2017Du35165 Revocation of Disposition of Imposing Corporate Tax, etc.

Roman Round Co., Ltd.

Law Firm Jeong-man, Counsel for the plaintiff-appellant

Attorney Go Jong-ju et al., Counsel for defendant

Head of Central Tax Office

Busan High Court Decision 2016Nu21862 Decided January 25, 2017

December 10, 2020

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

The grounds of appeal are examined.

1. The method of denying wrongful calculation under Article 52 of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) is a legal fiction that a corporation unfairly avoided or reduced tax burden by abusing various forms of transactions listed in each subparagraph of Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22951, Jun. 3, 2011; hereinafter the same) without using a reasonable method from a person with a special relationship. This is limited to cases where the competent authority denies or reduces tax burden by taking advantage of a certain types of transactions with a person with a special relationship. Determination of economic rationality should be made based on whether the transaction is deemed to have neglected economic rationality in light of sound social norms or sound practices, taking into account the various circumstances of the transaction.

Meanwhile, according to Article 52 of the former Corporate Tax Act and Article 88(2) main sentence of the former Enforcement Decree of the Corporate Tax Act, Article 88(1) of the former Enforcement Decree of the Corporate Tax Act applies to transactions between the relevant corporation and related parties. This includes transactions conducted through persons other than related parties. However, if such transactions cannot be deemed to be abnormal acts lacking economic rationality, even if a person in a special relationship with a corporation has gained economic benefits by making transactions with unrelated parties, such transactions cannot be deemed to be subject to the avoidance of wrongful calculation under each subparagraph of Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (see Supreme Court Decisions 2013Du20127, Apr. 10, 2014; 2016Du54213, May 30, 2019).

2. Review of the reasoning of the lower judgment and the evidence duly admitted by the lower court reveals the following facts.

A. Status of the instant company

C. On September 19, 2007, the company of this case (hereinafter referred to as "the company of this case") is an affiliated company of the same steel company (hereinafter referred to as "the same steel company") as the non-listed company established with the manufacture, sale, etc. of thermal pressure and voltage products as its business purpose.

B. Acceptance of the shares of the instant company, such as a new Capital Capital;

1) On July 27, 2009, New Capital Co., Ltd. (hereinafter referred to as "New Capital") purchased 20,000,000 won per share (hereinafter referred to as "the shares of this case") from the same steel from the same steel company in total of 10,000 won per share (hereinafter referred to as "the shares of this case"). At the time, the date when one year has elapsed from the date when the new Capital Capital was the largest shareholder of the same steel and the non-party, the representative director of the plaintiff, from the date when the transaction was closed, until the date when one year has elapsed from the date when the company was open to the public, the non-party was entitled to sell the shares of this case to the non-party "the amount calculated by adding the amount calculated by the ratio of 13% from the date when the transaction was closed to the original purchase price of shares" (hereinafter referred to as "the options contract of this case"). The non-party can have designated the so-called "non-party option to put options" to the contract of this case.

2) Meanwhile, on July 27, 2009, the new bank (hereinafter referred to as the “new bank”) purchased 200,000 won per share of the company’s shares from the same steel and entered into a contract with the Nonparty to provide put options to the new bank on the same condition as the put options contract of this case.

C. Circumstances of the instant transaction, etc.

1) On the grounds that it is difficult for New Capital to hold the unlisted stocks for a long time around August 2010, the Plaintiff made a resolution to the Nonparty, who is a purchaser of the instant put option contract, to disclose his intention to sell them, and the Plaintiff opened a board of directors on November 10, 2010 to the effect that the Plaintiff would purchase the instant stocks held by new Capital, etc., and that the details of the instant stocks will be entrusted to the Nonparty’s representative director. Accordingly, the Nonparty designated the purchaser of the instant stocks as the Plaintiff. On November 23, 2010, the Plaintiff purchased the instant stocks from new Capital amounting to KRW 23,518,500 per share in accordance with the calculation method stipulated in the instant put option contract (hereinafter “the instant transaction”). Meanwhile, the new bank purchased the instant stocks from the Nonparty, who is a purchaser of the instant stock, at the price of the instant put options to sell them to the Nonparty on the same day as the instant stocks transaction.

D. Operational status, etc. of the instant company

1) As a result of the instant company’s commencement of production around April 2009 by securing an independent production technology on the “Babert poppy,” which is a type of shipbuilding, the instant company maintained the sales revenue of approximately KRW 95.5 billion for the first time in 2009. In 2010, approximately KRW 2,12.6 billion increased compared to the previous year. Since 2010, the instant company maintained the sales revenue of KRW 20 billion continuously until 2013.

2) In addition, since its establishment in 2007, the instant company recorded approximately KRW 2.3 billion in 2007, approximately KRW 2.3 billion in 2008, KRW 4.9 billion in 2009, KRW 5.8 billion in 2010, and approximately KRW 2.5 billion in 201, but the operating profit rate was continuously increased by 0.6% in 2009, KRW 2.91% in 201, and KRW 71% in 201, and KRW 6.7 billion in 2012, and KRW 16.9 billion in 2013.

3) Since then, the instant company was taking measures to divide shares for listing around 2013.

On July 2014, it was listed on the KOSDAQ market.

4) Meanwhile, on December 20, 2013, before the instant company was listed on the KOSDAQ market, the Plaintiff sold the instant shares to the New Growth Power Furur Private Equity Fund, thereby obtaining approximately KRW 3.3 billion transfer margin.

E. Disposition, etc. of this case

1) As a result of examining the change of shares with the Plaintiff from January 13, 2014 to February 25, 2014, the Commissioner of Busan Regional Tax Office: (a) deemed that the Plaintiff, instead of the Nonparty’s duty to purchase shares under the instant put option contract, distributed the interest cost of KRW 153,463,836 to the Nonparty for gains from transfer that he/she acquired from the Nonparty’s new capital gains; and (b) accordingly, notified the Plaintiff of the change of the amount of income; and (c) the Plaintiff did not object to this.

2) After conducting an audit of the Busan Regional Tax Office from September 15, 2014 to October 2, 2014, the Board of Audit and Inspection issued a request to the director of the Busan Regional Tax Office to the effect that, as the Plaintiff performed the duty to purchase the Nonparty’s shares under the instant put option contract and the market price of the instant shares is high to KRW 23,518 per share, the Plaintiff purchased the instant shares that amounting to 20,000 per share at a higher price than the market price of KRW 23,518 per share, the Plaintiff’s excessive amount of KRW 703,60,000 per share was denied as a wrongful calculation and included in the Plaintiff’s gross income and thereby, the Nonparty

3) On March 1, 2015, the Defendant, as the competent authority, notified the Plaintiff of the change in the amount of income of KRW 550,136,165, and notified the Plaintiff of the change in the amount of income of KRW 157,879,450 for the business year 2013, March 4, 2015 (hereinafter collectively referred to as the “instant disposition”).

3. A. Examining the following circumstances revealed through such factual relations and records in light of the legal principles as seen earlier, even if the Plaintiff purchased the instant shares at a price higher than the market price by instead of performing the Nonparty’s obligation to purchase shares through the instant transaction, it is difficult to view such transaction as an abnormal transaction lacking economic rationality in light of sound social norms and commercial practices. This also applies to the case where the Nonparty, in a special relationship with the Plaintiff, was exempted from the obligation to purchase the instant shares due to the instant transaction, thereby gaining any economic benefits.

1) At the time of the instant transaction, both the Plaintiff and the Nonparty were the representative director, and the Plaintiff was the largest shareholder of the instant company. Accordingly, the Plaintiff appears to have been well aware of the corporate value of the instant company. As to the details of the instant transaction, even if the Plaintiff consistently at the tax trial stage, at the time of the instant transaction, the Plaintiff proposed to purchase the instant shares at KRW 23,518 per share with interest only on the cost for acquisition and at least 40,000 per share if considering the future value of the instant company in view of the company’s future value, and thus, the Plaintiff argued to the effect that the Plaintiff would not sell the instant shares if the sales amount of the instant company was published in 2010 in the next year, or would have increased the sale price, and thus, the Plaintiff considered that the new shares would not be sold or the sales price would have been sold.

However, in fact, the company of this case plans and prepares for the disclosure and listing of the company from July 27, 2009, which is the transfer date of this case, and thereafter was listed in the KOSDAQ market around July 2014 through the increase of sales and the improvement of profit structure, etc. Furthermore, in light of the fact that the company of this case sold the shares of this case before the listing as above and obtained approximately KRW 3.3 billion gains from transfer, it seems objectively reasonable to determine that the market price per share of this case is much higher than KRW 23,518, when considering the future value of the company of this case at the time of the transaction of this case.

Considering the relationship between the Plaintiff and the instant company, and various circumstances related to the instant company before and after the instant transaction, even if the market value per share of the instant shares at the time of the instant transaction, such as the instant disposition grounds, is recognized as KRW 20,000 under the relevant Acts and subordinate statutes, it cannot be concluded that the instant transaction, which assessed the company’s future value from a long-term point of view, expected transfer margin, etc. of the instant shares, and purchased the instant shares in KRW 23,518, is abnormal, and thus, economic rationality is nonexistent.

2) Meanwhile, the new bank purchased 200,000 shares of the company of this case from the same steel on the same day as the trade of this case, and exercised put options against the non-party on the same day as the trade of this case. The non-party performed his duty to purchase shares and purchased the shares at the same price as the trade of this case. If the non-party had intended to be exempted from such duty to purchase shares because the price of the shares at the time of the transaction of this case was higher than the market price at the time of the transaction of this case, the non-party was designated as the purchaser and had the plaintiff purchase the shares of this case with the shares of this case. In light of the fact that the non-party purchased the shares directly from the new bank, it is difficult to conclude that the non-party and

B. Nevertheless, solely on the grounds stated in its reasoning, the lower court determined that the instant disposition was lawful on the erroneous premise that the instant disposition was rendered on the grounds that the Nonparty, the representative director of the Plaintiff, who was a special relationship with the Plaintiff, should purchase the instant shares at a high price, and that the Plaintiff, who was not obligated to purchase such shares on behalf of the Nonparty, was a transaction lacking economic rationality, and that the Plaintiff’s act constitutes “an act corresponding to Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act, and constitutes “an act deemed as an act under Article 88(1)9 of the Enforcement Decree of the Corporate Tax Act,” and thus, constitutes “an act under Article 8

4. Therefore, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Jae-hwan

Justices Park Sang-ok

Justices Lee In-bokon

Justices Noh Jeong-hee