Implications of the Supreme Court's decision that welfare points constitute earned income under the income tax act

At a glance

• The Supreme Court ruled that welfare points awarded by a private company to employees are considered earned income under the Income Tax Act (Act).
• The court's decision was based on the fact that welfare points are economic benefits used by employees for purchasing goods and services.
• The interpretation of earned income under the Act is broader than under the Labour Standards Act (LSA), including benefits closely related to work.
• A similar case involving the Korea Railroad Corporation is under review, which may further clarify the standards for welfare points as earned income.

This article has been reproduced with the permission of the authors Weon Jung Kim, Ki Young Kim, Paul Cho, Sun Ha Kweon, Ji-Hyo Ryu and Hoin Lee at Kim & Chang.

The Supreme Court recently rendered a decision that welfare points awarded to employees by a private company in exchange for labour constitute earned income under the Act (Decision).

The issue in this case centred on whether welfare points under the selective welfare programme 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 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.

However, unlike the aforementioned ruling, the Decision recognised that welfare points provided by the private company constitute earned income under the Act based on the following grounds:

• 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.
• Although the Framework Act on Labour 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 Labour 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 recognised as earned income based on economic reasonableness, even though they do not directly constitute wages for labour.

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.