SM paid Lee 6% of sales over 5 years

Court: compensation 'excessively high'

Tax authority failed to prove fair market value; 12.9 billion won in levies canceled

Lee Soo-man, former chief producer of SM Entertainment. [Newsis]
Lee Soo-man, former chief producer of SM Entertainment. [Newsis]

SM Entertainment has won a partial court victory against tax authorities after the company was hit with a 20.2 billion won tax bill following payments of about 60 billion won ($43.3 million) to former chief producer Lee Soo-man over five years. The Seoul Administrative Court ordered 12.9 billion won of the 20.2 billion won assessment canceled.

Administrative Division 5 of the Seoul Administrative Court ruled Thursday entirely in SM Entertainment's favor in its lawsuit against the Gangnam Tax Office seeking cancellation of a corporate tax assessment. The court granted all of SM's claims and ordered the tax authority to bear litigation costs.

The ruling cancels tax assessments totaling about 12.9 billion won — comprising roughly 8.8 billion won in corporate tax and about 4.06 billion won in value-added tax. The court acknowledged that the amounts paid to Lee were excessive, but said the National Tax Service had failed to prove what a fair and appropriate fee would have been and therefore could not use that as a basis to impose additional taxes.

SM had contracted to pay Lee 6 percent of revenue from album sales, performances and management as compensation for music, content and artist producing. Payments from 2015 to 2019 reached about 60 billion won.

Tax authorities accepted 20.2 billion won tied to album and music-streaming sales as a legitimate business expense. However, they excluded about 23 billion won linked to appearance fees and usage rights, arguing Lee had not actually provided the related services. They also deemed 14.6 billion won in vocal performance fees excessive compared with industry peers. On that basis, they levied roughly 16.1 billion won in corporate tax and about 4 billion won in value-added tax on SM.

SM challenged the assessment before the Tax Tribunal in 2024, but the appeal was rejected, prompting the company to file an administrative lawsuit.

The court agreed that the compensation paid to Lee was excessive and said the payments fell under the "wrongful calculation denial" regime — a system that allows tax authorities to disregard transactions conducted at abnormal prices to reduce tax liability and recalculate the tax owed based on fair market value.

The court found, however, that the tax authority had failed to prove what the appropriate fair market value should have been.

Authorities had excluded certain payments from deductible expenses on the grounds that Lee had not performed specific tasks tied to particular revenue streams. The court rejected that reasoning, ruling that the album and performance-related portions of the contract were not meant to require Lee to provide separate, discrete services for each category, but rather served as a formula for calculating his overall producing fee.

On the value-added tax question, the court also concluded that because SM had issued and received tax invoices based on actual transaction amounts, the invoices could not be treated as "false tax invoices," as the tax authority had argued.

Meanwhile, Lee has paid all income taxes on the roughly 60 billion won he received from SM.


notstrong@heraldcorp.com