-2 and 45-2 of the Inheritance Tax and Gift Tax Act as of Act No. 21065 [effective 1 October 2025]. The date of verification is 16 October 2026.

The sources for the judgments are the issues, summaries and operative parts of the two judgments published on the National Law Information Center. The quoted summaries reproduce the original wording, and amounts, tax amounts by taxable period, and the specific circumstances of the parties are not stated beyond what appears in the summaries.

The original texts of the former Framework Act on National Taxes and the former Enforcement Decree applied by the two judgments were not separately checked for this brief. The correspondence between the former article numbers and the current provisions follows the referenced provisions indicated in the judgments, and neither the full reasoning of the judgments nor the lower-court judgments were checked.

Points left open

Whether the same fraudulent act requirement may be read differently in the long assessment exclusion period and in the increased imposition of additional tax is a point on which opinions are divided even in the en banc. Whether the same conclusion is maintained in a structure where, as under current law, the definitional provision is linked through the Enforcement Decree to the Punishment of Tax Offenses Act is also a matter warranting reexamination.

Current Article 26-2, paragraph (2), subparagraph 3 separately sets the assessment exclusion period for the additional tax at ten years where a taxpayer commits a fraudulent act and thereby becomes subject to imposition of a certain additional tax. How breach-of-trust-type fraudulent acts of employees, etc. are handled under this provision is a question not addressed in the Summary of Decision of the two judgments.

It also remains that, although the determination of tax evasion in criminal Procedure and the determination of additional tax and assessment exclusion period use the same definition, the direction and degree of proof may differ. Where the same Records are evaluated differently in a criminal case and in a case seeking revocation of disposition concerning taxation, how the two determinations are to be read in conjunction needs to be organized separately.

The specific criteria distinguishing ordinary incidental acts from active concealment in nominal trusts, and whether the same framework of determination is maintained even after the person liable for payment became the actual owner on December 31, 2018, are matters that will be organized as Cases accumulate.

When to reconsider

If the provisions of the Framework Act on National Taxes on the assessment exclusion period and additional tax, or the definitional provision of fraudulent act, are amended, or if a new determination of the Supreme Court emerges regarding the attribution of fraudulent acts of employees, etc. and the affirmative character of a fraudulent act, this report will be rewritten.

At that time, on the basis of the statutes in force at the time of the conduct, the divergence in period and sanction will be reorganized within the scope stated in the Holdings and Summary of Decision of the two judgments and the new judgment.

Statutes referred to

• 국세기본법 제26조의2, 제47조의2, 제47조의3
• 국세기본법 시행령 제12조의2
• 조세범 처벌법 제3조
• 상속세 및 증여세법 제4조의2, 제45조의2

Decisions referred to

• 대법원 2021. 2. 18. 선고 2017두38959 전원합의체 판결 · Decision ledger
• 대법원 2021. 7. 8. 선고 2017두69977 판결 · Decision ledger

Verification status

The cited provisions (Article 26-2, Article 47-2, and Article 47-3 of the Framework Act on National Taxes, Article 12-2 of the Enforcement Decree of the Framework Act on National Taxes, Article 3 of the Punishment of Tax Offenses Act, and Article 4-2 and Article 45-2 of the Inheritance Tax and Gift Tax Act) were compared with the current official text of the National Law Information Center as of October 16, 2026. The cited judgments (Supreme Court en banc judgment 2017Du38959 decided February 18, 2021, and Supreme Court judgment 2017Du69977 decided July 8, 2021) were compared with the Holdings, Summary of Decision, and dispositive part of the judgment texts in the National Law Information Center. The original texts of the former Framework Act on National Taxes and the former Enforcement Decree applied by the judgments, and the full text of the reasons for the judgments, were not compared.