Supreme Court rules on tax treatment of overvalued asset contributions

The Supreme Court ruled that receiving assets at values above market price does not automatically constitute an improper outflow of corporate funds for tax purposes. The court determined that if shares issued in exchange are also valued higher to match the inflated asset price, no actual loss occurs.

The decision, announced March 12 in case 2024Du37008, came in a lawsuit challenging a comprehensive income tax assessment involving an in-kind contribution. Under Article 88 of the Corporate Tax Act Enforcement Decree, tax authorities typically exclude excess value from acquisition costs and add it to taxable income.

However, the bench stated that determining whether funds actually flowed out requires more than checking if contributed property was overvalued. Because an in-kind contribution combines a property transfer with a capital transaction, judges must also examine whether the shares issued to the investor were similarly overpriced. If both the contributed property and the received shares are inflated by the same amount, the situation represents only an accounting overstatement of assets and capital on paper rather than a real economic loss.

The court concluded that unless tax officials can provide additional proof that the excess value ultimately left the company and benefited the investor, the mere existence of an overvaluation does not justify treating the amount as an improper outflow. The ruling clarifies that the presence of an exchange gain must be verified alongside asset valuation to establish that taxable income was effectively distributed outside the corporation.