[1] In a case where a title trustee with respect to shares pays gift tax based on the deemed donation of title trust, whether the scope of the right to indemnity that can be exercised against the title truster under Article 25-2 of the Framework Act on National Taxes and Article 425 of the Civil Act extends to the whole amount of gift tax

[2] Whether the gift tax borne by the title trustee pursuant to the provision on deemed donation of title trust constitutes expenses to be borne by the title truster pursuant to Article 688 of the Civil Act (affirmative in principle), and whether the newly established provision of Article 4(4) of the former Inheritance Tax and Gift Tax Act allows the title trustee to exercise the right to indemnity under the Framework Act on National Taxes means that the title trustee should make a final burden on the gift tax related to the trust property under the title trust property prior to the establishment of the aforementioned provision, or that the title truster’

[1] A joint and several tax obligor who jointly discharged a tax obligation at his own expense may exercise a right to reimbursement against the other joint and several tax obligor (Article 25-2 of the Framework Act on National Taxes and Article 425 of the Civil Act). A gift tax is recognized as a joint and several tax liability for a donor only in cases where it is difficult to secure a tax claim against a donee, but the donor is jointly and severally liable to pay the amount jointly and severally with the title trustee even if it is not difficult to secure a tax claim against the donee unlike the general gift tax (see Articles 4(4) and 41-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003). Accordingly, where a title trustee paid a gift tax on shares, he/she may exercise a right to reimbursement against the title truster pursuant to the provisions of the Framework Act on National Taxes.

The scope of the right to indemnity should be deemed to extend to the whole amount of the gift tax borne by the trustee, unless there are special circumstances, such as the parties separately agreed on the share of gift tax or the trustee acquired economic benefits, such as dividend. The reasons are as follows.

Under the Framework Act on National Taxes, several provisions of the Civil Act concerning the right to indemnity of a person jointly liable for tax payment apply mutatis mutandis, but Article 424 of the Civil Act concerning the presumption of equal apportionment is excluded from applicable mutatis mutandis. Accordingly, internal share of tax liability among persons jointly liable for tax payment is not presumed to be equal, and unless otherwise agreed, it is determined in consideration of the legal relationship which forms the basis for establishing the relevant tax liability and the actual

The provision on deemed donation of title trust recognizes an exception to the substance over form principle in order to effectively prevent tax avoidance by using the title trust system. Such provision does not affect the legal relationship of the title trust property, such as stocks. Generally, profits arising from the title trust, including tax avoidance, etc., belong to the title truster, and the title truster enjoys economic benefits, such as dividends, etc. arising from the title trust

[2] Various taxes borne by a title trustee with respect to title trust property are expenses incurred in performing the business affairs under the title trust agreement, and the title truster is obligated to reimburse such expenses (Article 688 of the Civil Act). The gift tax borne pursuant to the provision on the deemed donation of title trust property is included in such expenses, barring

According to Article 4(4) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003), even if the title trustee is entitled to exercise the right to indemnity against a joint and several tax obligor under the Framework Act on National Taxes other than the right to indemnity under the Civil Act, the title trustee is not obliged to make a final burden on the gift tax related to the trust property under the title trust property prior to the establishment of the said provision, or the title truster’s obligation to

[1] Article 25-2 of the Framework Act on National Taxes, Articles 424 and 425 of the Civil Act, Articles 4(4) and 41-2 of the former Inheritance and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003) / [2] Article 688 of the Civil Act, Articles 4(4) and 41-2 of the former Inheritance and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003)

[1] Supreme Court Decision 2003Du13649 Decided December 23, 2004 (Gong2005Sang, 211) Supreme Court Decision 2004Du11220 Decided September 22, 2006 (Gong2006Ha, 2016) / [2] Supreme Court Decision 98Da6176 Decided October 12, 199 (Gong199Ha, 2307)

Plaintiff (Attorney Kim Hyun-do et al., Counsel for the plaintiff-appellant)

Defendant (Law Firm C&S, Attorneys Shin Young-chul et al., Counsel for the defendant-appellant)

Gwangju High Court Decision 2017Na13723 decided March 30, 2018

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

The grounds of appeal are examined.

1. The right to indemnity and scope of a title trustee who paid gift tax following the deemed donation of title trust (ground of appeal No. 1)

A. Joint and several tax payers who jointly discharged a tax obligation at their own expense may exercise a right to reimbursement against other joint and several tax obligors (Article 25-2 of the Framework Act on National Taxes and Article 425 of the Civil Act). Where it is difficult to secure a tax claim against a donee, a donor may be jointly and severally liable to pay the gift tax, but even if it is not difficult to secure a tax claim against a donee unlike the general gift tax, a truster is jointly and severally liable with a title trustee (see Articles 4(4) and 41-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003; hereinafter the same). Accordingly, where a title trustee paid a gift tax on shares, he/she may exercise a right to reimbursement against a title truster pursuant to the aforementioned provisions of the Framework Act on National Taxes.

The scope of the right to indemnity should be deemed to extend to the whole amount of the gift tax borne by the trustee, unless there are special circumstances, such as the parties separately agreed on the share of gift tax or the trustee acquired economic benefits, such as dividend. The reasons are as follows.

(1) Although Article 424 of the Civil Act applies mutatis mutandis to the right to indemnity of a person jointly liable for tax payment under the Framework Act on National Taxes, Article 424 of the Civil Act concerning presumption of equal sharing is excluded from the scope of application mutatis mutandis. Accordingly, the internal share of tax liability among persons jointly liable for tax payment is not presumed to be equal and, barring any separate agreement, determined by taking into account the legal relationship which forms the basis for establishing the relevant

(2) The provision on deemed donation of title trust recognizes an exception to the substance over form principle with the purport of effectively preventing the tax avoidance act using the title trust system (see, e.g., Supreme Court Decision 2003Du13649, Dec. 23, 2004). Such provision does not affect the private legal relationship of the title trust property such as stocks (see, e.g., Supreme Court Decision 2004Du11220, Sept. 22, 2006). Generally, the profit arising from the title trust, including tax avoidance, belongs to the title truster, and the economic profit, etc., such as the dividend accruing from the title trust property, etc. is enjoyed by

B. The lower court determined that, in light of the developments leading up to the conclusion of the instant title trust agreement and the relationship of attribution of profits accrued therefrom, the Defendant could claim for reimbursement against the Plaintiff regarding the total amount of gift tax borne by the Defendant in relation to the shares that was held in title trust by the Plaintiff in 2003. Such determination by the lower court is justifiable as it is based on the foregoing legal doctrine. In so determining, the lower court did not err by misapprehending the legal doctrine on the portion of joint

2. Repayment of gift tax in a title trust relationship before 2003 (ground of appeal No. 2)

A. Various taxes imposed on the property held in title trust by the title trustee are expenses incurred in performing the affairs under the title trust agreement, and the title truster is obligated to reimburse such expenses (see Article 688 of the Civil Act, Supreme Court Decisions 98Da6176, Oct. 12, 1999). The gift tax borne according to the provisions on deemed donation of title trust property is included in such expenses, unless there are special circumstances.

According to the new establishment of Article 4(4) of the former Inheritance Tax and Gift Tax Act, even if the title trustee is able to exercise the right to indemnity against joint and several taxpayers under the Framework Act on National Taxes in addition to the right to indemnity under the Civil Act, the title trustee does not have to make a final burden on the gift tax related to the trust property prior to the establishment of the same provision, or deny

B. The lower court determined that the gift tax borne by the Defendant in relation to the shares held in title trust in 2000 and 2001 may be fully repaid from the Plaintiff as necessary expenses for the handling of delegated affairs, etc. In so doing, the lower court did not err by misapprehending the legal doctrine on the gift tax burden relationship arising from the deemed donation in title trust, contrary to what is alleged in the grounds of appeal.

3. Conclusion

The Plaintiff’s appeal is dismissed as it is without merit, 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 Kim Chang-suk (Presiding Justice)