In case where a merged corporation disposes of the stocks issued by the merged corporation held by the merged corporation due to the merger, whether the disposal profit is included in the merger marginal profit subject to inclusion in the calculation of earnings (affirmative)

In light of the structure and purport of Articles 15(1) and 17 subparag. 3 of the Corporate Tax Act and Article 11 subparag. 2 of the Enforcement Decree of the same Act, if the profits from the disposal of a corporation’s treasury stocks constitute capital transactions, they shall be excluded from the calculation of earnings, and in addition, in case of transactions where the acquisition and disposal of treasury stocks are increased or decreased in the net assets of the corporation, the disposal profits shall be subject to the inclusion of earnings. In the case of mergers, the acquisition of treasury stocks would result in the issuance of new stocks of the merged corporation held by the merged corporation, i.e., the acquisition of treasury stocks by the merged corporation, but it does not constitute the acquisition by succession from the merged corporation, as assets owned by the merged corporation were originally owned by the merged corporation, and the disposal profits by succession of the stocks of the merged corporation held by the merged corporation by the merged corporation is related to the increase or decrease of capital, and therefore the disposal profits shall be excluded from the calculation of earnings under Article 17 subparag. 3 of the Corporate Tax Act. 3.

Articles 15(1) and 17 subparag. 3 of the Corporate Tax Act; Article 11 subparag. 2 of the Enforcement Decree of the Corporate Tax Act

Supreme Court Decision 91Nu13670 Decided September 8, 1992 (Gong1992, 2911) Supreme Court Decision 94Nu21583 Decided April 11, 1995 (Gong1995Sang, 1889) Supreme Court Decision 200Du1720 Decided May 12, 200 (Gong200Ha, 1451)

Seoul High Court Decision 200Na14488 delivered on August 2, 200

Sejong District Court Decision 200Hun-Ga40 delivered on July 1, 200

Seoul High Court Decision 2003Nu15180 delivered on March 18, 2004

The appeal is dismissed. The costs of appeal are assessed against the defendant.

Article 15(1) of the Corporate Tax Act (hereinafter “the Act”) provides that profits shall be the amount of profits generated from transactions which increase the net assets of the corporation, except as provided in the Act, such as payment of capital or financing and other transactions. Article 17 subparag. 3 of the Act provides that a merger marginal profits (excluding a merger marginal profits from an asset appraisal) shall be one of the profits generated from capital transactions excluded from the inclusion in the calculation of earnings. Article 11 subparag. 2 of the Enforcement Decree of the Corporate Tax Act provides that the scope of profits subject to the inclusion in the calculation of earnings shall be one of the profits from the transfer of assets, including treasury stocks. In light of the structure of the relevant provisions and the purport of the relevant provisions, if the profits from the disposal of treasury stocks of the corporation constitute capital transactions, such profits shall be excluded from the calculation of earnings, and if the acquisition and disposal of treasury stocks constitute transactions that increase or decrease the net assets of the corporation, such profits shall

However, in the case of a merger, the acquisition of treasury stocks if the new stocks of the merged corporation are issued to the combined stocks of the merged corporation, that is, the acquisition of treasury stocks, but it is not originally acquired by succession from the merged corporation, and its disposal profits do not constitute the acquisition from the merged corporation. However, it is reasonable to view the merged corporation's disposal by succession to the stocks of the merged corporation held by the merged corporation due to the merger as capital transactions because it has the nature of refund or payment of capital, and the disposal profits are included in the merger profits referred to in Article 17 subparagraph 3 of the Act (see, e.g., Supreme Court Decisions 91Nu13670, Sept. 8, 1992; 94Nu21583, Apr. 11, 1995; 200Du1720, May 12, 200).

In the same purport, the court below is just in holding that the plaintiff company's acquisition by succession of the shares issued by the merged company (the treasury shares) held by the merged company at the book value while absorbing and merging the merged company under the parent-subsidiary relationship constitutes capital transactions related to increase and decrease of capital, and thus the disposal profit is excluded from the calculation of earnings from a merger under Article 17 subparagraph 3 of the Act, and there is no error in the misapprehension of legal principles as to the nature of the profits from disposal of treasury shares

Therefore, the appeal is dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices.

Justices Yang Sung-tae (Presiding Justice)