[2] In a case where it is difficult to apply the transfer price taxation system under the former Adjustment of International Taxes Act to an international trade among the related parties, and the substance of the trade constitutes a transfer of profits to a domestic corporation’s foreign related parties without compensation, whether it is included in each subparagraph of Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act (affirmative)

[3] In a case where shares issued by a company are transferred along with the right of management, whether the transaction price can be deemed the market price in general (negative) / Whether the transaction price can be deemed the arm’s length price in the case of shares transaction involving a complete transfer of management right (negative in principle)

[2] In full view of the history of the enactment and amendment of the Adjustment of International Taxes Act, the developments leading up to the establishment of Article 3(2) of the former Adjustment of International Taxes Act (amended by Act No. 9914, Jan. 1, 2010; hereinafter “former Adjustment of International Taxes Act”), the mutual relationship between the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “Corporate Tax Act”) and the former International Tax Adjustment Act, the relationship between the object and type of wrongful calculation under Article 8(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20720, Feb. 29, 2008; hereinafter “Enforcement Decree of the Corporate Tax Act”) and the circumstances leading up to the exclusion from application of the former Adjustment of International Taxes Act, it is difficult to interpret that the former Enforcement Decree of the Adjustment of International Taxes Act includes the substance and substance of transactions among the related parties under Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act.

Therefore, a domestic corporation's act of distributing profits to a foreign specially related person in a manner that allows a foreign corporation to exercise all rights corresponding to the holding ratio without exercising rights with a foreign specially related person, is equivalent to "free transfer of assets" under Article 3-2 subparagraph 1 of the former Enforcement Decree of the International Tax Adjustment Act, and is subject to the avoidance of wrongful calculation under Article 52 (1) of the Corporate Tax Act and Article 88 (1) 7-2 of the Enforcement Decree of the Corporate Tax Act.

[3] In a case where shares issued by a company are transferred with the management rights of a company, the transaction price cannot be deemed as the ordinary market price reflecting the objective exchange value when only shares are transferred. Likewise, the share transaction involving the complete transfer of management rights cannot be deemed as the transaction with a foreign related party, and it is difficult to view that the domestic corporation is a transaction with a high possibility of comparison with the transaction that partially transfers shares

1. As to the grounds of appeal Nos. 1 and 5

A. The substance over form principle under Article 14(1) of the former Framework Act on National Taxes (amended by Act No. 911, Jan. 1, 2010) refers to a person to whom the actual income, profit, property, transaction, etc. belongs, if there is a separate person to whom such income, profit, property, and transaction, etc. belong, unlike the nominal owner, the nominal owner is a taxpayer for tax payment. Therefore, where the nominal owner is not capable of controlling and managing the property, and there is another person who substantially controls and manages the property through the control, etc. over the nominal owner, and the disparity between the nominal owner and the real owner arises from the purpose of tax evasion, the income on the property shall be deemed to have been reverted to the person who actually controls and manages the property and the person to whom the income is to be liable for tax payment (see, e.g., Supreme Court en banc Decision 2008Du8499, Jan. 19, 201). Such substance over form principle is established in a country where a non-resident or a foreign corporation provides tax benefits to tax evasion.

B. According to the reasoning of the lower judgment and the evidence duly admitted, the following facts are revealed.

(1) On May 2, 200, the non-party 1, non-party 2, non-party 3, and Jad Industrial Co., Ltd. established the Pacific General Limited (hereinafter referred to as the "PGC"), an investment holding company, in Malaysia, and thereafter, the non-party 1 remains as a shareholder holding 83% and non-party 2 17% shares.

② On April 200, Nonparty 1 and Nonparty 2 decided to establish an investment holding company in Malaysia, which had low possibility of local taxation due to the lack of duty to report on taxation and the lack of obligation to prepare financial statements and audit reports due to the characteristics of the region. Nonparty 1 and Nonparty 2 led to the establishment of PGC.

③ The PGC did not have a special physical facility or employee in the Malaysia, and the company located in Hong Kong on its behalf in accordance with the orders of Nonparty 1 and Nonparty 2, but did not carry out a major decision-making procedure, such as a resolution of the board of directors.

④ Nonparty 1 did not prepare a reliable accounting book, even though Nonparty 1 depended on Nonparty 1’s asset management, including frequently entering and withdrawing from the PGC’s account to his own account.

⑤ Meanwhile, from 2000 to 2007, Nonparty 1, a permanent resident of Singapore, was the number of days of stay in Korea from September to 112 each year. Nonparty 2 was a domestic resident, but Nonparty 2 was holding only 17% of the shares of the PGC, and the income earned by the PGC was not subject to the principle of dividend of a specific foreign corporation under the Adjustment of International Taxes Act, which was in force at the time.

(2) The Plaintiff, as a domestic corporation that the PGC owns its entire shares, owned a call option that can acquire shares of Singapore corporations Magiet Pte. Ltd (hereinafter “MPL”) with the PGC, and exercised a call option solely around September 14, 2007 by giving up the option.

In addition, on February 1, 2008, the Plaintiff transferred the MPL stocks held separately to PGC, and the balance was settled.

(3) On July 1, 2010, the head of the regional tax office imposed corporate tax on the Plaintiff for each of the business years 2007 and 2008 (hereinafter “instant disposition of imposition of corporate tax”) on the ground that (i) the Plaintiff waived the call option that the Plaintiff could acquire at low price, and (ii) the call option option exercise price that the PGC, a special party company, could obtain by exercising all call options, and (iii) the distribution of profits equivalent to the difference between the market price and the market price by transferring the PEL stocks at low price to the PGC; and (ii) the amount of income in the instant case was notified to the Plaintiff on July 1, 2010 as bonus in 207 and 208 (hereinafter “the instant disposition of imposition of corporate tax”). Moreover, the head of the regional tax office of Seoul Regional tax office imposed corporate tax on the Plaintiff for each of the following reasons: (i) deeming that the amount included in the gross income was directly attributable to Nonparty 1 and Nonparty 2, an officer of the Plaintiff.

C. Examining the facts in light of the aforementioned legal principles regarding the establishment process and purpose of the PGC, the details of the personnel and material organization and business activities of the PGC, the form of decision-making and asset management of the PGC, and the governance structure of the PGC, etc. (1) PGC is established in the tax have no ability to control and manage the PGC’s assets, and there is no ability to carry out substantive business activities, and Nonparty 1 and Nonparty 2 performed substantial business activities in the name of the PGC while making decision-making and asset management of the PGC through control. The disparity between the name and substance lies solely in the PGC as the principal agent of the transaction and the act and changing the owner of the income from Nonparty 1 and Nonparty 2 to the PGC to the PGC, and thus, it is reasonable to deem that the PGC’s profits under the principle of substantial taxation can not be acknowledged to be attributed to the non-party 1 and the Plaintiff’s profits accrued to the non-party 2.

Therefore, in order to determine the illegality of the disposition imposing corporate tax in this case and the notice of change in the amount of income, it is necessary to examine and determine whether Nonparty 1 and Nonparty 2 constitute a resident under the Income Tax Act, and whether the profit sharing due to the waiver of the Plaintiff’s call options and the low-price transfer of MPL stocks are a domestic trade or international trade, thereby satisfying the taxation requirements under the Corporate Tax Act or the Adjustment of International Taxes Act (hereinafter “International Tax Adjustment Act”).

D. Nevertheless, the lower court erred by misapprehending the existence of the PGC and determined otherwise, based on the erroneous premise that: (a) Nonparty 1 and Nonparty 2 were unable to pay PGC as a nominal agent while making a transaction with the Plaintiff as an individual qualification; or (b) the above included in the gross income cannot be deemed as having been directly reverted to Nonparty 1 and Nonparty 2, not PGC; (c) determined that the above included in the gross income belongs to PGC, a foreign corporation, and thus the above included in the gross income falls under only the international transaction; and (d) determined that the above included in the gross income belongs to PGC

In so determining, the lower court erred by misapprehending the legal doctrine on the principle of substantial taxation and the scope of its application, thereby adversely affecting the conclusion of the judgment. The ground of appeal assigning this error is with merit.

2. As to the grounds of appeal Nos. 2 and 3

A. (1) Article 2(1)1 of the former Adjustment of International Taxes Act (amended by Act No. 9914, Jan. 1, 2010; hereinafter “former International Tax Adjustment Act”) defines “international trade” as “any transaction between one or both parties to a transaction, which is a nonresident or a foreign corporation, involving the sale and purchase of tangible or intangible assets, the provision of services, the lending and borrowing of money, and any other transaction related to the profits, losses, and assets of the parties.” Article 3(2) provides that “The provisions of Article 41 of the Income Tax Act and Article 52 of the Corporate Tax Act shall not apply to an international trade.” Provided, That this shall not apply to the donation of assets as prescribed by the Presidential Decree.”

In addition, Article 3-2 of the former Enforcement Decree of the Adjustment of International Taxes Act (amended by Presidential Decree No. 21299, Feb. 4, 2009; hereinafter “former Enforcement Decree of the Adjustment of International Taxes Act”) provides that “The term “the donation of assets prescribed by Presidential Decree” under Article 3(2) of the former Enforcement Decree of the Adjustment of International Taxes Act refers to any of the following: “The transfer of assets without compensation (excluding the transfer of assets at a significantly low price) or there is debt exemption” (Article 1); “the purchase of assets without profits or the contribution in kind or the bearing of expenses for the relevant assets” (Article 3); “the purchase of assets without profits or the bearing of expenses for the relevant assets” (Article 4); “other capital transactions which fall under any of the items of Article 8(1)8 of the Enforcement Decree of the Corporate Tax Act or subparagraph 8-2 of the same paragraph (Article 5).

(2) Meanwhile, Article 52(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “Corporate Tax Act”) provides, “Where it is deemed that a domestic corporation’s act or calculation of its income amount has unjustly reduced the tax burden on its corporate income due to transactions with a specific specially related person, the head of the district tax office having jurisdiction over the place of tax payment, etc. shall, regardless of the corporation’s act or calculation of its income amount (hereinafter “Calculation by wrongful act”), provide for a wrongful act and calculation panel allowing the relevant corporation to calculate its income amount for

In addition, Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20720, Feb. 29, 2008; hereinafter “Enforcement Decree of the Corporate Tax Act”) provides for the type of wrongful calculation under Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 20720, Feb. 29, 2008; hereinafter “Enforcement Decree of the Corporate Tax”) where profits are distributed by means of not exercising rights based on derivatives prescribed by Ordinance of the Ministry of Finance and Economy or adjusting the period of exercise. Article 42-3 of the former Enforcement Rule of the Corporate Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 10, Mar. 31, 20

(3) Prior to the enactment of the International Tax Adjustment Act, Article 46(4) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 14861, Dec. 30, 1995) prior to the enactment of the said Act provides for the method of calculating the market price, etc., which serves as the basis for the setting aside of wrongful calculation in international trades, thereby allowing a wrongful calculation under the Corporate Tax

However, the International Tax Adjustment Act, enacted by Act No. 4981 on December 6, 1995, intended to apply the International Tax Adjustment Act preferentially to other Acts in order to comply with internationally generalized and commonly accepted standards for international trades among related parties, and deleted all relevant provisions in the Corporate Tax Act, etc.

However, the requirements for the application of the transfer price taxation under the International Tax Adjustment Act and the requirements for the avoidance of wrongful calculation under the Corporate Tax Act are different, and the International Tax Adjustment Act amended by Act No. 6779 on December 18, 2002, newly established Article 3(2) and amended by Act No. 6779 on December 18, 2002 so that only the provision of the unfair calculation panel under the Corporate Tax Act is applied to the donation of certain assets which are difficult to apply the transfer price taxation.

(4) In full view of the legislative and amendment history of the said International Tax Adjustment Act, the developments leading up to the establishment of Article 3(2) of the International Tax Adjustment Act, the mutual relationship between the Corporate Tax Act and the International Tax Adjustment Act, the nature and structure of Article 8(1) of the Enforcement Decree of the Corporate Tax Act setting forth the scope of exclusion from application of the said Act, and Article 3-2 of the former Enforcement Decree of the International Tax Adjustment Act, which set forth the scope of exclusion from application of the said Act, are difficult to apply the transfer price taxation under the International Tax Adjustment Act to international trades among the related parties, and where the substance of the said transaction falls under the transfer of profits to the foreign specially related parties of the domestic corporation without compensation, it shall be construed that the said transaction is included in each subparagraph of Article 3-2 of

Therefore, the act of a domestic corporation holding a right based on derivatives with a foreign related party and distributing profits to a foreign related party in a manner that allows the foreign related party to exercise the entire rights without exercising the rights corresponding to the holding ratio is equivalent to the "free transfer of assets" under Article 3-2 (1) of the former Enforcement Decree of the International Tax Adjustment Act and is subject to the avoidance of wrongful calculation under Article 52 (1) of the Corporate Tax Act and Article 88 (1) 7-2 of the Enforcement Decree of the Corporate Tax Act.

B. According to the reasoning of the lower judgment and the evidence duly admitted, the following facts are revealed.

(1) On May 10, 2005, when the Plaintiff and PGC transfer MP stocks (Plaintiff 26%, 13%) owned by them to USD 4.210 per share (hereinafter “$”) and when the MPT does not list MPL stocks in the Japanese stock market by June 30, 2007, the Plaintiff and PGC concluded an agreement between the Plaintiff and the Plaintiff and the shareholders to receive a call option that can purchase 1% or 35% of the MPL stocks acquired by MPT to 70% of the price acquired by MPT.

(2) The TPP did not list its shares in the Japanese stock market within the time limit set by the above arrangement.

(3) However, the Plaintiff did not exercise the call option (hereinafter “instant call option waiver”), on the other hand, the PGC independently exercised the call option and purchased 35% of the MPL shares from USD 2.7944 per share to USD 5.5342 per share, 10% per market price.

C. Examining these facts in light of the legal principles as seen earlier, the Plaintiff’s exercise of call options, which was able to obtain USD 2.7944 per share below the market price, and then had PGC exercise the entire exercise of such options without exercising it, and thus, it can be deemed that the profit corresponding to the amount calculated by multiplying the difference between the exercise price of call options owned by the Plaintiff and the market price was distributed to a specially related person via PGC. Thus, even if the distribution of profit is recognized as an international transaction with a foreign specially related person, such act may be subject to the avoidance of wrongful calculation under Article 52(1) of the Corporate Tax Act and Article 88(1)7-2 of the Enforcement Decree of the Corporate Tax Act.

D. Nevertheless, the lower court determined otherwise on the erroneous premise that the act of distributing profits through the waiver of the instant call option does not constitute an international transaction even with respect to a specially related person, and thus does not fall under any of the subparagraphs of Article 3-2 of the former Enforcement Decree of the International Tax Adjustment Act, and thus, does not constitute the object of the avoidance of wrongful calculation under the Corporate Tax Act, and determined whether the instant disposition of imposing corporate tax and

Therefore, such judgment of the court below is erroneous in the misapprehension of legal principles as to the interpretation and application scope of Article 3-2 of the Enforcement Decree of the former Adjustment Act or Article 88(1)7-2 of the Enforcement Decree of the Corporate Tax Act. The ground of appeal assigning this error is with merit.

3. As to the fourth ground for appeal

A. Article 4(1) of the former Adjustment of International Taxes Act provides that a transaction party may determine or rectify the tax base and tax amount of a resident (including a domestic corporation and a domestic business place) on the basis of the arm’s length price in cases where the transaction price falls short of or exceeds the arm’s length price in an international transaction between a foreign related party and a foreign related party. Article 5(1)1 of the former Adjustment of International Taxes Act provides that one of the aforementioned methods of computing arm’s length price refers to the method of deeming the transaction price between an independent business operator who does not have a special relationship in a transaction similar to the said transaction in an international transaction between

Meanwhile, Article 5(1) of the former Enforcement Decree of the International Tax Adjustment Act provides that “When calculating an arm’s length price pursuant to the provisions of Article 5(1) of the former International Tax Adjustment Act, a reasonable method shall be selected taking into account the following criteria.” Article 5(1)1 provides that “The possibility of comparison shall be high between an international trade among related parties and a trade between unrelated parties. In such cases, the high possibility of comparison means any of the following cases.” (a) Item (b) provides that “Where a difference in the compared circumstances has no significant impact on the price or net profit of the trade being compared to the compared circumstances,” and (b) provides that “where a difference in the compared circumstances has a significant impact on the compared price or net profit, a reasonable adjustment by which the difference can be removed from such impact may be made”.

In full view of the language, purport, etc. of these provisions, in order for a tax authority to impose a tax on a resident’s transaction with a foreign related party based on the arm’s length price, it must select the most reasonable arm’s length price calculation method by taking into account the comparative feasibility, etc. based on the data collected through a request for submission of data, etc. against the taxpayer. In a case where the difference in the compared situation has a significant impact on the compared transaction price or net profit, the difference must be reasonably adjusted to calculate the arm’s length price, and the burden of proof on the situation that the arm’s length price, which forms the basis for the taxation, was lawfully calculated through the same process, lies in the tax authority (see Supreme Court Decision 2011Du6127, Dec. 26, 2012)

In addition, where shares issued by a company are transferred along with the management right of the company, the transaction price cannot be deemed the general market price that reflects the objective exchange value when only shares are transferred (see, e.g., Supreme Court Decision 89Nu558, Jan. 12, 1990). Likewise, a share transaction involving the complete transfer of management right is difficult to view that a domestic corporation is a transaction with a high possibility of comparison with a transaction that transfers only a part of shares to a foreign person with a special relationship, and thus,

B. (1) On December 12, 2007, the lower court determined that: (a) on February 1, 2008, the Plaintiff transferred 20% of the Plaintiff’s PEL stocks to USD 3.4032 per share; (b) settled the balance on February 1, 2008; (c) on September 21, 2007, the Plaintiff transferred 10.47% of the PEL stocks to 5.5342 per share; and (d) on December 21, 2007, the lower court determined that it is difficult to view the Plaintiff’s domestic corporation’s domestic corporation’s liability and/or obligation to transfer PEL stocks to 30% on the premise that it would be difficult for the Plaintiff to view the transfer of PEL stocks to 15.79% on the premise that it would be difficult for the Plaintiff’s domestic corporation’s domestic corporation’s domestic corporation’s domestic corporation’s share transfer price to PE (hereinafter “the Plaintiff’s shares transfer price”).

C. Examining the reasoning of the lower judgment in light of the evidence duly admitted, the part on the determination that it is difficult to regard the instant price as the arm’s length price as the arm’s length price under the International Tax Adjustment Act appears to be based on the foregoing legal doctrine, and the part is not erroneous by misapprehending the legal doctrine on the selection, etc. of comparable transactions for calculating the arm’s length price, contrary to what is alleged in the grounds of appeal. However, the lower court erred by concluding

4. Conclusion

Therefore, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Shin (Presiding Justice)