Cho High Court Decision 2010Du0513 ( December 03, 2010)

The disposition imposing capital gains tax on a large shareholder who owns 3% or more of the shares is legitimate.

If a person falls under a major shareholder as of the end of the immediately preceding business year, it is reasonable to view that all shares traded in the year concerned as a major shareholder and if he becomes a major shareholder during the pertinent business year, all shares traded as a major shareholder. Therefore, the disposition imposing capital gains tax is legitimate because he/she owns 3% or more of shares and is deemed to fall under a major shareholder.

2011Gudan4810 Revocation of Disposition of Imposing capital gains tax

LAA

○ Head of tax office

June 17, 201

July 15, 201

1. The plaintiff's claim is dismissed.

2. The plaintiff shall bear the litigation costs.

The Defendant’s disposition of imposition of capital gains tax of KRW 227,960,970 for the Plaintiff on January 14, 201 is revoked.

1. Details of the disposition;

A. The Plaintiff, a KOSDAQ-registered corporation, acquired shares issued by AAE (hereinafter “Nonindicted Company”), from January 21, 2005, through purchase and participation in capital increase increase for new shares, and held 3,284,070 shares (3.28%) on March 11, 2005. However, the Plaintiff did not file a transfer income tax report during the period from January 25, 2005 to August 11, 2005, even though it transferred 4,789,290 shares (transfer value 3,097,647,850 shares) during the period from January 25, 2005 to August 11, 2005.

B. As of March 11, 2005, the Defendant: (a) deemed that the Plaintiff owned more than 3% of the shares of the non-party company and became a major shareholder pursuant to Article 157(4) of the Enforcement Decree of the Income Tax Act; and (b) determined and notified the Plaintiff of KRW 227,958,630 on November 6, 2009 regarding the total transfer of shares.

C. On January 27, 2010, the Plaintiff appealed and filed a tax appeal on the same date. On December 3, 2010, the Tax Tribunal decided that the Plaintiff’s 4,000 shares of Nonparty Company transferred on January 25, 2005 excluded Nonparty Company from taxation subject to capital gains tax, and that the tax base and tax amount should be corrected. As a result, the Defendant corrected the calculation of the transfer value, etc. according to the determination, by adding KRW 2,340 to the Plaintiff on January 14, 201, the Plaintiff issued an additional notice of KRW 227,960,970, total amount of KRW 227,960,970 (hereinafter “instant disposition”).

[Reasons for Recognition] Facts without dispute, entry of Eul's evidence 1 to 7 (including each number), and the purport of the body before oral argument

2. Whether the disposition is lawful;

A. The plaintiff's assertion

The instant disposition is unlawful for the following reasons.

1) In interpreting Article 157 (4) 1 (2) of the Enforcement Decree of the Income Tax Act, the meaning of "short" is premised on the ownership of stocks even if part of it is owned by the non-party company as of the end of the immediately preceding business year. However, since the plaintiff did not own the stocks of the non-party company as of the end of the immediately preceding business year, it does not constitute a major shareholder under Article 157 (2) of the Income Tax Act.

2) The defendant deemed that the plaintiff participated in the issue of new shares issued by the non-party company on March 11, 2005 and became a major shareholder. However, on March 11, 2005, the date of the receipt of 2,854,070 shares that the plaintiff accepted by paying the subscription price for new shares on March 11, 2005, the plaintiff sold 430,000 shares of the shares held by the plaintiff on March 30, 2005, and on March 29, 2005, the previous company sold 430,00 shares of the shares held by the plaintiff on March 30, 2005. Accordingly, the plaintiff owned only 2,854,070 shares of the non-party company, and the plaintiff did not hold 3

3) Even if the Plaintiff becomes a major shareholder holding at least 3% of March 11, 2005, this would result from the occurrence of forfeited shares following the avoidance of capital increase by other shareholders' subscription and the resolution of non-issuance of certain forfeited shares of the non-party company, and thus, the Plaintiff becomes a major shareholder holding at least 3% of its own intent. In such a case, an exception provision that provides an opportunity to escape from the status of a major shareholder holding at least 3% of the taxable subject to capital gains tax by disposing of shares within a given period of time should be set up, and the Plaintiff’s bona fide victim, such as the Plaintiff, should be protected. The imposition of capital gains tax by deeming the Plaintiff as a major shareholder without such protective measure is unlawful against the principle of excessive prohibition. In addition, since the shares of the non-party company was suspended from trading on January 21, 2005, and thus, the Plaintiff did not have a normal way to avoid ownership more than 3%

4) Even if the Plaintiff becomes a major shareholder holding at least 3% of March 11, 2005, it is unlawful to impose capital gains tax on the transfer after April 6, 2005, since the Plaintiff sold 630,000 shares on March 31, 2005, and thereafter became a major shareholder, it is unlawful to impose capital gains tax on the transfer after April 6, 2005. Since the number of Plaintiff becomes a major shareholder is 3,284,070 shares, it is merely 3,284,070 shares to impose capital gains tax on the Plaintiff.

5) The Plaintiff’s imposition of penalty tax is contrary to the excessive prohibition principle, since it is not intentionally avoided the return of capital gains tax.

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

(1) Fact finding (the details of the Plaintiff’s acquisition and transfer of shares)

On March 11, 2005, the Plaintiff owned 3,284,070 shares of the non-party company as of March 11, 2005 with capital increase, etc., 3.28% of the shares of the non-party company 100,000,070 shares. The Plaintiff transferred 4,789,290 shares through the Association brokerage market (Market) for the period of January 21, 2005 as of August 11, 2005, based on the statements in evidence No. 2 and the evidence mentioned above.

(The following table omitted):

(2) Specific determination

(A) As to the Plaintiff’s assertion

If the Plaintiff does not hold all the shares of the pertinent corporation as of the end of the immediately preceding business year, it is difficult to find a reasonable ground for interpreting Article 157 (4) 1 of the Enforcement Decree of the Income Tax Act by limiting the amount of capital gains tax even if the shares were acquired at least 3% and sold in the next year, and such interpretation is difficult to recognize the validity in terms of the equity of taxation. Therefore, in the case of the “person who is short of 3/100 as of the end of the immediately preceding business year” as referred to in the second sentence of the same Article, it is reasonable to interpret that the “person who does not hold all the shares as of the end of the immediately preceding business year” includes the “person who does not hold at all

(B) As to the Plaintiff’s assertion

According to the evidence as seen earlier, the Plaintiff could recognize the fact that the Plaintiff paid all the subscription price for new shares on March 11, 2005, which appears to be the due date for the subscription of new shares (see Article 423 of the Commercial Act). The date of acquisition is March 11, 2005, which is the date of the payment of the subscription price under Article 162(1) of the Enforcement Decree of the Income Tax Act. The Plaintiff already owned 430.00 shares already owned on March 11, 2005, which is the date of acquisition of new shares, and thus falls under a major shareholder holding more than 3% after March 11, 2005. The date of the Plaintiff’s subscription for new shares asserted by the Plaintiff is irrelevant to the date on which the Plaintiff becomes the owner of new shares or the “acquisition date” under Article 157(4)1(2) of the Enforcement Decree of the Income Tax Act, and there is no reason for the Plaintiff’s assertion on other premise.

(C) As to the Plaintiff’s assertion

The Plaintiff holding stocks of an Association-registered corporation on the basis of the scale that would be subject to taxation pursuant to the Enforcement Decree of the Income Tax Act is expected to have a change in the holding ratio of his/her stocks at the time of acquiring the stocks. Therefore, in the process of acquiring new stocks, it is difficult to find reasonable grounds for the Plaintiff to provide an opportunity to escape from his/her position so that he/she would not be subject to capital gains tax, and imposing capital gains tax by deeming the Plaintiff as a major shareholder without such protective measure is not contrary to the principle of excessive prohibition. As seen below, once the Plaintiff becomes a major shareholder of 3% or more, even if he/she sells the stocks thereafter, it does not change the status of the Plaintiff as a major shareholder in the pertinent year, and thus, the existence of trade suspension measure does not affect the Plaintiff’s status. The Plaintiff’s assertion on a different premise is without merit.

(d)As to the claim of the plaintiff

In light of Article 157 (4) 1 of the Enforcement Decree of the Income Tax Act, in cases where a person holds 3% or more shares as of the end of the immediately preceding business year as of the transfer of all shares transferred in the relevant year as a major shareholder, and imposes capital gains tax, it is reasonable to deem that all shares transferred in the relevant year are transferred in the position of a major shareholder continuously as to all shares transferred during the relevant business year from the date of transfer to the end of the relevant business year as of the end of the relevant business year. In other words, if a person falls under the major shareholder as of the end of the immediately preceding business year, it is deemed that all shares traded in the relevant year as a major shareholder if he/she becomes the major shareholder during the relevant business year, it is reasonable to view that all shares traded until the end of the relevant business year as a major shareholder. Article 157 (6) of the former Enforcement Decree of the Income Tax Act of the same Act as of December 31, 199 separately based on the shareholding ratio as of the date of transfer of shares subject to capital gains tax as of the major shareholder.

(E) As to the Plaintiff’s assertion

Under the tax law, in order to facilitate the exercise of taxation right and the realization of tax claims, a taxpayer’s intentional or negligent act is an administrative sanction imposed in accordance with the law in cases where the taxpayer violates the reporting and tax liability as prescribed by the law without justifiable grounds, and the taxpayer’s intentional or negligent act does not constitute a justifiable reason (see Supreme Court Decisions 2000Du5944, Apr. 12, 2002; 2005Du3714, Oct. 26, 2006).

On a different premise, the Plaintiff’s above assertion is without merit.

(iii)In the case of a suit

The instant disposition is lawful.

3. Conclusion

Thus, the plaintiff's claim is dismissed as it is without merit.