[Sejong = E-Daily Reporter Kim Mi-Young ] The eldest son of a company’s founder was appointed CEO about six months after joining the company and had been receiving a high salary until a tax audit put a stop to it. Although the company claimed the compensation was justified as part of the management succession process, both the National Tax Service and the Tax Tribunal ruled that there was insufficient evidence of business performance or contributions to justify the salary. Consequently, they did not recognize the excess salary as a corporate expense and imposed additional corporate income tax on the company.

According to the tax industry on the 25th, the Busan Regional Tax Office conducted a tax audit from April to July of last year on Company A, an auto parts manufacturer headquartered in Changwon, South Gyeongsang Province. During the investigation, the tax authorities determined that the salary paid to the CEO—the founder’s eldest son—was excessive. Consequently, they disallowed a portion of the salary as a deductible expense and imposed additional corporate income tax on Company A. Company A filed an appeal with the Tax Tribunal, but the Tribunal dismissed the appeal.

The key issue was the appropriateness of the CEO’s salary. The founder’s eldest son joined Company A in 2021 and was appointed CEO the following year. He was also the controlling shareholder, holding a 60% stake in the company. The tax authorities focused on the fact that the CEO’s salary accounted for 27.2% of the company’s operating profit in 2022. In contrast, the salary share for CEOs of other affiliated companies ranged from 1.5% to 4.3%. The authorities determined that there was insufficient objective evidence to show that the CEO had contributed enough to management to warrant receiving significantly higher compensation than the CEOs of other affiliated companies.

Whether the CEO actually performed his duties also served as a basis for the assessment. The National Tax Service determined that it was difficult to verify whether he had achieved management results commensurate with his high salary, given that he was appointed CEO approximately six months after joining the company despite having no prior work experience in the manufacturing industry. The authorities also found that he spent most of the period during which he received his salary abroad, with his days spent in the country totaling only 44 in 2022, 72 in 2023, and 78 in 2024.

Another point of contention was who actually led the group’s management. After reviewing internal approval documents and the reporting structure, tax authorities concluded that the founder continued to handle major group-level decision-making and overall management. They determined there was insufficient evidence to support the company’s claim that the CEO received a high salary in exchange for being responsible for the management of the entire group.

Company A countered that management authority and final decision-making power were transferred upon the CEO’s appointment, and that the compensation paid was commensurate with the duties and responsibilities associated with that role.

However, the Tax Tribunal found that there was insufficient evidence of special contributions or management performance to justify the salary level. Ultimately, it ruled that the tax authorities’ decision to disallow the amount exceeding the average salary of CEOs at affiliated companies as a deductible expense and to impose corporate income tax was valid.

Meanwhile, disallowance of a deduction refers to the exclusion of an expense from a corporation’s taxable income. When the amount recognized as an expense decreases, taxable income increases, which can lead to a higher corporate income tax burden.