Article 26(7) of the previous Value-Added Tax Act (prior to the current version amended pursuant to Law No. 16101 on December 31, 2018) provided that passenger transportation services to be exempted from value-added tax and that the scope of the passenger transportation services not exempted (taxable objects) shall be prescribed by Presidential Decree. Meanwhile, Article 37 of the Enforcement Decree of the previous Value-Added Tax Act (prior to the current version amended pursuant to Presidential Decree No. 29535 on February 12, 2019) set forth the scope of the passenger transportation services subject to tax, yet did not include certain transportation services for recreation purposes, such as a cruise ship and a cable car. Accordingly, it was possible to interpret the law as if a cruise ship and a cable car were tax-exempt.

Based on the above interpretation, a cable car operator made a claim for tax reassessment seeking a refund of the paid VAT which was taxed on the payment made to the cable car operator for its services. When the tax authorities denied this claim, the cable car operator initiated an action against the tax authorities to revoke the determination of denial. At the court of first instance, the court rendered the judgment that, based on the opinion given by the commissioner of the Statistics Korea (part of the Ministry of Strategy and Finance), the tax authorities’ rectification denial was without merit. The court found that the cable car transportation services would fall under “other industrial activities that regularly transport passengers over the land in the city and the suburbs” pursuant to the classification made by the Korea Standard Industrial Classifications, and categorizing it as taxable would be broadly interpreting the law or make an inference thereof.

DR & AJU, on behalf of the tax authorities on its appeal, argued the following: (i) consideration should be made as to what kind of services are exempt from tax based on all circumstances and characteristics, (ii) a tourism cable car includes part of characteristics of passenger transport but its main character is to provide tourism service, and (iii) tourism cable car transportation belongs to services related to other recreation services that are not classified by Korea Standard Industrial Classification.

The appellate court accepted the above arguments made by DR & AJU and reversed the lower court’s judgment and found that the tax authorities’ denial was valid. Furthermore, the VAT Enforcement Decree was amended as of February 12, 2019, to expressly exclude transportations for recreational purposes such as cable cars and cruise ships from taxable transportation.

This was the first case that expressly determined whether recreational transportation services are subject to tax and the ripple effect thereof was significant. Additionally, this case was important in providing a standard of judgment to determine the nature of a service where the service has many characteristics combined.