[2] Whether gift tax should be levied on profits earned by the shareholders of the company becoming a complete subsidiary through an all-inclusive share swap by applying Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (affirmative)

[2] In full view of the structure and characteristics of the comprehensive exchange transaction of stocks under the Commercial Act, the structure and nature of the comprehensive exchange transaction of stocks, and Articles 35(1)2 and (2), 39(1)1, and 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”), and the text, legislative purport, and system of the relevant provisions under the former Inheritance Tax and Gift Tax Act, including Article 360-2(1) and (2) of the Commercial Act, with regard to profits acquired by the shareholders of a company becoming a wholly owned subsidiary through an all-inclusive exchange of stocks, gift tax cannot be imposed by applying Article 35(1)2 and (2) of the former Inheritance Tax and Gift Tax Act or Article 39(1)3 of the former Inheritance Tax and Gift Tax Act concerning donation of profits from the issuance of new stocks at low prices under Article 39(1)4(c) of the former Inheritance Tax Act.

1. Article 35(1)2 and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter “Capital Increase Tax Act”) provides for “the donation of profits from the transfer of property at a high price” concerning “the donation of profits from the transfer of property at a lower price,” and Article 39(1)1 provides for “the donation of profits from the issuance of new stocks from among donations of profits from capital increase,” and Article 42(1) provides for “the donation of other profits” as “the donation of profits from the issuance of new stocks at a lower price,” and Articles 33 through 41, 41-3 through 41-5, 44 and 45 provide for “the value of the relevant profits from the conversion of stocks at a price higher than or higher than that determined by Presidential Decree, such profits shall not apply to the conversion of stocks at the time of the conversion or exchange of stocks from the price of stocks to the said person:

Meanwhile, according to Article 360-2 of the Commercial Act, a company may hold the total number of outstanding shares of another company (hereinafter “wholly owning parent company”) by an all-inclusive share swap. If an all-inclusive share swap is made, shares of the company becoming a wholly owned subsidiary shall be transferred to the company becoming a wholly owning parent company on the date of share swap. The shareholders of the company becoming the said wholly owned subsidiary shall be entitled to the allocation of new shares issued by the company becoming the said wholly owning parent company for share swap (Paragraph 2). As can be seen, an all-inclusive share swap under the Commercial Act is combined between the shares of the company becoming a wholly owned subsidiary and the shares of the company becoming a wholly owned subsidiary are transferred from the company becoming a wholly owning parent company for which the shares of the company becoming a wholly owned subsidiary are transferred, and transactions which become shareholders of the company becoming a wholly owned subsidiary after obtaining a share allocation from the company becoming a wholly owned parent company for consideration for shares of the company becoming a wholly owned subsidiary and transactions which become shareholders of the company becoming a wholly owned subsidiary under the tax law on the increase or decrease of new shares under tax law.

In full view of the structure and characteristics of the comprehensive exchange transaction of stocks, and the language, legislative purport, and system of the relevant provisions under the Inheritance and Gift Tax Act including the aforementioned provisions, gift tax may not be imposed on profits acquired by the shareholders of a company becoming a wholly owned subsidiary through an all-inclusive share swap under the Commercial Act by applying Article 35(1)2 and (2) of the Inheritance and Gift Tax Act or Article 39(1)1(c) of the Inheritance and Gift Tax Act concerning donation of profits arising from the issuance of new stocks at a low price, and the gift tax shall not be imposed by applying Article 42(1)3 of the Inheritance and Gift Tax Act concerning donation of profits arising from the transaction to increase corporate capital.

2. Nevertheless, the lower court deemed that gift tax may be imposed on profits acquired by the shareholders of a company becoming a wholly owned subsidiary through an all-inclusive share swap under the Commercial Act by applying Article 39(1)1(c) of the Inheritance Tax and Gift Tax Act to the profits earned by the shareholders of the company becoming a wholly owned subsidiary. In so determining, the lower court determined that the imposition of gift tax of this case was lawful on the premise that the Plaintiffs, who were the shareholders of the non-listed corporation, received profits by acquiring new shares issued by the company becoming a wholly owning parent company at a low price in the process of the all-inclusive share swap of the shares held in accordance with Article 360-2, etc. of the Commercial Act, based on the premise that they received profits by taking over the new shares issued by the company becoming a wholly owned subsidiary at low price, by applying Article 39(1)1(c) of the Inheritance Tax and Gift Tax and Gift Tax Act to which the difference between the appraised value of new shares acquired by the Plaintiffs and the acceptance value

3. Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Min Il-young (Presiding Justice)