In case where a foreign corporation which is not an existing shareholder of a newly issued corporation receives profits from the existing shareholders who have a special relationship with a low-price acquisition of new shares, whether it constitutes a domestic source income of a foreign corporation as provided in Article 93 subparag. 11 (i) of the former Corporate Tax Act

Article 93 subparag. 11 (i) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides for one of the domestic source income of a foreign corporation that “income accruing from a domestic corporation whose stocks or equity shares are held by a person with a special relationship prescribed by the Presidential Decree are increased by its value due to capital transaction prescribed by the Presidential Decree.” Article 132(14) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009; hereinafter the same) provides that “where a foreign corporation, such as a stockholder, receives profits distributed from another stockholder, etc. in a special relationship under the provisions of each subparagraph of Article 88(1)8 of the former Enforcement Decree of the Corporate Tax Act, and Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act provides that “where a stockholder is not entitled to the allocation or acceptance of new stocks by the corporation, the corporation’s price of new stocks.”

Therefore, even if a foreign corporation which is not an existing shareholder of a newly issued corporation receives profits from the existing shareholders who have a special relationship with the low-price acquisition of new shares, it does not constitute a domestic source income of a foreign corporation under Article 93 subparag. 11 (i) of the former

Article 93 subparag. 11 (i) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010; see Article 93 subparag. 10 (i) of the current Act); Article 132(14) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 21302, Feb. 4, 2009); Article 418(2) of the Commercial Act

Supreme Court Decision 2011Du29779 Decided March 29, 2012 (Gong2012Sang, 716)

T Lease Co., Ltd. (Law Firm Squa, Attorneys Lee In-bok et al., Counsel for the plaintiff-appellant)

Seoul Regional Tax Office

Head of the District Tax Office

Seoul High Court Decision 2014Nu62861 decided July 8, 2015

All appeals are dismissed. The costs of appeal are assessed against the Plaintiff and the director of the Seoul Regional Tax Office, while the costs of appeal between the Plaintiff and the director of the regional Tax Office are assessed against the Defendant.

The grounds of appeal are examined.

1. Judgment on the Plaintiff’s grounds of appeal

A. The act of a representative director, etc., who is the actual manager of a corporation, uses the corporation’s funds on the premise of early recovery, and thus, constitutes an outflow from the company as an expenditure itself. As to special circumstances, which cannot be deemed as not premised on recovery from the utilization time, the determination shall be made individually and specifically by taking into account all the circumstances, such as the actual status within the corporation of the representative director, etc., the subject of the embezzlement, the degree of control over the corporation, the circumstances leading to the embezzlement, and the measures taken by the corporation after the embezzlement, etc., such as where the representative director, etc.’s intent is identical to the corporation’s intent or where it is difficult to deem that the corporate economic interest is in fact identical with the representative director, etc., and such special circumstances must be proved by the corporation asserting it (see, e.g., Supreme Court Decision 2007Du20959, Jan.

B. After finding the facts as stated in its reasoning, the lower court determined that: (a) Nonparty 1, who was the representative director of Nonparty 2, obtained the Plaintiff’s proposal from Nonparty 1 for the first time; (b) obtained the Plaintiff’s capital increase of KRW 70 billion; and (c) obtained the Plaintiff’s capital increase of KRW 1,000,000,000 from Nonparty 2; and (d) obtained the Plaintiff’s capital increase of KRW 1,000,000,000,000,000,000,000,000,000,000 KRW 70,000,000,000,000,000,000,000,000 won; and (d) obtained the Plaintiff’s capital increase of KRW 1,000,000,000,000,000,000,000,00.

In light of the above legal principles and records, such determination by the court below is just, and contrary to the allegations in the grounds of appeal, there is no error of law by misapprehending the legal principles on the outflow from the company

2. Determination on the grounds of appeal by the director of the regional tax office

A. Article 93 subparag. 11(i) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides for one of the domestic source income of a foreign corporation that “the income accrued from the increase of value of stocks or equity shares of the domestic corporation held by a person with a special relationship as prescribed by the Presidential Decree due to capital transactions prescribed by the Presidential Decree.” Article 132(14) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009; hereinafter the same) provides that “The same shall apply to transactions falling under any of the items of Article 88(1)8 of the former Enforcement Decree of the Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) shall not apply to cases where a foreign corporation, such as a stockholder, receives the allocation of new stocks or acquisition thereof at a higher price than the market price.”

Therefore, even if a foreign corporation which is not an existing shareholder of a newly issued corporation receives profits from the existing shareholders with a special relationship due to low-price acquisition of new shares, it does not constitute a domestic source income of a foreign corporation as stipulated in Article 93 subparag. 11 (i) of the former Corporate Tax Act (see Supreme Court Decision 2011Du29779, Mar. 29, 2012).

B. In the same purport, the lower court is justifiable to have determined that: (a) the acquisition of new shares at low price by the Plaintiff at the time of the issuance of new shares at low price by the Plaintiff was based on the method of directly allocating new shares to a third party other than shareholders pursuant to Article 418(2) of the Commercial Act; (b) thus, even if there were profits received by distribution from the Plaintiff’s existing shareholders in a special relationship with the dlim and e-learning, it does not constitute a foreign corporation’s domestic source income under the former Corporate Tax Act; and (c) on a different premise, the imposition of withholding tax for the year 2008 and other income tax for the year 209 and additional tax for the failure to submit a payment record for the year 209, which was made by the director of the tax office at the lower tax office on the same premise,

3. Conclusion

Therefore, all appeals are dismissed. The costs of appeal between the Plaintiff and the Defendant Director of the Seoul Regional Tax Office are assessed against the Plaintiff, and the costs of appeal between the Plaintiff and the Defendant. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee Ki-taik (Presiding Justice)