Whether gift tax may be levied by applying Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (negative in principle) to the title trustee of the merger who is subject to the first deemed donation and has been, or may be, imposed upon the trustee of the merger who is subject to taxation (negative)

As a merger occurs, when a person who was held a title trust of the extinguished company's merger principal is allocated and delivered new shares issued by the surviving company and the transfer of title is completed in the future, a new title trust relationship that is different from the previous title trust relationship between the title truster and the title trustee is formed with respect to new shares that are a new property separate from the merger principal.

① Since Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007) permits a company to succeed to the rights and duties of the extinguished company in order to prevent the act of title trust for the purpose of tax avoidance, as an exception to the principle of substantial taxation, to impose gift tax by deeming the relevant property from the actual owner to have been donated to the nominal owner, it shall be applied only to the extent necessary and appropriate to prevent the act of tax avoidance.

Considering such circumstances, gift tax may not be levied on the new stocks that have been allocated as a result of a merger to the trustee of the merged old-gu who was first deemed donated and is subject to taxation or may be imposed by applying the said provision, barring any special circumstances.

Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007)

Supreme Court Decision 2011Du10232 Decided February 21, 2017 (Gong2017Sang, 646), Supreme Court Decision 2012Du5848 Decided April 13, 2017, Supreme Court Decision 2012Du27787 Decided March 29, 2018 (Gong2018Sang, 826)

Plaintiff 1 and seven others (Law Firm LLC et al., Counsel for the plaintiff-appellant)

Head of the East District Tax Office and five others (Law Firm LLC et al., Counsel for the plaintiff-appellant)

Seoul High Court Decision 2015Nu38872 decided November 27, 2015

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

The grounds of appeal are examined.

1. Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”) provides that “where the actual owner and the nominal owner are different in the property whose transfer or exercise of the right requires registration, the value of the relevant property shall be deemed to have been donated from the actual owner on the date when the actual owner and the nominal owner are registered as the nominal owner, notwithstanding Article 14 of the Framework Act on National Taxes: Provided, That the same shall not apply to cases falling under any of the following subparagraphs.” Article 1 provides that “Where a property is registered in another person’s name without the purpose of evading taxes or a transfer of ownership is not made in the actual owner who has acquired the ownership.”

As a merger occurs, when a person who was held a title trust of the extinguished company's merger principal is allocated and delivered new shares issued by the surviving company and the transfer of title is completed in the future, a new title trust relationship that is different from the previous title trust relationship between the title truster and the title trustee is formed with respect to new shares that are a new property separate from the merger principal.

① However, in order to prevent the act of title trust for the purpose of tax avoidance, as an exception to the substance over form principle, the legal provision of this case permits the actual owner to levy gift tax by deeming the pertinent property to have been donated from the nominal owner to the title holder. As such, in order to prevent the act of tax avoidance, it shall be applied only to the extent necessary and appropriate to prevent the act of tax avoidance. ② In a case where a transfer of ownership is made by applying the legal provision of this case to the title trustee as the first title trust shares, which were either taxable or taxable, corresponding to the first title trust shares, which are deemed to be deemed to have been donated, the imposition of gift tax without restriction on such a merger may result in inconsistency that denies the effect of deemed donation of first title trust shares in relation to the imposition of gift tax. ③ Furthermore, the surviving company will succeed to the rights and duties of the extinguished company, and, in such a case, the shareholders of the extinguished company shall be given a new shares equivalent to the value of the merger principal, so it is difficult to deem that there is a substantial change in the economic value of shares held before and after the merger.

Considering such circumstances, gift tax cannot be levied on the new stocks that have been allocated as a result of a merger to the trustee of the merged old-gu who was first deemed donated and is subject to taxation or may be imposed by applying the legal provisions of this case, barring any special circumstances.

2. Review of the reasoning of the lower judgment and the record reveals the following facts.

A. A. On December 20, 2007, DD Forest Co., Ltd. merged d S. D. D.C. A. The Plaintiffs, who received the shares of the merged company from the Nonparty, under title trust, were allocated new shares equivalent to the shares of the merged company, and completed the registration in the name of the Plaintiffs in the register of shareholders.

B. On December 29, 2008, Plaintiff 1, Plaintiff 2, and Plaintiff 3 terminated the title trust on the total of 30,000 shares of the merger, and upon conversion of real name into the Nonparty’s name, reported and paid gift tax pursuant to the title trust on the total of 75,000 shares of the merger district, which was the title trust.

C. According to the result of the corporate tax integration conducted by the director of the Seoul Regional Tax Office, around April 2010, the director of the Seoul Regional Tax Office, etc. imposed gift tax by deeming that Plaintiff 4, Plaintiff 5, Plaintiff 6, Plaintiff 7, and Plaintiff 8 received title trust from the Nonparty on the aggregate of 182,143 shares of the merged district. The said Plaintiffs paid gift tax accordingly, and the said Plaintiffs converted the total of 72,857 shares of the merged shares into the Nonparty’s real name on December 31, 2010.

D. According to the result of the gift tax investigation conducted by the director of the Seoul Regional Tax Office, the Defendants deemed that the merged shares issued as compensation for the establishment of a merger was held in title by the Nonparty on November 2013, thereby imposing gift tax (including additional tax) on the Plaintiffs by applying the legal provision of this case.

3. Examining these factual relations in light of the legal principles as seen earlier, since the Nonparty was the first trusted shares that were acquired in the name of the Plaintiffs, the Plaintiff is entitled to constructive taxation by applying the legal provisions of the instant case. However, the Plaintiffs merely obtained allocation of new shares equivalent to the first deemed donation due to the merger and completed transfer of ownership in the future, and thus, cannot be imposed by applying the legal provisions of the instant case.

Nevertheless, the lower court determined otherwise on the erroneous premise that the instant legal provision may be applied again to the Plaintiff’s new shares that are merged, thereby adversely affecting the conclusion of the judgment. In so doing, the lower court erred by misapprehending the legal doctrine on the scope of application of the instant legal provision, thereby adversely affecting the conclusion of the judgment. The allegation in the grounds of appeal

4. Therefore, without further proceeding to decide on the remaining grounds of appeal, 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 Seon-soo (Presiding Justice)