Early High Court Decision 2014J 0866 (No. 22, 2014)

Since there was no new title trust act for new shares issued by merger, the provision on deemed donation of nominal trust property cannot be applied.

In order to impose gift tax on the new shares of the merger with the old owner, the replacement of the new shares of the merger with the old owner is not a shareholder who disposes of the new shares of the merger with his own intention and acquires the new shares of the merger with another company, but merely because the old owner of the merger with the other company is replaced by the new shares of the merger with the merger with the other company, a new title trust act is required different from the title trust relationship with

Legal fiction of donation of title trust property under Article 45-2 of the Inheritance Tax and Gift Tax Act

2014Guhap63190 Revocation of Disposition of Imposition of Gift Tax

1. The AA 2. LossB 3. The ACC 4.Korea-D

5. KangE 6. Maximum F. 7. KimG 8. Kim H

1. The head of the tax office of the same orchard;

5. Samsung Tax Director: 6. Samsung Tax Director

January 22, 2015

March 5, 2015

1. The disposition of imposition in the attached Form that the Defendants issued against the Plaintiffs shall be revoked.

2. The costs of lawsuit are assessed against the Defendants.

Cheong-gu Office

The same shall apply to the order.

1. Details of the disposition;

A. On December 207, 2007, the third JJ Co., Ltd., an unlisted corporation (hereinafter referred to as the “instant merger”), changed the name of the corporation to the third KK Co., Ltd. (hereinafter referred to as the “instant merger”) by absorbing the third KK Co., Ltd. (hereinafter referred to as the “instant merger”).

B. In the process of the above merger, the merger ratio was determined as 0.4 shares of the instant merger company with the registered common shares of the instant merger company, and there was no separate payment of the merger subsidy or additional payment of the capital.

C. The plaintiffs held 257,143 shares of the merged company of this case, which received title trust from the KimL prior to the merger of this case (hereinafter "the merger of this case"), and were allocated a total of 102,857 shares of this case (hereinafter "new shares of this case") in lieu of the merger of this case pursuant to 0.4, in lieu of the merger of this case, pursuant to the above merger ratio of 1:0.4.

[Attachment]

No.

Unmerged Shares

New Stocks of merger

Real Name Conversion

1

CHAPTER A

25,000 Shares

10,000 Shares

December 29, 2008

2

HandM

25,000 Shares

10,000 Shares

3

ACC

25,000 Shares

10,000 Shares

Sub-committees

75,000 Shares

30,000 Shares

4

D

57,143 Shares

2,857 Shares

5

EE

50,000 Shares

20,000 Shares

December 31, 2010

6

H Kim H

25,000 Shares

10,000 Shares

7

MaximumF

25,000 Shares

10,000 Shares

8

G Kim GG

25,000 Shares

10,000 Shares

Sub-committees

182,143 Shares

72,857 Shares

Total

257,143 Shares

102,857 Shares

D. On December 29, 2008, the Plaintiff headA, Contributor, and AnalCC (hereinafter “Plaintiff headA”) reported and paid gift tax pursuant to the title trust on each of 10,000 shares (total 30,00 shares) among the newly issued shares of the instant merger that was received by the instant merger on December 29, 208, on the ground of the termination of the title trust, for the real name conversion (transfer) in the name of KimL, on the ground of the termination of the title trust. On the other hand, with respect to each of 25,00 shares (total 75,00 shares) of the instant shares of the instant merger that were nominal by KimL, the Plaintiff headA, Contributor, and Anal

E. The director of the Seoul Regional Tax Office, from January 20, 2010 to April 1, 2010, conducted an investigation into corporate tax integration from 2008 to 2008 with respect to the instant company, determined that the instant merger price was under title trust with the Plaintiffs from the KimL, and notified the Plaintiff of gift tax under Article 45-2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter referred to as the “former Inheritance Tax and Gift Tax Act”) to the head of the Seoul Regional Tax Office, the director of the Seoul Regional Tax Office, the director of the Seoul Regional Tax Office, and the director of the Samsung District Tax Office, upon the determination that the instant merger price was under title trust with the Plaintiffs.

F. According to the above notification, 182,143 in the name of 5 Plaintiffs, including Korea-LL, among the instant mergers, the head of Si/Gun/Gu, the head of Si/Gun/Gu, the head of Si/Gun/Gu, the head of Si/Gun/Gu, and the head of Samsung District Tax Office imposed gift tax on 5 Plaintiffs, including Korea-LL, on the ground that the said Plaintiffs received title trust. 5 Plaintiff Korea-LL et al. paid gift tax accordingly, and on December 31, 2010, 72,857 shares in their names among the new shares of the instant mergers were transferred under the name of KimL.

G. After November 2013, the director of the Seoul Regional Tax Office conducted an investigation of gift tax on the Plaintiffs again, and determined that the merger new shares of this case received by the Plaintiffs as compensation for the merged party owner of this case was a title trust separate from the merged party owner of this case, and notified the Defendants to determine and notify gift tax to the Plaintiffs by applying the legal fiction of title trust property under Article 45-2(1) of the Inheritance Tax and Gift Tax Act. Accordingly, the Defendants imposed gift tax on the Plaintiffs (hereinafter “each disposition of this case”).

H. The Plaintiffs were dissatisfied with each of the instant dispositions and filed an appeal with the Tax Tribunal on January 9, 2014, but the Tax Tribunal dismissed the appeal on April 22, 2014, and filed the instant lawsuit on July 17, 2014.

[Ground for Recognition: Facts without dispute, Gap evidence 1 through 8, Eul evidence 1, 2, and 7, the purport of the whole pleadings]

2. The assertion and judgment

A. The plaintiffs' assertion

1) The instant new shares of the instant merger are merely the substitute items acquired instead of the instant merger agreement, and there is no new title trust, and there is no possibility of additional tax avoidance in addition to the possibility of tax avoidance arising from the title trust of the instant merger agreement with respect to the instant merger agreement. In the instant merger, there is no possibility of avoidance of additional capital gains tax because it is a merger between the non-listed corporation and the merger between the non-listed corporation different from the merger of the company that differs from the listing of the instant merger agreement. Therefore, the instant new shares of the instant merger cannot be applied to the instant merger agreement, and thus, each

2) Each of the instant dispositions is unlawful since it was conducted as a result of a tax investigation in violation of the prohibition of duplicate tax investigations.

(b) Related statutes;

Attached Form is as shown in the attached Form.

C. Determination

1) deemed donation of title trust property

Article 45-2 (1) of the Inheritance Tax and Gift Tax Act provides that "where the actual owner and the title holder are different from the property (excluding land and buildings) which requires a transfer or exercise of the right, the value of the property shall be deemed donated to the actual owner on the date when it is registered, etc. as the title holder (where such property is the property requiring a transfer of title, referring to the date following the end of the year following the year in which the date of acquisition of ownership falls), notwithstanding Article 14 of the Framework Act on National Taxes, the same shall not apply to cases where "where the title holder registers, etc. the property in another person's name without any purpose of evading tax or where the title holder fails to change the title in the name of the actual owner who has acquired the ownership" in subparagraph 1 of the proviso. Such provision on deemed donation of title trust property applies to cases where the actual owner and the title holder register, etc. in the name of the title holder under an agreement or communication (see Supreme Court Decision 2007Du15780, Feb. 14, 2008).

2) Title trust act

In light of the above legal principles, in addition to the gift tax imposed under the title trust property legal fiction on the owner of the merger of this case, in order to impose gift tax on the newly issued stocks of this case acquired by the plaintiffs according to the merger of this case pursuant to the title trust property legal fiction, a new title trust act is required on the newly issued stocks of this case, which is different from the title trust relationship on the owner of the merger of this case, and for the following reasons, it cannot be deemed that a new title trust act has been done on the newly issued stocks of this case different from the previous one.

① A merger of a company is a legal fact under the Act of the Company which comprehensively succeeds to all rights and obligations of a dissolved company or a newly incorporated company and accepts its employees without undergoing liquidation procedures. The essence of the merger is: (i) two or more subsidiaries of the extinguished company, (ii) dissolution without liquidation procedures; (iii) succession to the surviving company or the newly incorporated company of the rights and obligations of the dissolved company to the surviving company or the newly incorporated company; (iv) expropriation of the members of the dissolved company in principle; (v) series of legal procedures and legal personality. In other words, the merger can be deemed to be a single company through legal procedures; (v) the extinguished company’s merger does not require liquidation procedures for the continuity of the company; and (v) the effect of the surviving company or the surviving company’s shareholder rights of the surviving company or the newly incorporated company upon the acquisition of the shares of the surviving company or the surviving company in accordance with the merger ratio and allocation methods as a matter of course, and thus, the dissolved company’s shareholder is not a shareholder of the extinguished company or the newly incorporated company.

② Therefore, in a case where a shareholder of the merged company acquires the shares of the surviving company or the newly incorporated company (merger) in lieu of the shares of the merged company due to a merger of the merged company, the replacement of such merged shares with such merged shares shall not be deemed to have been conducted by the relevant shareholder at his/her own will by disposing of the merged shares and acquiring the new shares, but shall not be deemed to have been substituted by the merged shares, which are assets owned by the relevant shareholder, as a result of the merger with another company (see Supreme Court Decision 2008Du2330, Feb. 10, 201).

(3) Thus, the title trust agreement between the title truster and the title trustee constitutes a formal transfer of property pursuant to the title trust agreement. Even if the provision on the donation of title trust property under Article 45-2(1) of the Inheritance Tax and Gift Tax Act is an exception to the substance over form principle, as long as the actual owner imposes gift tax on the nominal owner with the fact of the formal act of title trusting the assets to the title trustee, the title truster at least should be premised on the title truster to apply the above provision. In the case of a merger of companies, such as the merger of this case, the new shares are automatically issued to the shareholders who became the title truster at the time of the merger, regardless of whether the former share was the title trust or the intent of the relevant shareholder, so even if the title truster was the title truster at the time of the merger and the said shareholders did not exercise the appraisal right of the shareholders opposing the merger, such new shares are issued according to the legal effect of the merger, as in the case of the ordinary shareholders, and thus, there is no new shares issued by the title truster in the process of the merger.

④ In addition, the provision on the constructive gift of trust property under Article 45-2(1) of the Inheritance Tax and Gift Tax Act provides that gift tax shall be imposed on an independent property which requires the transfer or exercise of the right to transfer or exercise of the right by way of its formal act as a taxation requirement if it differs from the actual owner or the nominal owner. In the case of the merger of this case, the Plaintiffs merely received new shares of this case holding the same value as the usual shareholders of the merger of this case under the merger agreement entered into between the merged company, the merged company, and the merged company, the merged corporation, and the merged company, which are the merged corporation, instead of the usual shareholders of the merged company, and did not receive any separate funds in the process of the merger. As such, the merger of this case, which the Plaintiffs received on behalf of the merged corporation, is merely a modified object of the merger of this case or a substitute object of the merger, and it is difficult to view that the new shares of this case are separate properties from the merged subject to the merger of this case. Thus, it seems reasonable to interpret that the existing title trust relationship with the merger of this case continues to exist.

The Defendants asserted to the purport that, in a case where a person who received a title trust of shares receives new shares from a wholly owning parent company under his/her name due to an all-inclusive share swap and completed a transfer of ownership, the new shares constitute a new title trust relationship different from that of the former title trust relationship between the title truster and the title trustee. Barring special circumstances, such as that there is no purpose of tax avoidance regarding such new shares, this would be subject to the constructive gift of trust property in the name of the title trust stipulated in Article 45-2(1) of the Inheritance Tax and Gift Tax Act (see Supreme Court Decision 2013Du5791, Aug. 23, 2013), and the merger of a company does not essentially differ from the all-inclusive share swap, the deemed donation provision

However, since an all-inclusive share swap falls under a commercial transfer of assets as stipulated in Article 88 (1) of the former Income Tax Act (amended by Act No. 9897 of Dec. 31, 2009; hereinafter the "Income Tax Act"), new shares of a complete parent company that becomes a wholly owned subsidiary is a new asset that is paid to the shareholders in return for the disposal of the shares transferred by such shareholders, and cannot be deemed a substitute or modified substance of the shares previously possessed by such shareholders. However, as seen earlier, the replacement of new shares of a merger principal and a merger principal is not a disposal of the merged principal according to their own intent and the replacement of new shares is not a replacement of new shares of the merged principal regardless of their intent. As a result, the merger that the shareholders of the merged company acquire should be deemed a substitute or modified substance of the former merger principal and thus, the above assertion by the Defendants cannot be accepted since the comprehensive exchange of shares can not be accepted in the case of a merger with a company.

In addition, on the grounds that Article 523 subparag. 4 of the Commercial Act provides that "the defendants may provide money or any other property to the shareholders of the company which ceases to exist after the merger as a whole or part of the consideration," and Article 523-2 of the Commercial Act provides that "the case where a parent company provides shares as a consideration for the merger", the new shares of this case cannot be viewed as a modified object of the merger principal (Article 44 of the Corporate Tax Act provides that "the shares that the shareholders, etc. of the merged corporation receive as a result of the merger" of the merged principal (Article 44 of the Corporate Tax Act provides that "the shares that the merger owner, etc. of the merged corporation received as a result of the merger" of the merger principal and Article 523 subparag. 4 of the Commercial Act provides that the above provisions are based on the above argument. However, the above provisions are not only on the law of the time when the merger was newly established or amended by Act No. 10600 on Apr. 14, 2011, nor on the newly established or amended provisions provide the defendants's new shares as a merger.

3) Purpose of tax avoidance

In applying the provision on the constructive gift of trust property under Article 45-2(1) of the Inheritance Tax and Gift Tax Act, if the title trust was deemed to have been made on the grounds other than the purpose of tax avoidance and only a minor reduction of tax incidental to the said title trust occurs, it cannot be readily concluded that there was such a purpose of tax avoidance (see, e.g., Supreme Court Decision 2007Du19331, Apr. 9, 2009). In a case where there is no purpose of tax avoidance, it cannot be viewed that there exists a possibility that future tax reduction may result in a future tax reduction (see, e.g., Supreme Court Decision 2004Du7733, May 12, 2006). In addition, whether there was a tax avoidance purpose or not, it should be determined at the time of the merger of the relevant shares at the time of the acquisition of the said shares (see, e.g., Supreme Court Decision 2009Du21352, Jul. 14, 2001).

In light of the above legal principles, considering the following circumstances revealed in light of the developments and grounds for recognition of the above dispositions as seen earlier, even if a new title trust was made with respect to the new shares of this case, as alleged by the Defendants, the acquisition of new shares of this case by the Plaintiffs does not constitute a case where the purpose of tax avoidance exists, and thus, Article 45-2(1) of the Inheritance Tax and Gift Tax Act cannot be applied.

① Around November 2007, prior to the instant merger, Kim NN, owned 50.15% of the shares of the instant merger company, and Nonparty Kim NN owned 49.85% of the shares. Accordingly, KimL was an oligopolistic shareholder of the instant merger company prior to the instant merger [see Article 39 of the former Framework Act on National Taxes (amended by Act No. 8830 of Dec. 31, 2007)]. Since KimL allocated the shares of the instant company to shareholders by the instant merger, Kim LL was 35.67% of the shares of the instant company, Kim NN was 13.37% of the shares of the instant company, and the aggregate was 57.17% of the shares were 13% of the shares of the instant merger company, and Kim NN, the mother of KimL, the subsidiaries of the instant merger, were 13% of the shares of the instant merger company, and it still remains possible that the Defendants were able to acquire the shares of the instant case through the instant merger.

② The instant company did not pay dividends until October 31, 2010, which the Plaintiffs completed the conversion of the real name following the instant merger. Therefore, it seems that there was no intent to evade taxation on dividend income through the maintenance of title trust on the new stocks of the instant merger to the Plaintiffs and KimL at the time of the instant merger.

③ There was no transfer of the instant new shares to a third party, and the Plaintiffs did not transfer them to the low-water 13 persons prior to the said real name conversion. Moreover, the transfer income tax rate for the transfer of non-listed shares, such as the instant company, is applied to the same tax rate depending on the size of the company or the holding period of the stocks (see Article 104(1)4 of the Income Tax Act). Therefore, there is no intention to evade the transfer income tax on the instant new shares for the instant merger to the Plaintiffs and KimL.

Ultimately, it cannot be said that the plaintiffs and KimL had the objective of additional tax avoidance regarding the new stocks of this case.

D. Sub-committee

Therefore, each of the dispositions in this case should be revoked as it is unlawful without any need to further examine the other issues claimed by the plaintiffs.

3. Conclusion

Therefore, the plaintiffs' claims are justified, and all of them are accepted, and it is so decided as per Disposition.