SM Entertainment wins 12.8 billion won tax case over Lee Soo-man payments

K-pop giant SM Entertainment won a court battle over 12.8 billion won ($9.27 million) in additional taxes tied to some 60 billion won it paid founder Lee Soo-man for producing services.

The court accepted that the payments were excessive and tax authorities failed to prove what a reasonable amount should have been.

The Seoul Administrative Court ruled in favor of SM Entertainment in a lawsuit against the head of the Gangnam Tax Office that sought to overturn additional corporate and value-added taxes on Thursday. Lee participated in the case as an intervenor supporting SM Entertainment.

The ruling canceled about 8.8 billion won in corporate taxes and 4 billion won in value-added taxes, for a total of approximately 12.8 billion won.

SM Entertainment had signed a producing contract with Lee, the company’s founder and then-largest shareholder, under which he would receive 6 percent of SM Entertainment's revenue from albums, digital content and concerts.

The company paid Lee approximately 60 billion won from 2015 through 2019 and booked the payments as business expenses.

Tax authorities took issue with part of those payments. They concluded that Lee had not actually provided services for some of the revenue covered by the agreement and that his compensation was excessive compared to that of other producers in the industry.

Authorities subsequently imposed an additional 16.1 billion won in corporate taxes and 4 billion won in value-added taxes.

SM Entertainment filed an administrative lawsuit against the head of the Gangnam Tax Office in June 2024 to have the additional taxes overturned.

The court sided with SM Entertainment. While it agreed that Lee had been paid excessively, it found fault with the method tax authorities used to impose the additional taxes.

It first rejected the tax authorities’ assumption that Lee needed to provide a separate service for each category of revenue covered by the contract.

“The revenue categories subject to settlement merely set out which revenue should be used as the basis for calculating compensation for the services,” the court said.

The court also found that tax authorities had failed to establish the fair market value of Lee’s producing services. Authorities could not establish how much of SM Entertainment's payments was excessive and tax the company accordingly without determining what an appropriate level of compensation would have been.

It was therefore ruled that the additional corporate tax assessment was unlawful.

Nevertheless, the court agreed that Lee’s overall compensation was excessive.

“Considering the purpose of the contract, the way it was carried out, the size of the compensation and the allocation of costs, the compensation SM Entertainment paid Lee was excessive,” the court said.

The court also canceled the additional value-added tax assessment because SM issued and received tax invoices based on the actual amounts paid under the contract.

Consequently, the invoices could not be considered false simply because the payments were excessive.

“The tax invoices cannot be considered inconsistent with the facts,” the court said.

SM Entertainment is known for creating leading K-pop acts such as girl groups Girls' Generation, Red Velvet and aespa; along with boy bands such as Super Junior, EXO and NCT. 

BY HAN YOUNG-HYE [[email protected]]