Supreme Court limits tax deduction on inherited losses in mergers

The Supreme Court ruled that a surviving corporation in a qualifying merger cannot deduct inherited carryforward losses against its entire income, but only against earnings generated by the acquired business.

The high court determined the deduction cap applies solely to income arising from the acquired operations because applying the limit ratio to the surviving corporation's aggregate income contradicts the wording and intent of the relevant tax statutes. The justices dismissed the appeal in case 2025Du35623, upholding the lower court's ruling that the tax authority's refusal to allow the broader deduction was lawful.

The case involved a paper manufacturing and sales company that sought to deduct losses inherited from a merged entity. Under the former Corporate Tax Act, the limit for such deductions was calculated by multiplying a specific ratio by the income amount, sparking a dispute over whether this referred to the surviving company's total earnings or strictly profits derived from the taken-over business.

For the 2018 fiscal year, income from the succeeded business stood at 16.2 billion won, subject to a 70 percent deduction limit ratio. The following year, that business income rose to 17.5 billion won, with the applicable ratio dropping to 60 percent.