Seoul High Court-2015-Nu65188 (Law No. 18, 2016)

If the nominal trust shares are inherited, the provision on deemed donation of transfer of title may not be applied.

It is reasonable to view that the provision on constructive gift for transfer of title does not apply in cases where the shares held in title by a title truster are inherited after the shares are nominal after the title truster died and his/her heir is transferred to another person.

Legal fiction of donation of title trust property under Article 41-2 (1) of the Inheritance Tax and Gift Tax Act

2016Du40030 Revocation of Disposition of Imposing gift tax

KoreaA

1. BB director of the tax office;

2. CCC director;

3. The director of the D Tax Office.

4. The head of the E Tax Office.

5. The head of the F Tax Office.

April 13, 2017

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Article 41-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter referred to as the "former Inheritance Tax and Gift Tax Act") provides that "where the actual owner and the nominal owner are different from each other with respect to the property (excluding land and buildings; hereinafter the same shall apply in this Article) which requires a transfer or exercise of the right, the value of the property shall be deemed to have been donated to the actual owner on the date when the actual owner registers, etc. as the nominal owner (where the property requires a transfer of ownership, referring to the day following the end of the year following the year in which the date of acquisition of ownership falls) notwithstanding the provisions of Article 14 of the Framework Act on National Taxes (hereinafter referred to as the " provision in this case"), and Paragraph 2 of the same Article, if the property is registered under another person's name, etc., it shall be presumed that the purpose of tax avoidance exists if the transferor fails to report the change of ownership under the provisions of Article 10 of the Income Tax Act.

In light of the language and structure of the instant provision and the provision on deemed donation of transfer of a title holder, in cases where a transferee of stocks fails to change a title for a long time, the primary taxpayer of gift tax is the transferor in the position of the title trustee upon the application of the provision. However, the transferor of stocks can be deemed to have directly involved in the formation of appearance such as the title trust due to the neglect of transfer of a title holder. Furthermore, the presumption of tax avoidance purpose can be reversed by reporting the details of transfer income tax or securities transaction tax pursuant to the proviso of Article 41-2(2) of the former Inheritance Tax and Gift Tax Act, and thus, it is difficult to deem that the existing title truster is subject to the provision on deemed donation of real estate to be donated to his/her heir upon the death of the title truster, as well as the existing title trustee is already subject to the application of the provision on deemed donation of transfer of a title trust on the date of the initial transfer of title holder. Considering that the shares held in the title trust do not constitute a new act to form legal relationship with the heir, and that the title truster is not subject to taxation.

2. Review of the reasoning and records of the first instance judgment cited by the lower court reveals the following facts.

A. On February 28, 1978, Hang, the father of the Plaintiff, was one of the instant companies HHHHH Co., Ltd. (hereinafter “instant company”). On February 28, 1978, Han G, the father of the Plaintiff, title trusted 1,506 shares out of the said company’s shares 2,957 and 4 other (hereinafter “the title trustee of the instant case”).

B. On March 1979, the Plaintiff succeeded to all the shares of the instant company upon the death of HanG, and the instant company, among which the title trustee did not transfer to the Plaintiff the shares held in title to the title trustee, increased the shares held in title by totaling 5,908 shares (hereinafter “instant shares”) according to the capital increase around August 1987.

C. The Defendants imposed each gift tax on the instant title trustee by applying the provision on deemed donation of transfer of ownership and Article 9 of the Addenda of the former Inheritance Tax and Gift Tax Act on the ground that the Plaintiff did not change the ownership of the instant shares until December 31, 2004 (see, e.g., Supreme Court Decision 2002, “ until December 31, 2002,” on the ground that the Plaintiff did not change the ownership of the instant shares until December 31, 204.

3. Examining such factual relations in light of the legal principles as seen earlier, even if the Plaintiff, the heir, after the death of HanGG, did not complete the transfer of title to the instant shares within the provision on deemed donation of entry, and the transfer of title to the instant shares under Article 9 of the Addenda of the former Inheritance Tax and Gift Tax Act, even if the transfer of title to the instant shares was not completed within the transfer of title to

Nevertheless, solely based on its stated reasoning, the lower court determined that the instant disposition was lawful on the premise that the provision on deemed donation of transfer can be applied even in cases where a title truster’s shares are inherited due to the death of the title truster. In so determining, the lower court erred by misapprehending the legal doctrine on the scope of application of the provision on deemed donation of transfer of title, thereby

4. Therefore, without examining the remaining grounds of appeal, 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.