This article was published on June 5, 2025, at 2 p.m. on the ChosunBiz RM Report site.
DL Group's construction company, DL E&C, filed a lawsuit against the tax authorities requesting a reduction of corporate tax by 113.6 billion won but lost in the first trial. DL E&C claimed it had incurred losses after converting bonds into equity following lending thousands of billions of won to a local subsidiary established in Saudi Arabia, but both the tax authorities and the court did not accept this. DL E&C has appealed the first trial verdict.
The Seoul Administrative Court's administrative division 6 reportedly ruled against DL E&C in the lawsuit for the cancellation of the 'refusal of corporate tax adjustment' filed against the head of Jongno Tax Office in April.
DL E&C (then Daelim Construction) held a 98% equity stake in the local subsidiary in Saudi Arabia. From 2013 to 2015, DL E&C lent $755 million to the local subsidiary.
Among these bonds, $640 million was converted into 2.4 million shares of the local subsidiary in 2015. At that time, $640 million amounted to 757.9 billion won, but the local subsidiary was evaluated at zero due to complete capital impairment. DL E&C reportedly incurred a loss of 757.9 billion won but did not report this as an expense in its corporate tax filing for the 2015 business year.
Later, as DL Group transitioned to a holding company structure in 2021, it spun off Daelim Construction into the holding company DL and the construction company DL E&C. In doing so, DL E&C requested the Jongno Tax Office to recognize the losses incurred from the conversion of the Saudi local subsidiary's equity as expenses. This meant asking for a reduction of 113.6 billion won in corporate tax for the 2015 business year.
However, the Jongno Tax Office rejected this. The tax office stated that 'this corresponds to a case where the tax burden was unjustly reduced through transactions with domestic corporations and related parties,' adding that '(the losses from the conversion) are not subject to expense recognition under tax law.' In response, DL E&C filed an administrative lawsuit in court.
The first trial court also agreed with the Jongno Tax Office's judgment. The judges stated, 'The shares of the local subsidiary in Saudi Arabia have a value of 0 both economically and legally,' and noted that 'Daelim Construction (now DL E&C) already owned 98% of the local subsidiary's shares, thus there was no significant benefit from the conversion.' DL E&C's argument that it needed to secure financial stability through the conversion for new contracts was not accepted by the court.
The judges further stated, 'The Corporate Tax Act strictly limits the scope of expense recognition; if we automatically accept losses from conversions into shares valued at 0 won as expenses, it could lead to circumventing legal provisions.' They indicated that, despite DL E&C waiving the loan without substantial benefits or having incurred losses, the tax could not be lowered.
Therefore, DL E&C appealed the first trial verdict.