[1] The meaning of the actual transaction price, which is the basis for calculating gains from transfer, which is the tax base of capital gains tax, and whether the actual transaction price can be verified in the case of value exchange based on the property value (affirmative

[2] In a case where Company A, a stock-listed corporation, and Company B, a stock-listed corporation, made an all-inclusive share swap with Company A as a complete parent company, and Company B as a complete subsidiary, the case holding that Company B’s shareholders should be deemed as the actual transaction price of shares transferred to Company A through a share swap, in case where Company B’s shareholders acquired the share swap as a complete subsidiary and Company B as a complete subsidiary

[1] In calculating gains from transfer, which is the tax base of capital gains tax, the actual transaction price refers to the actual transaction price, not the market price that reflects the objective exchange value, but the actual transaction price itself or the price for the payment at the time of the transaction. Thus, if a transaction subject to capital gains tax is a simple exchange, such actual transaction price cannot be confirmed, but if the exchange is a value exchange based on the value of the object, such as a settlement procedure for the difference of the appraised value, based on the market price appraisal of the object to be exchanged, it shall be a case where the actual transaction price can be confirmed. In this case, monetary value of the object to be acquired through the exchange and the amount of cash, etc.

[2] In a case where Company A, a stock-listed corporation, and Company B, a stock-listed corporation, concluded an all-inclusive share swap with Company A as a complete parent company and Company B as a complete subsidiary, the case holding that the judgment below erred in the misapprehension of legal principles on the ground that the actual transaction price cannot be confirmed on the ground that the actual transaction price of Company A’s shares calculated by the method prescribed in Article 36-12 of the former Enforcement Rule of the Securities and Exchange Act (amended by Ordinance of the Prime Minister No. 875 of Mar. 3, 2008) is applied to the share swap transaction, and that the price can be confirmed by related documents, since Company B’s shares are the actual transaction price of shares acquired by the said share swap, and the share disposal price of less than one share is the actual transaction price of shares transferred by Company B to Company A through the share swap, since Company B’s shareholders did not have an agreement on direct share swap contract or consideration, or there was a value exchange based on money value.

[1] Article 96 of the former Income Tax Act (amended by Act No. 7837 of Dec. 31, 2005) / [2] Article 94 (1) 3 (c) of the former Income Tax Act (amended by Act No. 7837 of Dec. 31, 2005) (see current Article 94 (1) 3 (b)), Article 96 (2) (see current Article 96 (1) of the Commercial Act), Article 360-2 of the Commercial Act, Article 360-12 of the former Enforcement Rule of the Securities and Exchange Act (amended by Ordinance of the Prime Minister No. 875 of Aug. 3, 2008)

[1] Supreme Court Decision 96Nu860 delivered on February 11, 1997 (Gong1997Sang, 805) Supreme Court Decision 97Nu629 delivered on February 9, 199 (Gong199Sang, 496) Supreme Court Decision 98Du19841 delivered on November 26, 199 (Gong200Sang, 94) (Gong200Sang, 94) Supreme Court Decision 2004Du5072 Delivered on January 14, 2005

Plaintiff (Law Firm Rate, Attorneys So-young et al., Counsel for the plaintiff-appellant)

Head of the District Tax Office

Seoul High Court Decision 2009Nu4687 decided October 9, 2009

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

The grounds of appeal are examined.

1. Articles 94(1)3(c) and 96(2) of the former Income Tax Act (amended by Act No. 7837, Dec. 31, 2005; hereinafter the same) provide that the transfer value of unlisted stocks shall be based on the actual transaction value as at the time of transfer. Article 114(5) of the former Income Tax Act and Article 176-2(1) and (3) of the former Enforcement Decree of Income Tax Act (amended by Presidential Decree No. 19254, Dec. 31, 2005; hereinafter the same shall apply) provide that where there is no evidentiary document necessary to confirm the actual transaction value, or where it is impossible to recognize or confirm the actual transaction value due to lack of important parts, such transfer value may be determined or corrected by means of the transaction example, standard market price, etc.

In calculating gains from transfer, which is the tax base of capital gains tax, the actual transaction price refers to the amount of actual transaction price, not the market price reflecting the objective exchange value, but the actual transaction price itself or at the time of transaction (see Supreme Court Decision 97Nu6629, Feb. 9, 199). Thus, where a transaction subject to capital gains tax is a simple exchange, the actual transaction price cannot be confirmed if the transaction subject to capital gains tax is a simple exchange. However, where the exchange is a value exchange based on the standard value of the object, such as accompanied by the procedure for settling the difference in the appraisal price after conducting the market price appraisal of the object subject to exchange, it constitutes a case where the actual transaction price is verifiable (see Supreme Court Decisions 98Du19841, Nov. 26, 199; 2004Du5072, Nov. 14, 2005; 200Du6686, Jun. 16, 1997).

2. On May 31, 2005, the lower court determined that, even if it is difficult to view that the Plaintiff and its members acquired shares as its members under the Agreement on the Exchange of New Shares No. 1, it was difficult to view that the Plaintiff and its members were 1,000,000 won of the Plaintiff and its members under the Agreement on the Exchange of Shares No. 30,00,000 won, and that it was difficult to view that there were 5,000 won of the Plaintiff and its members under the Agreement on the Exchange of Shares No. 1,00,000 won of the Plaintiff and its members under the Agreement on the Exchange of Shares No. 360,000,000 won of the Plaintiff and its members were 5,000 won of the Plaintiff’s shares, and thus, it was difficult to view that there were 1,000 won of the purchase of shares under the Agreement on the Exchange of Shares No. 5,000,000 won of the Plaintiff’s shares, the average of No. 1,7,031.

3. However, it is difficult to accept the judgment of the court below for the following reasons.

A. First of all, considering the relevant provisions and the following circumstances revealed by the evidence duly admitted by the court below, i.e., AlWnel and EWnel comprehensively exchanged stocks pursuant to Article 360-3 of the Commercial Act, and concluded a share swap contract between the Plaintiff and EWnel with its members as a complete parent company and EWnel. In the course of implementing the share swap contract, the Plaintiff’s shares were exchanged with its members’ shares; all-inclusive share swap under the Commercial Act is forced to transfer shares if the members meet the prescribed procedures and requirements; to avoid this, the Plaintiff did not request the purchase of the shares within 20 days from the date of resolution of the approval of the share swap contract at the general meeting of AlWnel pursuant to Article 360-5 of the Commercial Act, but did not request the purchase, and the actual transaction price is not necessarily a value agreed upon by the parties to the transaction. Thus, the share swap between the Plaintiff and EWnel is ultimately based on the Plaintiff’s intent, and even if the Plaintiff is not a direct party to the share swap contract.

B. In addition, the aforementioned legal principles and relevant regulations and the court below may find out the following facts: (a) the exchange rate of shares is the most important content of each company’s comprehensive exchange contract; (b) determined fairly in light of its property status and actual value; (c) if the exchange rate is substantially unfair for one of the companies, it may be invalid; (d) the actual value of each company’s shares in calculating such exchange rate cannot be determined based on an strict objective accuracy; (e) if all of the factors were to be considered within reasonable scope, the exchange rate is considerably unreasonable; (e) the exchange rate is determined based on the difference between the actual value of each company’s shares, other than asset value, profit value, and equivalent to the other party’s share price; and (e) the exchange rate is determined based on the comprehensive appraisal rate of 106 U.N.’s share price at the time of the exchange; and (e) the exchange rate is determined based on the aforementioned comprehensive appraisal rate of 106 U.N.’s share price at the time of the exchange.

C. In contrast, the court below determined that the actual transaction price of the shares of this case cannot be confirmed on the ground that the plaintiff and members did not have an agreement on the share swap contract or price or that there was a value exchange based on the monetary value of the object. Such judgment of the court below is erroneous in the misunderstanding of legal principles as to the actual transaction price in exchange, which affected the conclusion of the judgment, and the grounds of appeal pointing this out are with merit.

4. Therefore, without examining the remaining grounds of appeal, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Yang Chang-soo (Presiding Justice)