Recent Court Rulings Update

• Final ruling on tax deductibility of disability employment levy

On March 12, 2026, the Supreme Court finalized the lower courts’ decisions, ruling that the disability employment levy - paid by companies failing to meet their statutory hiring obligations - does not constitute “charges imposed as sanctions” (Supreme Court Case 2024Du30809). This differs from the previous tax treatment and administrative guidance, under which the disability employment levy had generally been treated as non-deductible expense for corporate income tax reporting purposes.

Following this final ruling, corporates that previously treated the disability employment levy as non-deductible in their annual corporate income tax returns can now seek refunds of corporate income tax by filing amended returns at least for the tax years 2020 through 2024. For the fiscal year ending in December 2020, the amended return must be filed by the end of March 2026 to secure the refund.

On the other hand, the Ministry of Finance and Economy amended the Corporate Income Tax Law in 2024, revising the phrase “charges imposed as sanctions” to “charges imposed on the grounds of violations”. As such, in relation to the filing of annul corporate income tax returns for 2025, it may once again become a matter of debate whether the disability employment levy naturally falls under the amended provision, namely “charges imposed on the grounds of violations”.

• Final rulings on inclusion of performance bonuses in average wage calculation

On January 29, 2026, the Supreme Court rendered significant rulings concerning whether performance-based bonuses paid by companies should be included in the calculation of average wages. As these rulings represent the Supreme Court’s decision on an issue that had been inconsistently decided by lower courts, they are expected to have a substantial impact on future practices.

This Supreme Court’s decisions applied the existing legal criteria for determining whether certain payment constitute “average wage” namely:
1) Whether the payment constitutes consideration for work (i.e., whether the obligation to pay arises directly from or is closely related to the provision of labor);
2) Whether it is paid continuously and regularly; and
3) Whether the employer has an obligation to make such payment.

The Supreme Court did not establish a new legal doctrine, but it clarified that determination of whether performance bonuses should be included in the calculation of average wages may vary depending on how the relevant compensation system is designed and operated, including factors such as payment cycle, eligible recipients, whether the calculation formula is pre-determined, and the possibility of non-payment.

In particular, the Supreme Court recognized that performance bonuses may be included in the average wage – used as the basis for calculating severance pay – in the case where employees are able to control the achievement of targets and play a primary causal role in attaining such targets, and where the compensation is more in the nature of a post-settlement of individual performance rather than a distribution of overall corporate performance.

As this decision is expected to serve as an important benchmark for the design and operation of performance-based compensation systems and the resolution of related disputes, companies that provide performance bonuses will inevitably need to reassess the legality of their severance pay or retirement benefit calculations. It is advisable for companies to conduct a comprehensive preemptive review of overall compensation structure through their local labor and legal advisers to evaluate risks, including retroactive payment liabilities, provisions for liabilities, and the impact on future labor costs, and to establish appropriate corrective measures.