The Supreme Court recently rendered a decision that welfare points awarded to employees by a private company in exchange for labor constitute earned income under the Income Tax Act (“Act”) (Supreme Court Decision 2024Du34122, December 24, 2024, the “Decision”).
The issue in this case centered on whether welfare points under the selective welfare program constitute taxable earned income. Company A, a private company, allocated welfare points to its officers and employees each year through a selective welfare program, allowing them to use the welfare points to purchase goods via the company’s affiliated online shopping malls, or to pay with their credit cards and then receive a refund from the company for the amount spent.
In this regard, Company A filed a claim against the tax authority to cancel the rejection of its income tax reassessment, arguing that the welfare points should be excluded from taxable earned income and that the tax already paid should be refunded since the welfare points do not fall within the scope of earned income as defined by the Act.
This case appears to have been triggered by a Supreme Court ruling in 2019 under which welfare points were not deemed wages under the Labor Standards Act (“LSA”), despite the fact that the employer, by operating a selective benefits program, continuously and regularly allocated welfare points to employees for purchasing goods through the company’s online shopping mall (Supreme Court Full Bench Decision 2016Da48785, August 22, 2019).
However, unlike the aforementioned ruling, the Decision recognized that welfare points provided by the private company constitute earned income under the Act based on the following grounds:
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(i) |
The welfare points at issue are economic benefits that can be freely used by officers and employees as a payment method for purchasing goods and services to use within specific time periods and for designated purposes. |
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(ii) |
Although the Framework Act on Labor Welfare, which serves as the legal basis for a selective welfare program, specifies that the concept of “employee welfare” excludes basic working conditions such as wages and working hours, this exclusion pertains only to the basic working conditions regulated under the LSA. It does not imply that all other working conditions, including welfare benefits, should be excluded from the concept of employee welfare under the Framework Act on Labor Welfare. |
In other words, according to the Decision, the interpretation of earned income under the Act is broader than that under the LSA, since earned income not only includes wages for work but also is in exchange for working conditions closely related to work. Therefore, welfare points are recognized as earned income based on economic reasonableness, even though they do not directly constitute wages for labor.
Unlike the Decision, where the Supreme Court acknowledged that welfare points provided by private companies constituted earned income, there is also a case under review by the Supreme Court regarding the same issue filed by a public company, the Korea Railroad Corporation. In this regard, we believe that the upcoming decisions will further clarify the standard on whether welfare points constitute earned income under the Act.
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#Welfare Points #Earned Income #Income Tax Act #Labor & Employment #Legal Update
