Whether a gratuitous share holder allocated in proportion to the shares held to a title trustee of existing shares is subject to the deemed donation under the main sentence of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act as a corporation issuing stocks transfers earned surplus to its capital (negative in principle)

The main text of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”) is one of the exceptions to the principle of substantial taxation as prescribed by Article 14 of the Framework Act on National Taxes, and is a provision of restrictive application within the scope to realize tax justice by preventing abuse of title trust as a means of tax avoidance. The real owner and the nominal owner of shares transfer of retained earnings to the nominal owner as a result of the transfer of retained earnings into capital by a corporation that issued shares without compensation is allocated to the nominal owner. Thus, even if the actual owner and the nominal owner of shares transfer the retained earnings to the nominal owner, there is no change in the net assets or profits of the issuing corporation, and the share ratio of the shareholders, and thus, it cannot be said that there is no additional purpose of tax avoidance other than the purpose of tax avoidance by the existing shares under title trust, barring special circumstances, it is not subject to deemed donation under the main sentence of Article 45-2(1) of the former Inheritance Tax Act.

Article 14 of the Framework Act on National Taxes, Article 45-2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007), Article 17 of the former Income Tax Act (amended by Act No. 8825 of Dec. 31, 2007)

Supreme Court Decision 2003Du13649 Decided December 23, 2004 (Gong2005Sang, 211) Supreme Court Decision 2004Du1223 Decided January 28, 2005 (Gong2004Du11220 Decided September 22, 2006)

Plaintiff 1 and one other (Attorneys Lee Im-soo et al., Counsel for the plaintiff-appellant)

Gangwon Tax Office et al.

Seoul High Court Decision 2009Nu12312 decided November 5, 2009

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

The grounds of appeal are examined.

1. The main text of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”) provides that “where the actual owner and the nominal owner are different from that of the property (excluding land and buildings; hereinafter in this Article the same shall apply), the value of the property shall be deemed to have been donated to the actual owner by the nominal owner on the date when the actual owner and the nominal owner are registered, etc. as the nominal owner (where the property requires a transfer of ownership, referring to the date following the end of the year following the year in which the date of acquisition of ownership falls), notwithstanding the provisions of Article 14 of the Framework Act on National Taxes.” However, the proviso of subparagraph 1 of the same Article provides that the same shall not apply to “where the property is registered in another person’s name without any purpose of evading taxes, or a transfer of ownership is not

The main text of Article 45-2(1) of the former Inheritance and Gift Tax Act is one of the exceptions to the substance over form principle under Article 14 of the Framework Act on National Taxes, which is limited to the extent that the title trust is intended to realize tax justice by preventing abuse of the title trust as a means of tax avoidance (see, e.g., Supreme Court Decision 2004Du11220, Sept. 22, 2006). In view of the fact that even if the actual owner of shares and the nominal owner transfer of retained earnings of the issuing corporation to the nominal owner as a result of the transfer of stocks into capital, the net assets or profits of the issuing corporation, and the actual shareholder’s share ratio are not changed, and the actual shareholder did not transfer the title to the nominal owner in his name with respect to the gratuitous owner, barring special circumstances, it cannot be said that there is an additional purpose of tax avoidance other than the purpose of tax avoidance under the title trust of existing stocks, it is not subject to the deemed donation of gift under Article 45-2(1) of the former Tax Act.

2. The court below acknowledged the facts as stated in its reasoning based on the evidence of employment, and found that the plaintiffs' taxation of gift tax in this case by deeming that the provision on deemed donation under the main sentence of Article 45-2 (1) of the former Inheritance and Gift Tax Act does not apply to the gratuitous share allocated by the above company's stocks under title trust from the actual shareholders, such as the non-party, upon transferring the earned surplus into capital, is unlawful. In light of the above provisions and legal principles, the judgment of the court below is just, and there is no error of law by misapprehending the legal principles as to Article 45-2 of the former Inheritance and Gift Tax Act

3. Therefore, all appeals are dismissed, and the costs of appeal are assessed against the losing party. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Min Il-young (Presiding Justice)