Comprehensive Real Estate Tax Case

[20-2(B) KCCR 1, 2006Hun-Ba112, 2007Hun-Ba71·88·94, 2008Hun-Ba3·62, 2008Hun-Ka12 (consolidated), November 13, 2008]

In this case, the Constitutional Court decided that the provision of the Comprehensive Real Estate Tax Actth at stipulates aggregate taxation of all the properties held by the members of the same household violates Article 36 Section 1 of the Constitution, which ensures people's marriage and family life, and that the provision which provides for imposition of progressively levied comprehensive real estate taxes that are established at a higher rate than the separately charged property taxes on houses exceeding certain values is not compatible with the Constitution. However, the Court also ruled that the comprehensive real estate tax system itself, including the imposition of comprehensive real estate taxes on the subjected lands, does not violate the Constitution.

Background of the Case

Petitioners and the requesting petitioner, possessing housing or lands subject to comprehensive aggregate taxation, were required by the director of the competent tax office to pay comprehensive real estate taxes for 2005 or 2006, and, while involved in a procedure seeking cancellation of the action requiring imposition or rejecting their request for rectification after payment, filed a motion to request for constitutional review of the founding rules of the aforementioned action, i.e., provisions of the former Comprehensive Real Estate Tax Act (enacted January 5, 2005 as Act No.7328 and revised by Act No.7836 on December 31, 2005, hereinafter the "former Act") and the Comprehensive Real Estate Tax Act (Act No.7836, revised December 31, 2005, hereinafter the "revised Act", and collectively the "Comprehensive Real Estate Tax Act"), respectively. However, when the competent court granted only the motion regarding the provision stipulating aggregate taxation of households in the Revised Act and requested the Constitutional Court for constitutional review of the statute concerned (2008Hun-Ka12) while denying other motions, thepetitioners and directly filed constitutional complaints with the

Constitutional Court, (2006Hun-Ba112, 2007Hun-Ba71, and 2008Hun-Ba62 as regards the former Act and 2007Hun-Ba88·94 and2008Hun-Ba3 regarding the Revised Act, respectively), thus consolitated.

Summary of Decision

The Constitutional Court ruled that ① by a vote of 7 to 2, the provision employing aggregate taxation of all the properties held by the members of the same household in imposing comprehensive real estate taxes violates the Constitution since it contradicts Article 36 Section 1 of the Constitution that ensures marriage and family life, ② by a vote of 6(incompatibility with the Constitution) to 1 (partially incompatibility with the Constitution) to 2 (constitutional), the provision imposingcomprehensive real estate taxes on housing is not compatible with the Constitution as it infringes property rights of the taxpayers, for example, who are one home owners having held their housing for residential purpose for a certain period of time or having no specific assets or source of income although their duration of retention falls short of the set period, and ③ in a unanimous opinion, that the provision imposing comprehensive real estate taxes on the subjected lands and the provision defining the comprehensive real estate tax as state tax do not violate the Constitution, for the following reasons:

1. Majority Opinion of Six Justices

A. Major Constitutional Issues Relating to Comprehensive Real Estate Tax System

(1) Double taxation

Although a real estate may be subjected to both the property and comprehensive real estate taxation, the portion taxed as properties by the local government and that taxed as comprehensive real estates by the state are split and, therefore, comprehensive real estate taxes are not paid for the same object whose property taxes have already been paid for. Also, the purpose or object of taxation varies between the

comprehensive real estate tax and the transfer income tax. For this reason, the problem of double taxation does not take place.

(2) Taxation based on retroactive legislation

Article 2 of the Addenda of the former Act clearly stipulates that the Act applies to the comprehensive real estate tax fulfilling the requirements for payment after its promulgation, so it is difficult to say that imposing comprehensive real estate taxes on the subjected real estate as of the basic date for taxation amounts to taxation by retroactive legislation.

(3) Taxation on unrealized profits and erosion of original value

The comprehensive real estate tax system essentially presupposes the taxpaying capacity of those who possess real estates and carries out imposition by using the real estate value as the tax base. Even if the comprehensive real estate tax has, in part, the nature of profit taxes, it is not likely that such nature gives rise to the issue of taxation on unrealized profits, and a partial erosion of the original real estate value alone, if any, cannot immediately be deemed as the reason for unconstitutionality.

(4) Violation of the right to financial autonomy

Whether to define real estate taxes as State tax or local tax is a matter of legislative policy, and it is hard to see that determining the comprehensive real estate tax, a tax for real estate ownership, as a state tax according to legislative policies undermines the essence of financial autonomy of local governments. Therefore, Article 16 Section 1 and the part of Article 17 relating to "the director of the competent tax office" and "director of the competent local tax administration office (hereinafter the "State Tax Provision") of the Comprehensive Real Estate Tax Act (herein referring to Act No.7328 enacted January 5, 2005, revised by Act No.8235 January 11, 2007), which define the comprehensive real estate tax as a state tax, cannot be deemed unconstitutional.

(5) Violation of Article 119 of the Constitution

Article 119 Section 2 of the Constitution that allows economic regulation and arbitration by the state does not appear to target the prohibition of the real estate tax itself, so simply imposing comprehensive real estate taxes on housing, etc. hardly violates Article 119 of the Constitution.

(6) Contradiction to systematic legitimacy under the Constitution

As an independent state tax separate from the local property tax, the comprehensive real estate tax does not constitute an special case for heavy taxation under the former Restriction of Special Taxation Act and is not irreconcilable with or contradictory to other taxes in terms of structures, contents, or the founding principles of regulation. Therefore, the comprehensive real estate tax does not fail to achieve legitimacy of the legislative system.

(7) Abuse of legislative power

It is difficult to say that there is an established constitutional practice that requires the government's submission of legislation in the case of tax related laws, and the legislative power is essentially vested with the National Assembly under Article 40 of the Constitution. Thus, it is hardly an abuse of the legislative power even if the Comprehensive Real Estate Tax Act is legislated with the submission on the draft by members of the National Assembly.

B. Aggregate Taxation of Properties Held by Members of the Same Household and Its Incompatibility with Article 36 Section 1 of the Constitution

(1)The issue is whether imposing more taxes on married couples or those who compose a household with family members in accordance with the parenthesized portion of the preceding sentence and succeeding sentence of Article 7 Section 1, Article 7 Sections 2 and 3, parenthesized part and proviso of Article 12 Section 1 Item 1 and

Article 12 Section 2 of the Revised Act (hereinafter the "Aggregate Taxation Provision") violates Article 36 Section 1 of the Constitution, which requires more protection for marriage and family life. Further, if this means a specific tax provision discriminates those who have family such as married couples against unmarried individuals, etc. on the ground of marriage or family life, it is a violation of Article 36 Section 1 of the Constitution unless justified through the proportionality review.

(2)The Aggregate Taxation Provision is perceived to have legitimacy in its legislative purpose as it aims to realize taxation that conforms to the actual living status of people and prevent tax evasion. However, it cannot immediately be concluded that possession of properties through transfer between family members implies the intention of tax evasion. Also, transfer of ownership between family members according to their legitimate intentions corresponds to people's rights. The Civil Act adopts a separate property system for married couples, and no regulation gives grounds to construe the properties of family members other than spouses as co-assets. Even if any regulation does construe the properties of family members as co-assets, it is not justified to aggregate all the properties of members of a household for taxation. Rise in the real estate price is a mixed consequence of several factors that not always takes place solely due to an incomplete tax system, and the Constitutional Court has previously declared unconstitutional the aggregate taxation of married couples' capital gains. Therefore, the Aggregate Taxation Provision cannot be deemed as reasonable discrimination.

Additionally, such aggregate taxation cannot be considered absolutely necessary because the legislative purpose of preventing tax evasion can fully be achieved also through the provisions nullifying title trust agreement or imposing administrative penalties under the Act on the Registration of Real Estate under Actual Titleholders' Name and the regulation on presumption of donation under the Inheritance Tax and Gift Tax Act, etc.

Further, the disadvantage of increased tax burden stemming from the Aggregate Taxation Provision far outweighs the public interest to be attained by the provision such as prevention of tax evasion. Balance

of interests is hardly met either, when considering that the public interests, herein the prevention of tax evasion, taxation based on the unit of economic activity, and stability of real estate prices, are legal interests pursued by legislative policy whereas protection of marriage and family life corresponds to constitutional values.

(3)Therefore, the Aggregate Taxation Provision discriminates, in violation of the principle of proportionality, married couples or those who compose a household with their family members against the individually taxed singles, couples in de facto marriage, homeowners who are not household members, etc. This violates Article 36 Section 1 of the Constitution.

C. Imposition of Comprehensive Real Estate Tax and Infringement of Property Rights

(1)The comprehensive real estate tax aims to enhance the equity of real estate tax burden, stabilize real estate prices, and contribute to the balanced development of local finances and sound development of national economy, which are acceptable in terms of legitimacy of the legislative purpose and appropriate means. In addition, given the ratio of comprehensive real estate taxpayers to the entire population or household of property taxpayers, average amount of tax per person or household, distribution of taxpayers and amount of tax depending on tax amount level, ratio of tax burden to real estate prices, the ceiling of tax amountat 150 or 300 percent of the total tax burden in the previous year, the tax burden prescribed by the Comprehensive Real Estate Tax Act is a restriction on property rights within the boundary of retaining the real estate owners' private usability and the basic right of disposal as essential elements of property rights. Further, taking into account the ratio of the aforementioned tax burden to real estate prices, even an annual imposition of comprehensive real estate taxes would, in fact, hardly result in confiscating the total value of real estates under the name of taxes. Therefore, it would generally be difficult to see that the taxpayers' tax burden derived from the tax base and tax rates of the comprehensive real estate tax on housing and aggregate lands is excessive given the legislative purpose of the

system and thus cannot be concluded as having deviated from the legislative discretion.

(2)However, as for housing, special protection is required as prescribed by Article 35 Section 3 of the Constitution. In the sense that housing is inevitable as a residence of an individual with dignity and value in realizing the right to pursue happiness through pleasant living and that people's housing can be stabilized also through reasonable housing supply policies, choosing the means to stabilizing housing prices by subjecting, based on housing prices, the owners of high-priced homes to policy execution must be done under a stricter standard of constitutional review.

Article 7 Section 1, Article 8, and the first paragraph of Article 9 Section 1 of the former Act and the non-parenthesized part of the first sentence of Article 7 Section 1, Article 8 Section 1, and Article 9 Section 1 Item 2 of the Revised Act (hereinafter the "Housing Tax Provision"), which prescribe the taxpayers, tax base, and tax rates and values of the comprehensive real estate taxes on housing in this case, should, in consideration of the necessity for policy-oriented taxation like motivation or duration of ownership and taxpaying capacity and circumstances affecting housing life, allow exceptional provisions or adjustment mechanism such as adopting taxpayer exceptions or adjusting the tax base or alleviating the tax burden by cutting housing-related comprehensive real estate tax rates on the concerned taxpayers who own one housing for residential purpose, especially those who have held the housing for a certain period of time or who have yet to retain for the set period but have low or de facto no taxpaying capacity due to lack of specific properties or income other than the housing subject to taxation. Regardless, such circumstances are not taken into account: treating taxpayers in the said specific situations the same as regular homeowners and applying progressive taxes that are relatively higher than property taxes uniformly or indiscriminately, leading to a large sum of comprehensive real estate taxes in the end. This crosses the boundary of policy means needed for fulfilling the legislative purpose, thereby excessively restricting the property rights of homeowners, which cannot but be viewed as contradicting the rules of least restrictive means and balance of interests.

(3)On the contrary, provisions concerning comprehensive real estate tax on aggregated lands under the Comprehensive Real Estate Tax Act (hereinafter the "Aggregate Lands Tax Provision"), which regulate the taxpayers, tax base, tax rates and amounts of comprehensive land taxes subject to taxation, may possibly restrict property rights through annual imposition of comprehensive real estate taxes of the subjected lands. Yet, when considering the degree of tax burden shouldered by comprehensive real estate taxpayers and the lands' unique characteristics different from housing, the Aggregate Lands Tax Provision promotes stability of real estate prices by constraining excessive home ownership and speculative demands, etc. as well as balanced development of local finances and sound development of the national economy through local transfer of the collected comprehensive real estate taxes. Since such public interests are great, it would be difficult to view that the Aggregate Lands Tax Provision contradicts the principle of the least restrictive means and balancing of interests.

D. Violation of Basic Rights through Imposition of Comprehensive Real Estate Tax

(1) Violation of equality rights or principle of equality

(A) Applying progressive tax rates on real estates exceeding certain values without considering debts aims at stabilizing real estate prices and realizing taxation based on taxpaying capacity within the boundary of legislative discretion, which is not a discrimination without reasonable grounds.

(B) Given the social function of lands and housing or their implication for the national economy, particularly the fact that housing is a living space buttressing people's basic survival, it would not be unreasonable to deal with lands and housing differently from other property rights.

(C) The Comprehensive Real Estate Tax Act is a type of property tax that has an owner's real estate value throughout the country aggregated to serve as the tax base, so the capital region is hardly

discriminated against non capital regions although those subject to imposition of comprehensive real estate taxes are concentrated in the capital region due to social and economic conditions.

(D) Rental housing, dormitories, employee housing, unsold houses distributed by construction companies, etc. contribute to housing supply aimed at stability of housing life and help stabilize real estate prices, and it would be reasonable to exclude them from those subject to aggregation to set the tax base, which is hardly a violation of the equality principle.

(2) Infringement of freedom of movement and residence

Imposing comprehensive real estate taxes on housing, etc. entails the possible restriction of the freedom of movement and residence, but this is not a violation of the stated basic right but merely a resulting disadvantage derived from restriction on property rights such as housing. Therefore, the Housing Tax Provision hardly infringes on the freedom of movement and residence.

(3) Violation of the right to live and lead a humane life

The Comprehensive Real Estate Tax Act designates the obligated taxpayers as ones who possess, based on the official price, 600-900 million Won in housing and 300-600 million Won in aggregate lands, so the comprehensive real estate taxpayers are in the position to maintain the minimum material life befitting human dignity given the value of housing, etc. subject to taxation. Therefore, the Housing Tax Provision hardly restricts or infringes on the right to live or humane life of the taxpayers concerned.

(4) Violation of property rights regarding lands in restricted development area

Although the lands subject to comprehensive real estate taxation are restricted in the exercise of property rights for being designated as limited development zone under the Act on Special Measures for Designation and Management of Areas of Restricted Development, it is not that the property value of the lands concerned vanishes entirely.

Instead, the restriction on property rights is factored into the area's individual official prices, leading to lower assessment of the tax base and less comprehensive real estate taxes compared to regular lands. Therefore, applying the same comprehensive real estate tax rate as regular lands on the restricted development area would neither specifically infringe upon the property rights of the petitioner nor violate the principle of equality.

E. Decision of Incompatibility with the Constitution and Temporary Application of Provisions

In case the Housing Tax Provision immediately loses effect through declaration of simple unconstitutionality, imposing comprehensive real estate taxes on housing will completely be impossible, leading to a legal vacuum. This, as opposed to the gist of the unconstitutionality decision in this case that lack of exceptional provisions or adjustment mechanisms in taxation in certain cases infringes property rights of taxpayers, will not only cause the injustice of being unable to impose comprehensive housing taxes on all taxpayers concerned but also reduce tax revenues and greatly affect state finances. In consequence, an unconstitutionality decision of the Provision that involves some unconstitutional elements may bring about a legal state more distant from the constitutional order compared to when the Provision is retained, and how exactly an unconstitutional provision will be constitutionally revised is, in principle, to be determined by the formative discretion of the legislature. As regards tax laws applied to a majority of people uniformly and on a long-term basis in particular, the legislature should rightfully be able to afford to contemplate on policy decisions followed by a substantial social consensus and resolve the unconstitutional issues. Therefore, the Housing Tax Provision will be held incompatible with the Constitution but is to be enforced until such Provision will be revised by the legislature.

2. Partial Dissenting Opinion of One Justice (Partially Constitutional on Provisions Declared Incompatible with the Constitution)

A.Determining the obligated taxpayers and applying different tax

rates depending on subjective factors of taxpayers is unreasonable given the nature of property taxes, and the scope of taxpayers and tax rates under the Comprehensive Real Estate Tax Act have hardly superseded the legislature's discretion on tax policies. Ultimately, Article 7 Section 1 of the Act concerning taxpayers (excluding the parenthesized part of the preceding sentence of Article 7 Section 1 of the Revised Act) and the preceding paragraph of Article 9 of the Act on tax rates (Article 9, Sections 1 and 2 of the Revised Act) do not violate the Constitution.

B.However, tax imposition on long-term homeowners is not only contrary to the purpose of "stabilizing housing prices" but does not help achieve such purpose either. Thus, Article 8 of the Act (Article 8, Section 1 of the Revised Act on tax base), which establishes the tax base based on official prices approximate to market prices yet lacks adjustment mechanism for the tax base such as tax base ceilings or deduction for inflation, infringes on the property rights of long-term homeowners in violation of the rule against excessive restriction and therefore is not compatible with the Constitution.

3. Dissenting Opinion of One Justice (Constitutional)

A.The possession of real estates exceeding the base value for taxation is in itself regarded as taxpaying capacity in imposing comprehensive real estate taxes, so not having set the actual asset value, namely the value of the real estate in ownership after debt deduction, as the basis for calculating the tax base can neither be seen as having wrongfully assessed the taxpaying capacity nor having violated the ability-to-pay principle. Further, the comprehensive real estate tax sets high the base value of real estates subject to taxation and brings the level of tax base increasingly approximate to that of official prices in order to alleviate the impact of increased real estate taxes, which cannot be viewed as crossing the discretional boundary of tax legislation power. This, therefore, hardly seem as a fundamental denial of the private property system nor a critical violation of taxpayers' property rights.

B.The essence of the comprehensive real estate tax is a property tax to finance the state budget, not a means to control real estate speculation or stabilize real estate prices. Therefore, it is not an imperative to determine tax imposition or taxation scope according to whether the homeowner has maintained a long-term ownership of a real estate subject to taxation or has a speculative purpose. For this reason, it would not be in violation of the Constitution to uniformly levy comprehensive real estate taxes on homeowners holding one housing for residential purpose without considering the ownership duration or possession of other assets or income.

C.The aggregate taxation of all the properties held by members of the same household in the imposition of comprehensive real estate taxes is a tax policy decision of establishing the real estate ownership of each household as the unit of taxation and a method of promoting substantial fairness in imposition of comprehensive real estate taxes by preventing tax evasion through dispersion of ownership title among household members. Therefore, it is not likely such aggregate taxation presupposes a mistaken standard for taxpaying capacity, breaks the ability-to-pay principle, or violate Article 36 Section 1 or Article 11 Section 1 of the Constitution.

D.Even though only a small minority of people who possess high-priced real estates are discriminated in taxation through restriction on the scope of taxation objects and high base values of real estates subject to taxation, this is hardly an unreasonable discriminatory taxation nor a violation of principle of equal taxation.

4. Dissenting Opinion of One Justice (Constitutional)

A.If legitimacy of the legislative purpose is acknowledged and the extent of taxpayers' burden is a matter of legislative discretion in the comprehensive real estate tax system, the retention of and remedies to the scheme should be left for the National Assembly to decide unless the irrationality of a provision composing the system, if any, is too excessive so as to undermine the constitutional values.

B.As regards the method of aggregate taxation, housing has its own characteristic of functioning as a common residential area for family members composing a household although the ownership may be subjected to each individual. Given the nature of housing as taxable goods, aggregate taxation of members of the same household basis instead of taxing on an individual basis in case household members possess a number of homes is not only necessary to fulfill the legislative purpose but is also impeccable in logical terms relating to unit of assessment, which therefore cannot be viewed as contradicting the Constitution.

C.In considering the exceptional provision on taxation of one homeowners, it is necessary to enhance equitable taxation by levying taxes equivalent to the housing value on one homeowners who hold housing for residential purpose but one with a high value. And yet the tax burden remains far lighter than in many other developed countries. Some aspects may compel taxpayers to believe that comprehensive real estate taxes are levied excessively only on a small minority of people. However, such belief to a certain extent stems from the problems in imposing transfer income taxes other than the comprehensive real estate tax and their legislative purpose also lies in, aside from enhancing the equity of tax burden, stabilizing real estate prices by controlling speculation and excess in home ownership. As such, it is not likely that lack of exceptional provisions or adjustment devices that factor ownership duration or taxpaying capacity for the aforementioned homeowners crosses the boundary of legislative discretion and thus violates the Constitution.

Related Case

Prior to the decision in this case, the Constitutional Court held unconstitutional the aggregate taxation of married couples' capital gains totaling their financial income, on the ground that the system violates Article 36 Section 1 of the Constitution. The Comprehensive Real Estate Tax Act, since its implementation in the former Roh Moo-hyun administration, has been stirring up a lot of controversies ranging from the legitimacy of taxation to aggregation taxation of members of the

same household, and a draft revision to the Act targeting the alleviation of the comprehensive real estate system, such as raising the tax base and lowering tax rates, was submitted to the National Assembly during the current Lee Myung-bak administration.