[1] The standard for determining whether the sale of shares constitutes a transfer of shares, which is an asset transaction, or an amount to be refunded of shares, which is a capital transaction

[2] In a case where Company A acquired Company A’s shares from a shareholder who is a person with a special relationship, and the tax authority deemed that the share price paid to Company B constitutes a provisional payment unrelated to business, and thus imposed corporate tax in addition to the deductible expenses, the case holding that the judgment below erred by misapprehending the legal principles, although the above share price cannot be deemed to have acquired the shares without the purpose of stock retirement, and thus, the court below erred by misapprehending the legal principles

[1] Whether a sale of stocks constitutes a transfer of stocks which are assets transaction, or a retirement of stocks or a refund of capital which is a capital transaction is a matter of interpretation of legal act, and should be determined based on the contents and intent of the parties. However, in light of the substance over form principle, the entire process of transaction should be determined by grasping the contents and form of the contract in question as well as the details and form of the contract in question, the process of conclusion

[2] In a case where Company A acquired Company B’s shares from a shareholder who is a specially related person, and the tax authority imposed corporate tax on Company B by deeming that the share price paid to Company B on the ground that the acquisition of the said shares becomes null and void constitutes a provisional payment unrelated to business affairs, and the tax authority excluded the interest paid to Company A from deductible expenses, the case held that the judgment below erred in the misapprehension of legal principles as to whether Company A acquired shares and the purpose of examining whether Company B’s acquisition of shares was erroneous in the misapprehension of legal principles, on the grounds that: (a) there is room to deem that Company B sold its shares to be refunded for refund of its own shares; and (b) Company B and Company B agreed to pay the share price in installments whenever it purchases shares; and (c) Company A was planned to retire shares at the time of completion of the purchase of shares from Company B; and (b) even if the purchase of shares was completed later, it cannot be deemed that Company A acquired shares without the purpose of stock retirement; (b) the ground for acquiring shares, method of determining the purchase price, dividend and exercise of voting rights; and (c)

[1] Article 28(1)4(b) and Article 52(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 53(1), Article 88(1)6, and Article 89(3) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 22577, Dec. 30, 201); Article 341 subparag. 1(b) and Article 342(c) of the former Commercial Act (Amended by Act No. 10600, Apr. 14, 201); Article 28(1)4(b) and Article 52(1) of the former Corporate Tax Act (Amended by Act No. 10423, Dec. 30, 2010); Article 28(1)4(1) and (3) of the former Enforcement Decree of the Corporate Tax Act (Amended by Act No. 10681, Feb. 14, 2017)

[1] Supreme Court Decision 2001Du6227 decided Dec. 26, 2002 (Gong2003Sang, 534)

Loyal Corporation (Law Firm aiming at Law Firm et al., Counsel for the plaintiff-appellant)

Head of Ansan Tax Office

Seoul High Court Decision 2012Nu12121 decided November 16, 2012

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

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Regarding ground of appeal No. 1

A. Article 28(1)4(b) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter “Corporate Tax Act”) and Article 53(1) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 22577, Dec. 30, 2010; hereinafter “Enforcement Decree of the Corporate Tax Act”) provide that interest on loans equivalent to the amount of loans not related to the business of the relevant corporation shall not be included in deductible expenses, regardless of any title, as the provisional payment, etc. to a person with a special relationship held by the relevant corporation, shall not be included in deductible expenses. Articles 52(1)6 and 88(1)6 of the Corporate Tax Act; Articles 89(3) of the Enforcement Decree of the Corporate Tax Act provide that where a corporation deems that its tax burden on its income has been unjustly reduced by lending money without compensation to a person with a special relationship, the tax authority shall be deemed an unlawful calculation and calculation and shall be included in gross income.

Meanwhile, Article 341 of the former Commercial Act (amended by Act No. 10600, Apr. 14, 2011; hereinafter “former Commercial Act”) provides that “A company shall not acquire its own shares on its own account except for the following cases” and Subparag. 1 provides that “when acquiring its own shares for the purpose of retiring its shares” means “when acquiring its own shares for the purpose of retiring its shares” and Article 342 provides that “when a company acquires its own shares for the purpose of retiring its shares, it shall without delay take the procedure of invalidation.”

B. Comprehensively taking account of the evidence adopted by the court below: (1) The plaintiff held a temporary shareholders' meeting on May 6, 2004 (35.86% of the shares held by the non-party 1, who is the related party of the plaintiff, to purchase 3,350 shares in total (35.86% of the shares) from May 2004 to 209 to 2017 and decided to retire the above shares at the time when the purchase is completed; (2) The plaintiff acquired 200,42 shares in total from non-party 1 to 200,005,872 shares and 20,000,000,000 shares and 253 shares from April 14, 2006 to the non-party 1, 200, 2008 to the non-party 20, 308, 300, 308, 2008.

Based on these factual basis, the lower court determined that the instant disposition was lawful on the ground that the Plaintiff’s acquisition of shares constitutes a provisional payment regardless of its business, as long as the Plaintiff’s acquisition of shares was not immediately recovered from Nonparty 1, a person with a special relationship, without any justifiable reason, in light of the developments leading up to the Plaintiff’s acquisition of shares, the fact that the acquisition of shares under the Commercial Act is strictly limited, and the time when the shares are actually retired. Therefore, it is reasonable to deem that the Plaintiff’s acquisition of shares in this case was null and void as it was in violation of the prohibition of acquiring shares under the Commercial Act.

C. However, we cannot agree with the judgment of the court below for the following reasons.

Whether a sale of shares constitutes a transfer of shares, or as a capital transaction, or as a result of the retirement of shares or the refund of capital, should be determined based on the contents and the intent of the parties in the transaction. However, in light of the substance over form principle, the entire process of the transaction should be actually identified and determined (see, e.g., Supreme Court Decision 2001Du6227, Dec. 26, 2002).

According to the reasoning of the judgment below and evidence duly admitted by the court below, Non-party 1, who was a major shareholder of the plaintiff 2 and non-party 2, had been involved in its operation after establishing the plaintiff around 1997 with the non-party 2, who is the largest shareholder of the plaintiff and the representative director. However, around February 2004, the plaintiff decided to withdraw from the plaintiff's operation and requested to purchase about 333 million won and 35.86% of its own shares acquired by investing about 1.6 billion won. Accordingly, the plaintiff decided to purchase the non-party 1's shares by capital reduction and the non-party 1's temporary general meeting held on May 6, 2004 had no other change in the purchase price of the non-party 1's shares from 200 billion won to 300 billion won until 200 billion won until 300 billion won or more of the plaintiff's share purchase price of the non-party 1's shares.

In light of the above circumstances, it is reasonable to view that Nonparty 1 and the Plaintiff reached a share purchase agreement to sell the instant shares to obtain refund of his own investment and return Nonparty 1’s investment by capital reduction. The price for shares purchased by the Plaintiff was to be paid in installments each time of purchase, and the share retirement was scheduled at the time of completion of purchase of shares from Nonparty 1. Thus, even if the Plaintiff completed the procedure for the retirement of the instant shares by paying the price for each share at the time of installment purchase, it cannot be deemed that the Plaintiff acquired the instant shares without the purpose of the retirement of shares (see, e.g., the Commercial Act amended by Act No. 10600, Apr. 14, 201).

Therefore, the court below should have determined whether the Plaintiff acquired the shares in this case, the grounds for the purchase of shares in this case, the method of determining the price thereof, the dividend of the shares in this case and the exercise of voting rights, and other transactional processes, and then determined whether the Plaintiff had the purpose of retiring shares. However, without such deliberation and determination, the court below determined that the Plaintiff’s acquisition of shares in this case was not derived from the purpose of retiring shares. In so doing, the court below erred by misapprehending the legal principles on the interpretation of the act of acquiring shares, thereby failing to exhaust all necessary deliberations, which affected the conclusion of the judgment. The grounds for appeal pointing this out are with merit.

2. Conclusion

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 Min Il-young (Presiding Justice)