The Seoul High Court recently rendered a decision on whether welfare points awarded to employees constitute earned income under the Income Tax Act (Seoul High Court Decision 2023Nu36536, February 2, 2024, the “Decision”).
 
Company A, a private company, filed a claim against the tax authority to cancel the rejection of its income tax reassessment, arguing that welfare points are not earned income under the Income Tax Act (the “Act”). The district court ruled that welfare points fall under the scope of earned income under the Act and dismissed the plaintiff’s claim.
 
In affirming the district court’s decision, the Seoul High Court held that the interpretation of earned income under the Act is broader than that under the Labor Standards Act (the “LSA”), since earned income not only includes wages for work but also is in exchange for working conditions closely related to work. In the Decision, the Seoul High Court stated that the welfare points at issue are economic benefits used as a payment method for the purchase of goods, services, and the use of facilities, and thus, such welfare points cannot be excluded from wages under the Act.
 
On the other hand, in a similar case, the Daejeon High Court overturned the judgement of the district court and ruled in favor of the plaintiff, Company B (a public enterprise), that had filed a claim against the tax authority to cancel the rejection of its income tax reassessment, arguing that welfare points are not earned income under the Act (Daejeon High Court Decision 2022Nu13617, October 26, 2023).
 
In this case, the Daejeon High Court found that the welfare points at issue fall under mere welfare (excluding working conditions such as wages and working hours) as defined in the Labor Welfare Framework Act, and thus, such welfare points do not fall under wages, including welfare benefits, which are closely related to work. In other words, the welfare points in this case should be excluded from earned income under the Act, considering that the right to use, profit, and dispose of welfare points is significantly restricted, which is different from other wages included in the scope of earned income.
 
It should be noted that the Supreme Court ruled in 2019 that welfare points do not constitute wages under the LSA, despite the fact that an employer continuously and regularly allocates welfare points to employees for purchasing goods through the company’s online shopping mall by operating a selective benefits program (Supreme Court Full Bench Decision 2016Da48785, August 22, 2019). Since then, many cases have arisen in which officers and employees of companies have demanded that their respective employer file a claim on their behalf, asking the tax authorities to refund the amount of income tax withheld on the grant of their welfare points on the ground that welfare points are neither wages under the LSA nor earned income under the Act, based on the above ruling.
 
As explained above, it is still unclear whether welfare points constitute earned income under the Act, as different levels of courts have ruled differently on this issue. However, appeals have been filed in both of the above cases and are currently being reviewed by the Supreme Court, which we believe will make the standard clearer to understand in its upcoming decisions.

[Korean Version]