Article 98 of the Income Tax Act: Time of Transfer or Acquisition

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The Defendant’s disposition imposing capital gains tax on the Plaintiff on February 1, 2015 is revoked.

A. On July 20, 206, the Plaintiff, the owner of 18/1,213 shares (around 15.34 square meters if converted into an area; hereinafter referred to as “instant shares”) in ○○○○○○○○○○-dong 147-115 square meters, and 1,034 square meters (hereinafter referred to as “the instant land”) (hereinafter referred to as “the instant new building”), provided the instant shares and the Plaintiff entered into an implementation agreement with the Plaintiff to newly construct the main complex building (hereinafter referred to as “CC”) on the instant land to provide the Plaintiff with the right to sell the instant new building (hereinafter referred to as “the instant new building”). The main contents are as follows.

Implementation Contract

Article 1 (Purpose)

The purpose of this Agreement is to ensure the successful completion of the main complex construction project (hereinafter referred to as the "project") by prescribing the status, rights, obligations, etc. of the Plaintiff andCC when the Plaintiff provided the land in this case, and delegated and developed the main complex construction toCC, and theCC agreed to exchange the right to sell new buildings in return for such an agreement.

Article 2 (Status of Parties, Business Principles, Method of Implementation of Projects, Definition of Terms)

② The Plaintiff delegated the implementation of the project toCC and provided real estate owned by the Plaintiff as a project site.

④CC completes “CC’s business” under the responsibility ofCC and, in return for the land provided by the Plaintiff,CC shall provide the Plaintiff with a right to sell commercial buildings, apartment buildings, officetels, etc. pursuant to Article 3.

5. The term "alternative payment" as used in this Agreement refers to the contract balance (hereinafter referred to as "area for substitute payment") in the sales contract that the Plaintiff receives as a result of the provision of land toCC.

6. The term "amount of the substitute payment" used in this contract means the amount obtained by multiplying the area of the substitute payment by the average of the 30 square-type apartment units on the design outline approved by the licensing authority (hereinafter referred to as "amount of the substitute payment") of the 30 square-type apartment units on the design outline approved by the licensing authority.

Article 3 (Method of Performance by Substitutes)

① The method of “alternative repayment” thatCC provides to the Plaintiff is multiplied by 4.64 per square meter of the Plaintiff’s registered land area, and this is called “alternative repayment area.”

② The Plaintiff may choose either commercial buildings, officetels, or apartment buildings.

③ The Plaintiff recognizes the sale price approved by the competent administrative agency and pays the sales price of the remaining ordinary water, excluding the area where the payment is made in substitution, toCC.

Article 4 (Liability of the Plaintiff for Sale by Units)

Where the sale price of a building facility sold in lots exceeds the amount of "payment in lieu of the plaintiff," theCC shall settle and pay the difference pursuant to Article 2 (6).

B. On April 2, 2007, in order to stably promote the new construction project of the new building of this case (hereinafter referred to as the "project of this case"), the Plaintiff entered into a land trust agreement (hereinafter referred to as "the trust agreement of this case") with a DD Trust Co., Ltd. (hereinafter referred to as the "DD Trust") and the Plaintiff on which the shares in this case are trusted to DD Trust, and its main contents are as follows.

Management-type Land Trust Agreement

Article 1 (Trust Purpose)

① The Plaintiff is entrusted with the instant shares in the DD Trust, and the DD Trust takes over such shares.

② The purpose of this trust is to construct a main complex building on land and sell land and buildings (hereinafter referred to as "trust real estate") as trust property.

Article 7 (Delivery of Buildings and Publication of Trust)

D Trust shall make registration of preservation of ownership and trust as trust property after obtaining delivery of a building from a construction company without delay after the inspection of use of the building.

Article 13 (Initial Beneficiary)

The first beneficiary of this trust is the plaintiff, but the third party can be the beneficiary with the consent of D Trust.

Article 19 (Payment of Expenses)

(1) The following expenses shall be borne by the plaintiff:

1. Taxes and public charges for trust property (value-added tax on the implementation of a trust project, acquisition tax, registration tax, public charges, etc. following the preservation registration of building), and all registration expenses;

2. Design and supervision expenses and construction cost;

3. Repayment of loans, rental deposit, etc. and interest thereon;

4. Repair, preservation, and improvement expenses of real estate in trust, and fire insurance premiums;

5. Expenses incurred in selling in lots and in dealing with rental affairs;

6. Other expenses necessary for the performance of trust affairs.

Article 20 (Appropriation of Transferred Expenses from Transfer to Trust Property)

Where the repayment of a loan and interest accrued from a trust property, loss incurred without the fault of a D trust due to the performance of trust affairs, and other expenses incurred in performing the trust affairs, and the substitute payment for DD trust are insufficient, the plaintiff shall be claimed, and where DD trust is insufficient, it may be sold in whole or in part, and appropriated for the payment thereof, as the method and value recognized as reasonable by DD trust.

Article 25 (Termination of Trust)

A trust contract shall be terminated in any of the following cases:

1. Where the purpose of trust is achieved;

2. Where the purposes of trust can not be achieved;

3. Where the period of trust expires;

4. Where a contract is terminated under Article 24;

Article 26 (Delivery of Trust Property upon Termination of Trust)

Where a trust contract is terminated, the DNA trust shall be delivered to the beneficiary in accordance with the following methods in relation to the final calculation:

1. DD Trust for trusted real estate shall be cancelled, and transferred to the beneficiary in the existing condition after completing the registration of transfer to the buyer;

C. On April 6, 2007, the Plaintiff completed the registration of trust based on the name of D Trust in accordance with the instant trust agreement.

D. On December 5, 2007, the Plaintiff entered into a sales contract with D Trust on 967,000,000 won (hereinafter referred to as the “water-sale apartment of this case”) for the new building of this case, and with regard to the remaining amount (493,669,357 won) excluding the appraised value of the shares in this case (473,30,643 won). D Trust is the owner of this case’s land and ○○○○○○-dong 147-29,95m2,95m2 (hereinafter referred to as “○○○○-dong 147-29m29m2,”) and completed the registration of ownership transfer for the purpose of converting the ownership of this case’s new building into the ownership of this case’s land and the ownership of this case’s new building on 14.25m27, 2011.

F. The Defendant deemed that the Plaintiff paid in kind the instant shares on February 14, 201, and determined and notified the transfer income tax on February 1, 2015 to the Plaintiff on February 1, 2015 (hereinafter “instant disposition”).

G. On November 25, 2015, the Plaintiff appealed to the Tax Tribunal for a trial, but received a decision to dismiss the request.

[Ground for Recognition: Facts without dispute, entry of Gap evidence 1 through 5, and 8 (including branch numbers in case of additional number), Eul evidence 1, 2, and 3, the purport of the whole pleadings]

2. Whether the disposition of this case is legitimate;

A. The plaintiff's assertion

The instant disposition is unlawful for the following reasons.

1) Of the instant housing site (16.52 square meters) transferred by the Plaintiff from DD trust, it cannot be deemed that there was any transfer from the beginning with respect to the instant shares (15.34 square meters) in the instant housing site (16.52 square meters). In the instant housing project, DD trust merely becomes the main agent of the project, but does not assume any responsibility for financing the project, and as such, it is anticipated to return ownership upon termination of the trust contract from the beginning, so the possibility of real income control cannot be deemed to have been transferred to DD trust. In full view of the fact that the Plaintiff and the land owners, including the Plaintiff, explain the process of performing the instant housing project from the Gu office to the National Tax Service, they continued to implement the instant housing project after receiving the answer that the transfer income tax may not be imposed, and trust shares of the Plaintiff do not constitute a transfer under the Income Tax Act (hereinafter “the allegation 1”).

2) Even if the transfer of the shares in this case constitutes a transfer under the Income Tax Act, it shall be deemed that the appraised amount of the shares in this case is 175,396,010 won equivalent to the construction cost that the Plaintiff was exempted from, not the KRW 473,330,643, and the transfer of the shares in this case should be subject to capital gains tax (hereinafter referred to as “second assertion

3) The time when the Plaintiff transferred the instant shares to the Plaintiff is not on February 14, 2011, but on April 2, 2007, which was trusted to D Trust (hereinafter “Third Claim”).

B. Relevant provisions

It is as shown in the attached Form.

C. Determination on the first argument

1) Article 4(1) of the former Income Tax Act (amended by Act No. 11146, Jan. 1, 2012; hereinafter referred to as the “former Income Tax Act”) provides that a resident’s income is classified into global income, retirement income, and capital gains, and thus, the resident’s income is “income accruing from the transfer of assets” ( Subparagraph 3).

Article 88 (1) provides that "The actual transfer of assets is made at a price due to sale, exchange, investment in kind in a corporation, etc., regardless of the registration or enrollment of the assets", and Article 88 (2) provides that "the transfer of the assets shall not be deemed the transfer provided for in paragraph (1) where the land category or lot number is changed due to a disposition of replotting under the Urban Development Act or other Acts or where appropriated by the authorities in recompense for development outlay."

2) In light of the following circumstances, it is reasonable to view that the trust of the Plaintiff’s key shares in the instant case constitutes a transfer under the former Income Tax Act, which is recognized by comprehensively taking account of the purport of the entire pleadings in the instant facts recognized. Therefore, the instant disposition is lawful on such premise, and the Plaintiff’s assertion

A) The instant project is a general real estate development project that rather than based on the Urban Development Act or the Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents, rather than based on the Urban Development Act or the Act on the Maintenance and Improvement of Urban Areas and Dwelling Conditions for Residents and takes the method of building costs by constructing more houses than the existing number of houses and selling them in lots to the public. Thus, it cannot be deemed that the land category or lot number is changed or appropriated as a land substitution disposition under the Urban Development Act and other Acts

B) The instant shares owned by the Plaintiff are the ownership of co-ownership of the instant land, while the ownership of the instant several apartment buildings sold by the Plaintiff is a component of the instant new building, which is an aggregate building, and its nature is entirely different from the ownership of the instant land. Furthermore, the ownership owned by the Plaintiff is 18/1,213 out of the instant land, while the ownership acquired by the Plaintiff is 16.52 shares of 3,989 out of the land including the instant land from ○○-dong 147-29, 00 to 16.52 shares of the ownership acquired by the Plaintiff. Therefore, the instant shares owned by the Plaintiff and the ownership of the instant several apartment buildings newly acquired by the Plaintiff cannot be deemed to be identical.

C) The Plaintiff provided the instant issues share and received the instant several apartment units, and paid an additional amount calculated by subtracting the sales value equivalent to the sales value from the sales value of the instant several apartment units multiplied by 4.64 per square meter from the sales value of the instant several apartment units. As such, only paying the difference with the sales value is for convenience of settlement, and on the premise that the Plaintiff pays the value of the instant outstanding shares and the value of the instant several apartment units, it cannot be deemed that there was no transaction or there was no payment for this portion.

D. Judgment on the second argument

1) Article 96(1) of the former Income Tax Act provides that “The transfer value of assets shall be the actual transaction value between the transferor and the transferee at the time of the transfer of the assets (hereinafter “actual transaction value”).” Here, “actual transaction value” means the actual transaction value, not the general market value that reflects the objective exchange value, but the actual transaction value itself or at the time of the transaction (see, e.g., Supreme Court Decision 2009Du19465, Feb. 10, 201).

2) According to the facts seen earlier, the Plaintiff agreed to recognize the sale price of the instant several apartment units approved by the competent authorities (Article 3(3)), and to bear the amount calculated by subtracting the Plaintiff’s area of payment in kind from the sale price of the instant apartment units (Article 4(1)) (Article 4), while entering into a DD trust sales contract with the DD trust, and only pays the remainder (493,669,357 won) excluding the appraised amount of the instant outstanding shares (473,330,643 won) out of the sale price, so it can be deemed that the Plaintiff agreed to consider the sale price as the basis for calculating the sale price. Accordingly, the transfer price of the instant outstanding shares should be calculated based on the sale price in accordance with the terms and conditions of each contract. The Plaintiff’s assertion on this part is rejected.

E. Judgment on the third argument

1) As seen earlier, capital gains tax is a tax item imposed on an increase in the value of assets arising from the transfer of assets, and thus, the transfer refers to the actual transfer of assets at a cost due to sale, exchange, investment in kind in a corporation, etc., regardless of the registration or enrollment of the assets.

2) In light of the following circumstances, it is reasonable to view that the time when the share in the instant land was transferred on February 14, 201, when comprehensively considering the facts and the purport of the entire argument as seen earlier and the evidence revealed. Accordingly, the Plaintiff’s assertion on this part is rejected.

A) According to the instant trust agreement, the Plaintiff completed the registration of the trust of the instant shares in the name of DDR, which is the trustee on April 6, 2007, pursuant to the instant trust agreement. Therefore, the ownership of the instant shares is entirely transferred to DDR in and outside the country. However, this is only intended to use DDR’s capacity, which is the trustee on the management and disposal of the instant assets, to promote the instant business in a stable manner. In addition, in the event the instant trust agreement terminates due to the termination of the trust period, the expiration of the trust period, or the achievement or failure of the purpose, the registration of the trust is canceled, the registration of the trust is completed, the ownership is completed, and the trust property is transferred to the beneficiary in the existing state (Articles 25 and 26). As such, in light of the fact that the instant trust agreement is planned to terminate from the beginning and is terminated, the trust property is returned to the beneficiary, the trustee, and the trustee’s acquisition of ownership in the instant shares is not subject to the ownership in the actual profits, etc. of the instant issues.

B) The price for the transfer of the instant shares was the purchase of the instant several apartment units, and the Plaintiff was in the state of not receiving the payment in return before completing the registration of ownership transfer in the Plaintiff’s future with respect to the instant several apartment units upon completion of the instant project. The process was registered under the instant trust agreement and trust registration. However, inasmuch as the Plaintiff did not receive the payment in return for the trust of the instant shares under the said trust agreement or agreed to receive the payment under the trust agreement, it is reasonable to deem that there was no settlement of the price for the instant shares at all.

3. Conclusion

Therefore, the claim of this case is dismissed as it is without merit, and it is so decided as per Disposition.