[1] Whether gift tax may be imposed by calculating the value of donated property according to the taxation requirement under Article 42(1)3 of the former Inheritance Tax and Gift Tax Act even if the taxation requirement under Article 40(1)3 of the same Act is not satisfied (affirmative), and whether the same applies to cases where the former Inheritance Tax and Gift Tax Act applies even if the provisions on the general principle of calculating the value of donated property were newly established under the Inheritance Tax and Gift Tax Act amended by Act No. 13557, Dec. 15, 2015; and even if the provisions stipulated under Article 42(1)3 were deleted from the said provisions (affirmative)

[2] Whether Article 42(3) of the former Inheritance Tax and Gift Tax Act is applicable to cases where a special relationship exists at the time of converting convertible bonds into stocks with regard to the conversion of convertible bonds, etc. by convertible bonds, etc. subject to gift tax under Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (negative)

[1] In light of Articles 2(3), 40(1)1, and 42(1)3 of the former Inheritance and Gift Tax Act (amended by Act No. 1357, Dec. 15, 2015; hereinafter “former Inheritance and Gift Tax Act”), the contents, language, and legislative intent of Article 42(1)3 of the former Inheritance and Gift Tax Act, Article 42(1)3 of the former Inheritance and Gift Tax Act is one of the provisions for calculating the value of donated property comprehensively defined as gift tax under Article 40(3) of the former Inheritance and Gift Tax Act (amended by Act No. 1357, Dec. 15, 2015; hereinafter “former Inheritance and Gift Tax Act”), even if the taxation requirement of Article 40(1)3 of the former Inheritance and Gift Tax Act is not satisfied, the provisions for calculating the value of donated property under Article 42(1)3 of the former Inheritance and Gift Tax Act can not be seen as Article 42(1)3 of the former Inheritance and Gift Tax Act.

[2] Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter “former Inheritance Tax Act”) provides that “Where a transaction between a person who is not a person with special interest is deemed to have justifiable grounds as a transactional practice, Paragraph (1) shall not apply.” Article 42(3) of the former Inheritance Tax and Gift Tax Act provides that “The same shall not apply to the transaction between a person with special interest where the transaction is deemed to have justifiable grounds as a transactional practice.”

Considering such provisions, language, legislative intent, etc. of the former Inheritance and Gift Tax Act, the case where a special relationship exists at the time of converting convertible bonds into stocks does not constitute “transaction between persons who are not a related party” and thus, is not subject to Article 42(3) of the former Inheritance and Gift Tax Act.

[1] Articles 2(3)(see Article 2 subparag. 6), 40(1)1 and 42(1)3(see Article 42-2(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 13557, Dec. 15, 2015); / [2] Article 42(1)3(3)(see Article 42-2(2) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 13557, Dec. 15, 2015);

Plaintiff (Law Firm LLC, Attorneys Jeon Young-young et al., Counsel for the plaintiff-appellant)

Samsung Head of Samsung Tax Office

Seoul High Court Decision 2018Nu52688 decided November 16, 2018

The appeal is dismissed. The costs of appeal are assessed against the plaintiff.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Regarding ground of appeal No. 1

A. Article 2(3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter “former Inheritance Tax Act”) provides that “The term “donation” means a free transfer (including transfer at a remarkably low price) of any tangible or intangible property, regardless of the name, form, purpose, etc. of such act or transaction, or an increase in the value of another person’s property by means of a direct or indirect method (including transfer at a remarkably low price) or by contribution. In addition, Article 40(1) of the former Inheritance Tax and Gift Tax Act provides that “The gains from acquiring convertible bonds, etc. in a situation in which a special relationship exists, and the profits from converting, etc. of the acquired convertible bonds, etc. into the stocks pursuant to the above-mentioned convertible bonds, etc. ( Subparagraph 2) shall be deemed the value of property.”

Meanwhile, Article 42(1) of the former Inheritance and Gift Tax Act provides that “In cases where profits other than donations under Article 40, which fall under any of the following subparagraphs and exceed the standard prescribed by Presidential Decree, are earned, such profits shall be deemed the value of donated property of the person who has acquired such profits.” Moreover, Article 42(1)3 of the same Act provides that “the profits acquired from transactions which increase or decrease the corporation’s capital, such as conversion of stocks, etc. by convertible bonds, etc. pursuant to Article 40(1)” shall be one of “donations other than donations pursuant to Article 40,” and that “the profits shall be calculated by subtracting the value of conversion,

As above, Article 42(1)3 of the former Inheritance and Gift Tax Act provides that where profits, etc. derived from converting convertible bonds, etc. acquired from a specially related person into stocks, etc., other than Article 40(1) of the former Inheritance and Gift Tax Act, which is subject to gift tax, have been acquired more than the profits prescribed by Presidential Decree due to the conversion of stocks, etc. by convertible bonds, etc., such profits shall be deemed as subject of comprehensive gift tax, and the purpose of this provision is to cope with the

Considering the content, text, legislative purport, etc. of the former Inheritance and Gift Tax Act, Article 42(1)3 of the former Inheritance and Gift Tax Act is one of the provisions for calculating the value of donations comprehensively defined as gift tax subject to gift tax under Article 2(3) of the former Inheritance and Gift Tax Act, and even if the taxation requirement under Article 40(1)3 of the former Inheritance and Gift Tax Act is not satisfied, it is reasonable to view that the gift tax may be imposed by calculating the value of donated property pursuant to Article 42(1)3 of the former Inheritance and Gift Tax Act if the taxation requirement under Article 42(1)3 of the former Inheritance and Gift Tax Act is satisfied. Although Article 42(1)3 of the former Inheritance and Gift Tax Act was newly established on December 15, 2015, and Article 31 of the former Inheritance and Gift Tax Act was deleted from the general principle of calculating the value of donated property under Article 42(1)3 of the former Inheritance and Gift Tax Act, it cannot be deemed otherwise applied to the case where the former Inheritance and Gift Tax Act is applied.

B. Review of the reasoning of the first instance judgment as cited by the lower court and the record reveals the following facts.

(1) On February 6, 2012, the Plaintiff entered into a contract to purchase 5,208,000,000 won in total, of the management rights for the non-party and the non-party’s share of 3,500,000 (hereinafter “instant shares”) owned by the non-party, the largest shareholder, as the representative director of the Co., Ltd., Co., Ltd., a corporation listed on KOSDAQ (hereinafter “Co.”), and Co., Ltd.

(2) On February 6, 2012, Co., Ltd. entered into a contract with 5 Plaintiff et al. and 4,576,270 shares of 2,69,99,300 won per share (590 won per share) with a third party; and 3,389,830 shares (hereinafter “instant new shares”) were allocated to the Plaintiff.

(3) On February 6, 2012, Co., Ltd entered into a contract with five (5) Plaintiff et al. and the total face value of KRW 5,330,00,000 (the issuance date February 9, 2012; the maturity date February 9, 2014; the bond interest rate of KRW 5% per annum; the conversion price of KRW 779; the conversion period of February 9, 2013 to January 9, 2014; and the Plaintiff allocated convertible bonds of KRW 4,400,000 (hereinafter “instant convertible bonds”).

(4) On February 9, 2012, the Plaintiff: (a) acquired the instant convertible bonds and the instant new stocks on February 10, 2012; and (b) acquired the instant old shares on February 10, 2012, and became the largest shareholder of the Center; and (c) was appointed as the representative director of the Center on March 16, 2012.

(5) On February 13, 2013, the Plaintiff converted the instant convertible bonds into 5,648,267 shares (hereinafter “instant shares”). At the time of conversion, the value of the instant shares was KRW 1,190 per share.

(6) On January 14, 2015, based on Article 42(1)3 of the former Inheritance Tax Act, based on the difference between KRW 1,190 per share value of the instant shares at the time of exercising the conversion right and KRW 779 won, the Defendant calculated the value of donated property due to the conversion of the instant convertible bonds as KRW 2,321,437 [=5,648,267 x (1,190 - 779 won; hereinafter “the converted profit of this case”)], and imposed a gift tax of KRW 1,057,86,750 (including penalty tax) on the Plaintiff in 2013.

C. Examining these factual relations in light of the aforementioned provisions and legal principles, it is reasonable to view that the Plaintiff’s acquisition of the instant convertible bonds from Co., Ltd. without a special relationship on February 9, 2012, and obtained profit equivalent to the instant conversion profit by converting the instant convertible bonds into the instant stocks on February 13, 2013, following the acquisition of the instant new stocks and the instant shares by Co., Ltd., which became a specially related party to Co., Ltd., and thus, the instant conversion profit constitutes subject to gift tax under Article 42(1)3 of the former Inheritance Tax and Gift Tax Act.

D. In the same purport, the lower court is justifiable to have rejected the Plaintiff’s assertion that the instant conversion profit cannot be taxed under Article 42(1)3 of the former Inheritance and Gift Tax Act by deeming that the instant conversion profit constitutes subject to gift tax under Article 42(1)3 of the former Inheritance and Gift Tax Act. In so doing, the lower court did not err by misapprehending the legal doctrine on the interpretation and application of Articles 2(3), 40(1), and 42(1)3 of the former Inheritance and Gift Tax Act, contrary to what is alleged in the grounds of appeal. The Supreme Court precedents cited in the grounds of appeal by the Plaintiff are different from the instant case, and thus are inappropriate to be invoked in the instant case.

2. Regarding ground of appeal No. 2

A. Article 42(1)3 of the former Inheritance and Gift Tax Act provides that “The taxable object of gift tax shall be the profits derived from transactions which increase or decrease the corporation’s capital through the conversion of convertible bonds, etc. by conversion of stocks pursuant to convertible bonds, etc., and Paragraph (3) of the same Article provides that “Where a transaction between a person who is not a related party is deemed to have justifiable grounds as a transactional practice, Paragraph

Considering such provisions, language, legislative intent, etc. of the former Inheritance and Gift Tax Act, the case where a special relationship exists at the time of converting convertible bonds into stocks does not constitute “transaction between persons who are not a related party” and thus, is not subject to Article 42(3) of the former Inheritance and Gift Tax Act.

B. The lower court acknowledged that the Plaintiff had a special relationship with the Center since it exercised de facto influence over the management of the Center through the exercise of the right to appoint and dismiss executives as the largest shareholder and the representative director of the Co Center at the time of converting the instant convertible bonds, and determined that Article 42(3) of the former Inheritance and Gift Tax Act cannot be applied to the instant case.

C. Examining the aforementioned legal principles and records, the lower court did not err by misapprehending the legal doctrine on the interpretation and application of Article 42(3) of the former Inheritance and Gift Tax Act, contrary to what is alleged in the grounds of appeal.

3. Conclusion

Therefore, the appeal is 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.

Justices Ahn Jae-chul (Presiding Justice)