Egynin loan Co., Ltd. (Law Firm Bocheon, Attorney Lee Jong-deok, Counsel for the plaintiff-appellant)

Head of Seodaemun-gu Daejeon Metropolitan City (Attorney Kim-type, Counsel for the plaintiff-appellant)

November 25, 2010

Daejeon District Court Decision 2010Guhap1882 Decided September 8, 2010

1. Revocation of a judgment of the first instance;

2. The plaintiff's claim is dismissed.

3. All costs of the lawsuit shall be borne by the Plaintiff.

1. Purport of claim

The Defendant’s disposition of imposition of acquisition tax of KRW 52,209,310 against the Plaintiff on February 11, 2010 is revoked.

2. Purport of appeal

The same shall apply to the order.

1. Details of the disposition;

A. On May 10, 2006, the Plaintiff is a corporation established for investment in a private equity fund under the former Indirect Investment Asset Management Business Act (repealed by Act No. 8635 of Aug. 3, 2007; hereinafter “Indirect Investment Act”), which is a special purpose company established for investment in stocks or equities of other companies permitted under relevant Acts and subordinate statutes, and is established for the purpose of investing in other assets, such as real estate permitted under relevant Acts and subordinate statutes, monetary claims, non-performing loans, etc.

B. 1) On November 3, 2008, the Plaintiff, while holding 12,163,705 shares of HK Mutual Savings Bank, acquired shares of 7,676,395 shares of the said HK Mutual Savings Bank (hereinafter “instant shares”), thereby holding approximately KRW 19,840,100 shares out of approximately 24,952,195 shares issued by the said HK Mutual Savings Bank, the total number of shares issued by the said HK Mutual Savings Bank.

2) Meanwhile, as of June 30, 2009, the Plaintiff’s total assets amounted to KRW 204,480,982,462, and among them, the Plaintiff’s shares of the said HK Mutual Savings Bank, a subsidiary, constitute KRW 164,819,778,779, and the Plaintiff’s total assets amounted to 80.6%.

C. 1) On December 2, 2008, the Plaintiff reported and paid KRW 52,209,310,000, acquisition tax on the land and buildings owned by the said HK Mutual Savings Bank, on the ground that the acquisition of the instant shares constitutes the time when the Plaintiff became an oligopolistic shareholder by acquiring the shares of a corporation, pursuant to Article 22 Subparag. 2 of the Local Tax Act and Article 105(6) of the same Act.

2) However, the Plaintiff changed the previous position around September 2009 and applied for the refund of acquisition tax voluntarily reported and paid to the Defendant, asserting that the acquisition of the instant shares is subject to exemption of acquisition tax, pursuant to Article 120(6)8 of the former Restriction of Special Taxation Act (amended by Act No. 9272, Dec. 26, 2008; hereinafter “the Restriction of Special Taxation Act”) and Article 2 of the Monopoly Regulation and Fair Trade Act (amended by Act No. 9272, Dec. 26, 2008).

D. Accordingly, the Defendant refunded the above acquisition tax by deeming that the Plaintiff did not have the obligation to pay acquisition tax as an oligopolistic stockholder under the Monopoly Regulation and Fair Trade Act, but on December 16, 2009, the Ministry of Public Administration and Security notified the Defendant of the detailed operational criteria to the effect that the Plaintiff cannot be deemed a holding company under the Fair Trade Act, such as the Plaintiff, and that the Plaintiff does not fall under the object of exemption from acquisition tax of oligopolistic stockholders under Article 120 (6) 8 of the Restriction of Special Taxation Act, and upon the above notification, the Defendant again imposed acquisition tax of KRW 52,209,310 on February 11, 2010 by deeming that the Plaintiff does not fall under the object of exemption from acquisition tax

[Ground of recognition] Facts without dispute, Gap evidence 1 to Gap evidence 6, Eul evidence 1, the purport of whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The Plaintiff is a holding company under the Fair Trade Act and the acquisition of the instant shares constitutes a case where a holding company acquires the shares of its subsidiary. Accordingly, even if the Plaintiff became an oligopolistic shareholder of the said HK Mutual Savings Bank, acquisition tax should be exempted pursuant to Article 120(6)8 of the Restriction of Special Taxation Act.

2) Article 276(1) of the Financial Investment Services and Capital Markets Act (hereinafter “Capital Markets Act”) provides that a special purpose company shall not be subject to the Fair Trade Act, but this does not mean that a company does not fall under a holding company under the Fair Trade Act. Article 120(6)8 of the Restriction of Special Taxation Act provides that when a holding company under the Fair Trade Act acquires stocks of its subsidiary, it shall be exempted from acquisition tax if it acquires stocks of its subsidiary company, and does not add any other requirement. Therefore, in light of the literal interpretation and the principle of strict interpretation of tax laws, the above provision shall apply to the Plaintiff who is a holding company under the Fair Trade Act.

3) Therefore, the instant disposition is unlawful.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

1) Regulation of the relevant laws and regulations on holding companies and special purpose companies

A) Holding company and special case of acquisition tax

The main text of Article 105 (6) of the Local Tax Act imposes an obligation to pay acquisition tax on an oligopolistic stockholder by deeming that the oligopolistic stockholder becomes an oligopolistic stockholder by acquiring the stocks or shares of a corporation, and Article 120 (6) 8 of the Restriction of Special Taxation Act provides for special provisions that exempt an oligopolistic stockholder from the obligation to pay acquisition tax under Article 105 (6) of the Local Tax Act by acquiring the stocks of a subsidiary under the Monopoly Regulation and Fair Trade Act or the Financial Holding Companies Act.

On the other hand, the government introduced a holding company system which was prohibited under the Fair Trade Act on February 5, 1999 because of the need for attracting foreign capital and restructuring due to the financial crisis at the end of the 1990s. The existing large-scale enterprise group was highly likely to lead to the insolvency of a single subsidiary or business group as a whole due to mutual investment or mutual guarantee between affiliated companies, and there have been no social and economic harm due to this reason. On the other hand, a holding company may prevent the risk of chain of chain production as it has a structure that takes responsibility only within the scope of a vertical investment structure and investment amount that can be transparent management, and it can contribute to the improvement of corporate ownership structure by separating strategic decision-making and daily decision-making through the characteristics of the holding company and its subsidiaries, and thus, it became institutionalized through the Fair Trade Act. Moreover, the policy authorities were exempted from the provision of the Fair Trade Act on the acquisition tax to the holding company as well as to promote the conversion of a holding company or the establishment of a new holding company within the existing enterprise group.

According to the current Monopoly Regulation and Fair Trade Act, "holding company" is a company whose main business is to control the business of a domestic company through the ownership of stocks (including shares) and whose total assets are at least 100 billion won on the balance sheet as of the date of registration of incorporation or the end of the immediately preceding business year, and its main business standards are at least 50/100 of its total assets (Article 2-1-2 of the Fair Trade Act and Article 2 of the Enforcement Decree of the same Act), and Article 8 of the Fair Trade Act requires the Fair Trade Commission to report its procedures to the company when it is incorporated or converted into a holding company (Article 2-1-2 of the Fair Trade Act and Article 2 of the Enforcement Decree of the same Act), and may take corrective measures if necessary, as well as direct regulations such as the restriction on the ratio of debt, the restriction on the ownership of shares of subsidiaries, and the

B) The purpose of introducing the special purpose company and the regulation of indirect investment law

A private equity fund is a collective investment scheme that issues equity securities through private placement as an investment limited partnership company that invests in equity shares or securities and manages them in order to participate in the management of the company subject to investment and improve its business structure or governance structure. A special purpose company refers to a stock company or limited company that invests its assets, such as the method of managing assets of the private equity fund (Articles 2, 144-2, 144-9 of the Indirect Investment Act; hereinafter referred to as “private equity fund, etc.

As such, in order to enhance the corporate value of the invested company and distribute profits to its members, a specialized investment company, etc. has a provision under the Indirect Investment Act, which was introduced on October 5, 2004 in order to create an opportunity to develop the asset management industry and ultimately develop the investment industry by promoting indirect investment, providing investors with various investment opportunities, and efficiently supplying capital that can be utilized for the restructuring, etc. of the company.

According to Article 144-17(1) of the Indirect Investment Act, Article 144-7(1)1 or 2 of the Indirect Investment Act provides that where a private investment company, etc. invests more than 10/100 of the total number of outstanding stocks or total amount of investment in another company or makes an investment so that it can exercise de facto control over major management matters of the company, the provisions governing holding companies under the Fair Trade Act shall not apply for 10 years from the date on which the requirements are met. In addition, Article 144-17(2) of the Indirect Investment Act provides that where a special purpose company satisfies the above requirements, a report shall be made to the Financial Services Commission if the said requirements are met, the Financial Services Commission shall notify the matters to the Fair Trade Commission, and Articles 144-7, 144-8, and 144-9 of the Indirect Investment Act restrict certain acts such as the limit on debt guarantee,

2) Whether special exception to acquisition tax on a special purpose company is applied

A) Interpretation Criteria

The Plaintiff’s acquisition of the instant shares becomes an oligopolistic stockholder of the said HK Mutual Savings Bank pursuant to Article 105(6) of the Local Tax Act and satisfies the external requirements of holding companies under the Monopoly Regulation and Fair Trade Act, there is no dispute. However, Article 144-17(1) of the Indirect Investment Act (hereinafter “Special Provision”) provides that the provisions concerning holding companies under the Fair Trade Act shall not apply until the tenth anniversary of the day on which the Plaintiff satisfies the pertinent requirements, and Article 120(6)8 of the Restriction of Special Taxation Act (hereinafter “this case’s exemption provision”) provides that acquisition tax shall be exempted in cases where a holding company becomes a holding company under the Fair Trade Act. In light of the meaning of the Special Provision, the issue of this case is whether to apply the exemption provision to the Plaintiff and the special purpose company, such as the Plaintiff, as a holding company under the Fair Trade Act, barring any special circumstance under the principle of no taxation without the law. It should be interpreted or analogically interpreted without any justifiable reason, but the legislative intent of the Special Provision need not be 2084.

B) Determination

In full view of the language and text of the Special Provision, the identity of the legal status based on the purport and nature of the introduction of the special provision and the holding company, and the structure compatibility with other relevant institutions, such as financial holding companies, it is reasonable to deem that the exemption provision of this case does not apply to the Plaintiff-specific purpose companies. Therefore, the instant disposition is lawful, and the Plaintiff’s assertion is without merit.

(1) The Special Provision provides that “The provisions on holding companies under the Fair Trade Act shall not apply to a special purpose company until the tenth anniversary of the day on which the requirements for the special purpose company are satisfied.” In light of the legal provisions, it is reasonable to view that the regulations on holding companies and the regulations on restrictions on activities under the Fair Trade Act include both the regulations on holding companies. It would be in violation of the legal provisions to interpret that the regulations on the definition of holding companies and the regulations on restrictions on activities except the regulations on the definition of holding companies are not included in the regulations on the definition of holding companies and the regulations on restrictions on activities under the Fair Trade Act. It would be reasonable to interpret that the regulations on the definition of holding companies and the regulations on restrictions on activities under the Fair Trade Act should not be included in the regulations on holding companies as a matter of course, without distinguishing the regulations on the definition of holding companies and the regulations on

(2) The main purpose of a holding company is to manage its management by continuously controlling its subsidiaries with its employees, including business activities. The provisions on the exemption of acquisition tax of a holding company was introduced as an encouragement plan to promote the conversion of a holding company into a holding company within an existing business group or the establishment of a holding company. On the other hand, the Plaintiff’s special purpose company, etc., such as the Plaintiff, etc., is to secure a company’s management right from the beginning as an investment organization that does not have a company’s substance, such as being unable to have a full-time officer or an employee, and to establish a place of business other than its head office, and to maximize the interests of investors by securing the company’s business value as much as possible. Thus, even if a special purpose company, etc. formally satisfies the external standards of a holding company under the Fair Trade Act, it is inappropriate to apply them as they are in light of the intent of introducing

(3) Article 2 subparag. 1-2 of the Fair Trade Act provides that “holding company whose main business is to control the domestic company’s business through stock ownership” is “a company whose business activities are to control the domestic company’s business through stock ownership.” On the other hand, corporate control of a holding company, etc. is merely a means of taking the main purpose of creating investment profits through restructuring, corporate acquisition, merger, etc., and thus, the Fair Trade Act is not in essence inconsistent with the original form of holding company originally scheduled

(4) The Fair Trade Act provides for various restrictions on activities in order to prevent a holding company from taking control of large-scale capital. However, the Indirect Investment Act provides that a special purpose company, etc. shall not be subject to such regulations for 10 years from the date it makes an investment in the form of holding company, even if the special purpose company, etc., is deemed to meet the requirements in the form of holding company. This provision, even if an investment company, etc. temporarily has the same type of holding company in the course of investment activities, is deemed to be aimed at generating profits through investment activities, contrary to the holding company’s nature, and thus, it shall be treated differently from the holding company in principle. However, if such investment situation continues for a long period of 10 years or longer, the purpose of the Act is to apply the provisions of the Fair Trade Act by deeming that it has the nature of holding company performing continuous control over the company subject to investment. Moreover, the provisions of the Indirect Investment Act

(5) A holding company should comply with the policy purpose to minimize the side effects of permitting holding companies on the one hand while carrying out its proper functions. Thus, it is insufficient to have only a requirement of a formal holding company under the Fair Trade Act, and further interpret it as a holding company in a genuine meaning under the Fair Trade Act only when it is subject to the application of various regulations to prevent the risk of side effects. This accords with the principle of justice and equity and the principle of substantial taxation.

(6) Article 144-17(3) of the Indirect Investment Act provides that “A private equity fund, etc. shall not be deemed a financial holding company under the Financial Holding Companies Act until the tenth anniversary of the day it satisfies the requirements under the Act.” In light of the purport of the Special Provision as seen earlier, it is natural to regard the phrase “not deemed a financial holding company” under Article 144-17(3) of the Indirect Investment Act as identical to the meaning of “the provision on holding companies under the Fair Trade Act” under the Special Provision. If it is interpreted that a private equity fund, etc., without such interpretation, is deemed a holding company as a financial holding company without distinguishing a holding company and a financial holding company, if the private equity fund, etc., satisfies the requirements of a financial holding company, acquisition tax will be imposed if it is exempted and meets the requirements. However, in light of the fact that there is no reasonable ground to determine differently the special cases of acquisition tax depending on the type of investable enterprises, such interpretation is inappropriate.

(7) In order to introduce and support the holding company system due to the foreign exchange crisis, the special form of the company called a special purpose company at the time of establishing a special provision to exempt the application of the acquisition tax imposition provision to oligopolistic stockholders was not likely to have existed, and it is not anticipated that such special purpose company system will be introduced in the future. Therefore, interpreting the exemption provision of this case to meet the original legislative purpose and purpose of the relevant laws and regulations as far as possible accords with the ideology of justice and equity.

3. Conclusion

Therefore, the plaintiff's claim of this case is dismissed as it is without merit, and since the judgment of the court of first instance is unfair with different conclusions, the defendant's appeal is accepted and the judgment of the court of first instance is revoked and the plaintiff's claim is dismissed as per Disposition.

[Attachment Form 5]

Judge Shin Young-young (Presiding Judge)