Seoul Administrative Court 201Gudan23422 (03.06)

Cho High Court Decision 201Do1671 (Law No. 106.20)

Foreign small and medium enterprises shall not be small and medium enterprises under the Income Tax Act.

In accordance with the legislative intent of the Framework Act on Small and Medium Enterprises, reducing tax rates for transferring stocks of small and medium enterprises under the Income Tax Act is to provide tax support to domestic small and medium enterprises in accordance with the legislative purpose of the Framework Act on Small and Medium Enterprises, and in light of the legislative purpose of the Framework Act on

2012Nu9569 Revocation of Disposition of Imposing capital gains tax

Maximum XX

The Director of the Pacific District Office

Seoul Administrative Court Decision 2011Gudan23422 decided March 6, 2012

July 6, 2012

September 7, 2012

1. The plaintiff's appeal is dismissed.

2. The costs of appeal shall be borne by the Plaintiff.

The judgment of the first instance shall be revoked. The defendant's disposition of imposition of KRW 000 on March 9, 201 against the plaintiff on March 9, 201 shall be revoked.

1. Details of the disposition;

A. On April 22, 2010, the Plaintiff transferred 10,000 shares of 10,000 shares (hereinafter referred to as “instant shares”) issued by the U.S. AINC. (hereinafter referred to as “Nonindicted Company”) as a corporation of the United States of America owned by the Plaintiff (hereinafter referred to as “Nonindicted Company”).

B. On August 23, 2010, the Plaintiff: (a) deemed the instant shares as shares of a small and medium enterprise; and (b) applied the tax rate of 10% to the Defendant, and paid KRW 000 as transfer income tax for the year 2010.

C. On March 9, 2011, the Defendant: (a) applied 20% tax rate to the Plaintiff on the ground that the instant shares are shares issued by a foreign corporation and do not constitute shares of small and medium enterprises; and (b) notified correction and notification of KRW 000 of the transfer income tax for the year 2010 (hereinafter “instant disposition”).

D. On April 27, 2011, the Plaintiff appealed to the Tax Tribunal, but the Tax Tribunal dismissed the said appeal on June 20, 201.

[Reasons for Recognition] Unsatisfy, Gap evidence 1 to 4, Eul evidence 1 to 4, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

Under the Income Tax Act, small and medium enterprises are exempted from small and medium enterprises under the Framework Act on Small and Medium Enterprises, and small and medium enterprises under the Framework Act on Small and Medium Enterprises do not necessarily mean domestic corporations. Although the non-party company is a U.S. corporation, 10% of the tax rate for the transfer of stocks of this case should also be applied to the tax rate for the transfer of stocks of this case.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

Article 118-5 (1) 2 of the former Income Tax Act (amended by Act No. 10175, Mar. 22, 2010; hereinafter referred to as the "Income Tax Act") provides that "the income tax on the income from the transfer of stocks or equity shares of overseas assets prescribed by Presidential Decree (property under subparagraph 3 of Article 118-2) among the income from transfer of overseas assets shall be the amount calculated by applying the tax rate of 10% for the stocks of small and medium enterprises and the tax rate of 20% for other stocks for the tax base of capital gains for the corresponding year."

However, in order to constitute a "small and medium enterprise", Article 104 (1) 11 (a) of the Income Tax Act must be a small and medium enterprise prescribed by the Presidential Decree. Article 167-8 of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 22151, May 4, 2010) provides that "small and medium enterprise prescribed by the Presidential Decree" refers to an enterprise falling under a small and medium enterprise under Article 2 of the Framework Act on Small and Medium Enterprises as of the transfer date of stocks, etc., and Article 2 of the former Framework Act on Small and Medium Enterprises (amended by Act No. 10952, Jul. 25, 201; hereinafter referred to as "small and Medium Enterprises Act"), Article 3 of the former Enforcement Decree of the Framework Act on Small and Medium Enterprises (amended by Presidential Decree No. 22652, Jan. 28, 201) stipulates that its characteristics, number of full-time workers, size of assets, sales, etc. shall be limited to domestic small and medium enterprises.

However, in light of the following circumstances acknowledged by comprehensively taking account of the provisions of the Income Tax Act and the Framework Act on Small and Medium Enterprises, it is reasonable to view that the shares of a small and medium enterprise subject to the tax rate of 10% (other shares are subject to the tax rate of 20% for other shares) with respect to the income accruing from the transfer of shares pursuant to Article 118-5 (1) 2 of the Income Tax Act mean the shares of a small and medium enterprise in Korea. Therefore, the shares of this case are shares issued by a foreign corporation and are included in the scope of a small and medium enterprise in the size of the non-party company, etc., and the shares of the non-party company do not constitute shares of a small and medium enterprise subject to the tax rate of 10% pursuant to Article 1

1) The purpose of the Framework Act on Small and Medium Enterprises is to support creative and independent growth of small and medium enterprises, upgrade their industrial structure, and develop the national economy in a balanced manner by providing for basic matters for fostering small and medium enterprises (Article 1). Accordingly, the central and local governments have the responsibility to establish and implement policies on small and medium enterprises taking into account the innovative capacity, competitiveness level, growth, etc. of small and medium enterprises (Article 3). Small and medium enterprises also have the responsibility to fulfill their social responsibility through technological development and management innovation to contribute to the development of the national economy and the increase of national welfare (Article 4). In addition, the Government provides for the expansion of entrepreneurial spirit (Article 5), technical guidance for business management and technology improvement (Article 7), cooperation among small and medium enterprises (Article 8), conversion of corporate structure (Article 9), protection of business sector (Article 10), establishment of the mutual aid system), establishment of the mutual aid system (Article 12), development of small and medium enterprises’ organizations and financial support (Article 13).

2) The reduction of tax rates due to the transfer of shares by small and medium enterprises under the Income Tax Act seems to have been intended to provide tax support to domestic small and medium enterprises in accordance with such legislative intent of the Framework Act on Small and Medium Enterprises. Furthermore, in light of the legislative purpose of the Framework Act on Small and Medium Enterprises as above, there is no reason to reduce tax rates due to the transfer of shares to foreign small and medium enterprises

3) Article 14(1) of the Framework Act on Small and Medium Enterprises provides that "the Government shall take necessary measures to facilitate export and import of small and medium enterprises and to promote cooperation with foreign enterprises in order to facilitate internationalization of small and medium enterprises." Thus, the small and medium enterprises referred to in the above provision should be interpreted as referring only to domestic small and medium enterprises, not foreign enterprises (including foreign small and medium enterprises).

3. Conclusion

Therefore, the plaintiff's claim is dismissed due to the lack of reason, and the judgment of the court of first instance is just in conclusion. The plaintiff's appeal is dismissed due to the lack of reason.