Whether the Plaintiff entrusted the instant shares for the purpose of tax avoidance

Whether there was a tax avoidance purpose in the title trust should be separately determined according to each type of trust. Thus, it cannot be deemed that there was a purpose of tax avoidance in the instant title trust, and thus, the disposition imposing gift tax is revoked.

Article 46-2 of the Inheritance Tax and Gift Tax Act

Incheon District Court 2014Guhap32848 Revocation of Disposition of Imposing Gift Tax

AA

BB Director of the Tax Office

oly 3, 2015

August 28, 2015

1. The Defendant’s imposition of gift tax of KRW 491,354,420 against the Plaintiff on February 12, 2014 shall be revoked.

2. The costs of the lawsuit are assessed against the defendant.

1. Details of the disposition;

A. The Plaintiff, established in 205, served as the representative director atCC (hereinafter “CC”) from September 201 to May 2012, 201. On September 30, 201, the Plaintiff acquired 22,000 shares issued byCC (5% of total issued shares; hereinafter “instant shares”) and disposed of the entire shares of this case to EE on March 21, 2012.

B. The director of the Seoul Regional Tax Office, from June 26, 2013 to July 21, 2013, conducted an investigation on the change of stocks with respect toCC, and decided and notified the Defendant on February 6, 2014 that DD owned the instant shares as the actual owner ofCC from April 2010 to May 2012, 201, but, on the other hand, DD owned the instant shares as the title trust (hereinafter referred to as “instant title trust”) on the part of the Plaintiff, a son, and the Defendant on February 12, 2014 pursuant to Article 45-2(1) of the Inheritance Tax and Gift Tax Act (hereinafter referred to as “Inheritance Tax and Gift Tax Act”) on the gift on September 30, 2011 (hereinafter referred to as “instant disposition”).

C. The Plaintiff appealed and filed a tax appeal on April 30, 2014, but the Tax Tribunal dismissed it on September 2, 2014.

[Ground of recognition] Facts without dispute, entry of Gap evidence 1 and 2 (including each number; hereinafter the same shall apply), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

It is true that there was a title trust with DDR as the title truster and the Plaintiff on the instant shares. However, given that there was no purpose of tax avoidance, the instant disposition, based on the premise that there was a purpose of tax avoidance, ought to be revoked in an unlawful manner.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

1) Facts of recognition

A) Around April 27, 2010 in order to carry out a removal-related project while carrying out the construction business, DD has taken overCC. At the time of the above acquisition, DD and EE, FF acquired a total of KRW 40,000 (5,000 per share) total of KRW 200,000 per share. Of them, 29,200 shares (73%) were owned by DD in substance, and held 16,80 shares to GG, HH (the wife of FF), 2,800 shares (7%) were owned by FF funds at the time, and owned by H 2,80 shares (7%) to H, 80 shares substantially, 8,00 shares in title trust, 80,000 shares (7%) were owned by H, 200, 300,00 shares in title trust (30,000) shares in PJ 20, 300,000 shares in each PJ 14.

B) On September 30, 201, DD changed its respective title trustee to K with respect to 22,00 shares of 29,200 shares that it actually owned as above (the shares of this case) and the remaining 7,200 shares to K.

C) According to the terms and conditions of the Z’s business transaction, where the representative (including actual owner) of the company (including the owner of the company) is classified as the non-performance of obligations, the company shall lose the benefit of the due date and immediately repay its obligations (Article 8(2)3 and 5). However, DD guaranteed a loan of approximately KRW 180,00,00 of its loan obligations, but was recorded as the bad credit holder at the Federation of the Bank around January 7, 2001 due to the occurrence of the guarantee accident. On April 28, 2005, DD was classified as the bad credit holder due to the failure to repay the above joint and several debt even after it was abolished, and DD was registered in the defaulters’s list on May 7, 201 (Seoul District Court Decision 2011Da2732, 2732). DD was cancelled on November 17, 2011.

D)DD is an adviser of Y Co., Ltd. (hereinafter referred to as “YY”), an affiliated company of XX Co., Ltd. (hereinafter referred to as “Y”), and is entitled to advisory fees of KRW 84,193,548 in 201, and KRW 158,147,110 in 201.DD fails to report the above advisory fees at the time of filing a global income tax return in 2012, and thereby is subject to global income tax on May 16, 2014.

34,659,027 won was corrected and notified.

E) From July 2010 to December 201, 201,CC ordered construction of 3,123,902,064 won in total from the supply price from the NN Station, Daejeon District Office, Nam Mine Construction Co., Ltd., Samsung Engineering Co., Ltd. In particular, on July 29, 2011, “construction of railroad facilities” was ordered from NN Station International Business Area Development Project, Railroad Facilities Removal and Soil Contamination Management Project, etc., and was issued from ZZ on September 6, 201, a guarantee was issued to cover 1,071,40,000 won in total.

F) On April 27, 2010, the Defendant informed HH of KRW 14,988,120 of the gift tax on February 1, 2014 with respect to the title trust of the 16,800 shares ofCC shares with HH, and notified GG of KRW 12,400 with respect to the title trust of the 12,40 shares, and notified GG of KRW 11,062,660 with respect to the 12,40 shares of the 12,00 shares, the Defendant designated the D as a joint obligor for gift tax on each of the following gift taxes. He HH, GG, and DD did not object to all of them.

G)CC did not pay dividends once since its establishment in 2005.

H) DD has been liable for a loan obligation from EE over a multi-year period (for that amount, the EE claimed that the amount reaches KRW 2 billion at the time of the tax investigation). EE demanded the repayment of the above obligation on January 2012, 2012, DD intended to repay to the profit that it would obtain by ordering the construction work fromCC, and transferred its name to the EE on March 21, 2012 (for this, the EE asserted that at the time of the tax investigation regarding this issue, the EE agreed to offset the loan claim equivalent to KRW 2 billion with the stock purchase claim).

I) As of February 2015,CC did not pay the total corporate tax and value-added tax amounting to KRW 219,180,800 for the business year 2013.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 3, 4, 7, Eul evidence Nos. 1 through 5, 6, 8, 9, 11, 15 through 17, and the purport of the whole pleadings

2) Determination

In the application of the provision on deemed donation of a nominal trust property under Article 45-2(1) of the Inheritance Tax and Gift Tax Act, if the title trust was deemed to have been made for reasons other than the purpose of tax avoidance and only a minor reduction of tax incidental to the said title trust occurs, it cannot be readily concluded that there was an objective of tax avoidance in the title trust (see, e.g., Supreme Court Decision 2007Du19331, Apr. 9, 2009). If there is no objective of tax avoidance, it cannot be deemed that there was a different purpose of tax avoidance merely because the mere mere fact that there is a possibility that there is a possibility that the result of future tax reduction may arise (see, e.g., Supreme Court Decision 2004Du7733, May 12, 2006). In addition, whether the relevant shares were tax avoidance purpose should be determined at the time of the title trust (see, e.g., Supreme Court Decision 2009Du21352, Jul. 14, 2001).

In light of the above legal principles, the following circumstances revealed by adding up the details of the above disposition and the facts of recognition as seen earlier, cannot be deemed to have existed the purpose of tax avoidance in the title trust of this case. Accordingly, Article 45-2(1) of the Inheritance Tax and Gift Tax Act cannot be applied to the instant case. Therefore, the instant disposition based on the premise that DD entrusted the instant shares to the Plaintiff for the purpose of tax avoidance is unlawful, and thus, should be revoked.

A) CC, which is a subcontractor, is essential in ordering construction works, to perform the performance bond of the Z and to issue defect repair performance bond of the Z. Accordingly, CC, at the time of the title trust of this case (as of September 30, 201), ordered construction works for removal of railroad facilities among the Y projects (as of July 29, 201) and issued a certificate of guarantee (as of September 6, 201), the amount of security deposit from Z to KRW 1 billion (as of September 201, 201, classified as the non-performance as the actual owner of the instant shares, and up to 55% of the total issued stocks, if it is revealed by the court’s decision that DD was the actual owner of the instant shares, it appears to have reached the title trust of this case in order to maintain existing construction contracts and avoid restrictions at the time of construction in the future, because it is likely to lose the benefit of the obligation under the provisions related to the basic terms and conditions for business transactions of Z.

B) If DoD was for the purpose of evading the secondary tax liability and deemed acquisition tax as an oligopolistic shareholder, DoD could have held title trust by allocating the ratio to a large number of names without any personal relationship with DoD, not the Plaintiff, who is the Republic of Korea, but the Plaintiff, instead of doing so, the entire shares of this case, which amounts to 55% of the total number of issued and outstanding shares, were trusted to the Plaintiff.

C) In a case where a dividend is made to shareholders, if a shareholder owns shares under the name of another person subject to the lower tax rate in the process, the dividend income of the beneficial shareholder may be reduced externally, thereby resulting in the avoidance of tax evasion due to the difference in the global income tax. Moreover, DD did not report part of the advisory fees received from Y. Since the advisory fees and dividend income are all the tax base of global income tax, there was a change in the tax base depending on the existence of theCC’s dividends. However, CC did not make a distribution once once after the date of its establishment until the date of its establishment, so it is difficult to readily determine the purpose of tax avoidance solely on the grounds that there is a possibility that the result of tax reduction may arise if the dividend is distributed. Moreover, in light of the situation that the instant shares were transferred in the name of EE only six months after the title trust of this case, it is difficult to deem that the title trust for the purpose of tax avoidance is intended to expect dividend and avoid global income tax.

D) Although DD had a position of Y as a Y adviser, it is apparent that the position of 'the above' adviser is not a specially related person who can apply the rejection of unfair act and calculation under the Corporate Tax Act, in light of the scope of 'specially related person' as known under Articles 87(1) and 20(1)4 of the Enforcement Decree of the Corporate Tax Act, it cannot be deemed that there was a purpose of corporate tax evasion in relation to transaction between CC and Y.

E) In light of the fact that DDR transferred KRW 29,200,00, including the instant shares, to EE on or around March 21, 2012, and without reporting capital gains tax under its name, the Defendant asserted that DD had a purpose of tax avoidance in light of the fact that DD avoided the amount equivalent to KRW 675,982,00,00 of capital gains tax to be borne by DD himself/herself by reporting the amount of KRW 220,00,000 in its name, without reporting capital gains tax under its name. However, it cannot be deemed that there was a causal relationship between underreporting and title trust on the transfer value of unlisted stocks, and thus, it cannot be deemed that CD avoided capital gains tax from the instant title trust. In addition, there is only the statement of EE at the time of tax investigation, in light of the relationship between D and EE, it is difficult to believe the above contents.

F) AlthoughCC appears to be delinquent in corporate tax and value-added tax for the business year 2013, it cannot be determined that it had the purpose of tax avoidance at the time of the instant title trust, which was previously conducted with the fact of delinquency at the above time, and there is no other evidence to support the fact thatCC continued to pay taxes and had been a considerable amount of money in arrears before and after the instant title trust.

G) In light of the fact that the instant shares were transferred to EE again at the time when about six months have passed since the transfer of the name in the Plaintiff’s future, the circumstance that DD had been cancelled from the list of defaulters, and that DD had recovered to a certain degree of credit by repaying all of the joint and several debt obligations, does not constitute a circumstance under which DD’s failure to recover the instant shares in its future from the end of 2011 to the beginning of 2012.

H) Whether there was a tax avoidance purpose in the title trust should be separately determined based on each type of trust. As such, the circumstance that there was no objection against the results of the tax investigation and tax disposition related to the title trust that existed between DD and HH and GG prior to the instant title trust, may not be a circumstance for estimatinging the purpose of tax avoidance in the instant title trust.

3. Conclusion

The plaintiff's claim is reasonable, and it is so decided as per Disposition.