A Study on the Legal Nature of Liquidated Damages due to delay in Delivery under Shipbuilding Contracts and the Domestic Source Income of Foreign Corporations under Corporate Tax Law
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A clause that adjusts the ship price for delays in vessel delivery is generally interpreted as a liquidated damages clause. However, in light of the English case law, in order to identify a ship price adjustment clause as liquidated damages, the amount to be received due to the breach of contract must represent the “genuine pre-estimate of the loss” that the Buyer would incur due to the delay in the delivery of the vessel. However, even if the amount to be paid according to the ship price adjustment clause exceeds the true pre- estimated amount of damages, it should not be hastily considered as not being liquidated damages; rather, it is necessary to further examine whether the provision can be commercially justifiable between the parties. On the other hand, regarding whether the price adjustment amount due to a delivery delay constitutes domestic-source income of a foreign corporation under the Corporate Tax Act, it is necessary to adhere to the principle of strict interpretation of laws, a fundamental principle of tax law. Therefore, regardless of the explicit provisions regarding the timing of passing of property of ships that have not been delivered during or after construction under the shipbuilding contract, ships being constructed in the country should be considered the property of the Builder. Thus, in relation to the interpretation of Article 93, Item 10. Sub-item a of the Corporate Tax Act, these ships cannot be regarded as assets located domestically owned by the Buyer. Even if the amount is referred to as liquidated damages under the shipbuilding contract, it would not fall under the category of ‘penalties or compensation paid domestically as income prescribed by Presidential Decree’ in Article 93(10)(b) of the Corporate Tax Act, as long as the amount does not exceed a genuine pre- estimate of the damages incurred by the Buyer.
Abstract
A clause that adjusts the ship price for delays in vessel delivery is generally interpreted as a liquidated damages clause. However, in light of the English case law, in order to identify a ship price adjustment clause as liquidated damages, the amount to be received due to the breach of contract must represent the “genuine pre-estimate of the loss” that the Buyer would incur due to the delay in the delivery of the vessel. However, even if the amount to be paid according to the ship price adjustment clause exceeds the true pre- estimated amount of damages, it should not be hastily considered as not being liquidated damages; rather, it is necessary to further examine whether the provision can be commercially justifiable between the parties. On the other hand, regarding whether the price adjustment amount due to a delivery delay constitutes domestic-source income of a foreign corporation under the Corporate Tax Act, it is necessary to adhere to the principle of strict interpretation of laws, a fundamental principle of tax law. Therefore, regardless of the explicit provisions regarding the timing of passing of property of ships that have not been delivered during or after construction under the shipbuilding contract, ships being constructed in the country should be considered the property of the Builder. Thus, in relation to the interpretation of Article 93, Item 10. Sub-item a of the Corporate Tax Act, these ships cannot be regarded as assets located domestically owned by the Buyer. Even if the amount is referred to as liquidated damages under the shipbuilding contract, it would not fall under the category of ‘penalties or compensation paid domestically as income prescribed by Presidential Decree’ in Article 93(10)(b) of the Corporate Tax Act, as long as the amount does not exceed a genuine pre- estimate of the damages incurred by the Buyer.