In case where a company becoming a complete parent company through an all-inclusive share swap acquires the shares of the company becoming a complete subsidiary at a price higher than its market price, whether the amount included in the corporation's gross income due to the denial of wrongful calculation should be disposed of as "other outflow from the company" under Article 88 (1) 8 of the former Enforcement Decree of the Corporate Tax Act (affirmative), and whether the dividends, bonuses, or other income may be disposed of to the person to whom

Since all-inclusive share swap is a transfer of assets for consideration, where a company that holds the total number of shares issued by another company (hereinafter “wholly owned company”) through an all-inclusive share swap acquires shares of a company that becomes a wholly owned company at a price higher than the market price, the assets of the corporation are over-paid, and thus, the excess amount is excluded from the acquisition price of the assets by wrongful calculation under Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19891, Feb. 28, 2007; hereinafter the same) and the amount is included in the gross income of the corporation that is a wholly owning parent company.

Article 106(1)3 of the former Enforcement Decree of the Corporate Tax Act provides that where it is inappropriate to impose a liability to pay income tax on a person to whom the same income is attributed, such as where the amount included in the corporation’s gross income is leaked out of the company, the same income is constituted taxable income of the person to whom the income is attributed, it shall be disposed of as “other outflow from the company” which only determines the fact of outflow without disposition of income on the person to whom the income is attributed. However, the profits earned by the shareholder of the company to be a wholly owned subsidiary through an all-inclusive share swap are donated as “the donation of profits from transactions that increase corporate capital,” and gift tax is imposed pursuant to Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (Amended by Act No.

Therefore, as a company becoming a complete parent company through an all-inclusive share swap acquires the shares of the company becoming a complete subsidiary at a price higher than its market price, the amount to be included in the corporation's gross income due to the denial of wrongful calculation shall be disposed of as "other outflow from the company" under Article 88 (1) 8 of the former Enforcement Decree of the Corporate Tax Act, and the dividends, bonuses, or other income cannot be disposed of to

Article 67 of the former Corporate Tax Act (Amended by Act No. 8831, Dec. 31, 2007); Article 88(1)1, 8(a), (b), and (c), Article 106(1)1, and 3(i) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 19891, Feb. 28, 2007); Article 360-2 of the Commercial Act; Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 9916, Jan. 1, 2010)

Supreme Court Decision 2011Du23047 Decided April 24, 2014 (2014Sang, 1150)

Esia Co., Ltd. (Attorneys Jeong Byung-chul et al., Counsel for the defendant-appellant)

Seoul Regional Tax Office

Seoul High Court Decision 2012Nu14660 decided October 19, 2012

The judgment below is reversed and the case is remanded to Seoul High Court.

Judgment ex officio is made.

1. Article 67 of the former Corporate Tax Act (amended by Act No. 8831, Dec. 31, 2007; hereinafter the same) provides that when filing a report on the corporate tax base, or determining or revising the corporate tax base, the amount included in the calculation of earnings shall be disposed of as prescribed by the Presidential Decree, such as bonus, dividend, other outflow from the company, internal reserve, etc. according to the person to whom such income accrue, and the main sentence of Article 106 (1) 1 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19891, Feb. 28, 2007; hereinafter the same shall apply) provides that "where it is obvious that the amount included in the calculation of earnings has leaked from the merger to the company, it shall be disposed of as dividends, bonuses, other income, or other outflow from the company to whom the stocks are reverted, or where the market price is higher than that of the company to whom the stocks are purchased under Article 106 (1) 3 (i) of the former Enforcement Decree of the Corporate Tax Act.

Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 9916, Jan. 1, 2010; hereinafter the same) provides that “the profit acquired by the increase or decrease of the capital (including the amount of investment) of a corporation, such as investment, reduction of capital, merger (including division and merger), division, and conversion, acquisition, and exchange of stocks through convertible bonds, etc. under Article 40(1) of the same Act (hereinafter referred to as “stock conversion, etc.”) or the profit acquired by the change of the ownership shares or the value of the corporation through the transfer, acquisition, business exchange, business exchange, restructuring, etc. of the corporation. In such cases, the profit shall be the value calculated by subtracting the value of the stock conversion, etc. from the value of the stock as at the time of stock conversion, etc. in cases of stock conversion, etc., and in cases other than stock conversion, etc., it shall be the

Meanwhile, an all-inclusive share swap under Article 360-2 of the Commercial Act is a combination of the transactions in which the shares of the company becoming a wholly owned subsidiary are transferred by the company becoming a wholly owned subsidiary through an all-inclusive share swap (hereinafter referred to as "wholly owned subsidiary"), and the transactions in which shareholders of the company becoming a wholly owned subsidiary become shareholders of the company becoming a wholly owned subsidiary by being allocated new shares related to the shares of the company becoming a wholly owned subsidiary from the company becoming a wholly owned subsidiary and becoming shareholders of the company becoming a wholly owned subsidiary. Therefore, an all-inclusive share swap basically has the character of "transaction increasing corporate capital," but since the capital investment is made by the kind of shares of the company becoming a wholly owned subsidiary, it is in existence of the nature of "transaction in which profit and loss is to be transferred for consideration" to such extent.

As such, since an all-inclusive share swap is characterized as a transfer of assets at a cost, if a company that becomes a complete parent company through an all-inclusive share swap acquires the shares of a company that becomes a complete subsidiary at a price higher than its market price, the assets of the corporation are excessively appropriated, and thus, the excess amount at the market price is excluded from the acquisition price of assets by the rejection of unfair act and calculation under Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act, while such amount is included in the

Article 106(1)3 of the former Enforcement Decree of the Corporate Tax Act provides that where it is inappropriate to impose a liability to pay income tax on a person to whom the same income is attributed, such as where the amount included in the gross income of the corporation was leaked outside of the company, the same income is constituted taxable income of the person to whom the income is attributed, it shall be disposed of as “other outflow from the company” which only determines the fact of leakage without disposition of income on the person to whom the income is attributed. However, the profits earned by the shareholder of the company to be a wholly owned subsidiary through an all-inclusive share swap are donated as “the donation of profits from transactions that increase the corporation’s capital,” and gift tax is imposed pursuant to Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (see Supreme Court Decision 2011Du

Therefore, as a company becoming a complete parent company through an all-inclusive share swap acquires the shares of the company becoming a complete subsidiary at a price higher than its market price, the amount to be included in the corporation's gross income due to the denial of wrongful calculation should be disposed of as "other outflow from the company" corresponding to Article 88 (1) 8 of the former Enforcement Decree of the Corporate Tax Act, and it cannot be disposed of as dividends, bonuses, or other income

2. Nevertheless, the lower court determined otherwise, that the Defendant’s instant disposition, which notified the Plaintiff, who becomes a complete parent company under the instant exchange contract, of the change in the amount of income pursuant to the rejection of unfair act and calculation under the Corporate Tax Act, was lawful, on the ground that the company becoming a complete parent company by an all-inclusive share swap received shares from the shareholders of the company becoming a complete parent company at a high price, as to the amount included in the corporation’s gross income as bonus or other income. In so doing, the lower court erred by misapprehending the legal doctrine on the object to be disposed of as “other outflow from the company” under Article 67 of the former Corporate Tax Act and Article 106(1)3(i) of the former Enforcement Decree

3. Therefore, without further proceeding to decide on the grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Lee Sang-hoon (Presiding Justice)