Daejeon High Court 2012Nu2847 (2013.07.04)

In the case of purchasing assets at a higher level than the market price with the acquisition of new stocks issued by a corporation which is a stockholder of a special relationship corporation, the wrongful calculation shall not be applied.

Even if a corporation which is a stockholder has acquired new stocks from another corporation which is a person with a special relationship at a higher price than the market price, it shall not be applied to the calculation of wrongful acts because it constitutes a case where the assets are purchased at a higher price than the market price or a case corresponding thereto: Provided, That the calculation of wrongful acts may apply only to cases where other shareholders who received profits by high

2013Du15729 Revocation of Disposition of Imposing Corporate Tax

AA Stock Company

The Director of the National Tax Service

Daejeon High Court Decision 2012Nu2847 Decided July 4, 2013

July 24, 2014

The judgment of the court below is reversed, and the case is remanded to Daejeon High Court.

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

1. Article 52(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same) provides that where a domestic corporation's tax burden on its income is deemed to have been unjustly reduced due to transactions with a person with a special relationship, the tax authority may calculate the amount of income for each business year of the corporation regardless of the act of the corporation or calculation of the amount of income of the corporation (hereinafter "Calculation by wrongful act"), and Article 88(1) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009; hereinafter the same) upon delegation from Article 8(4) of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 21302, Feb. 4, 2009; hereinafter the same) provides that "where assets are purchased at a price higher than the market price in the capital increase of the corporation," subparagraph 8(b) provides that "where a corporation, a person with a special relationship.

2. In full view of the adopted evidence, the lower court acknowledged the following facts: (a) the Plaintiff’s act of distributing 100% of the total outstanding shares to BB (hereinafter “B”) on June 4, 2008 by independently participating in the capital increase with 150 billion won of new shares (hereinafter “new shares”) which was held by BB (hereinafter “B”); and (b) the Plaintiff’s acquisition of 150 billion won of new shares (hereinafter “new shares”) at the time of the above capital increase; (c) not only caused net losses for three consecutive years at the time of the above capital increase but also limited to 0 billion won per share under the supplementary assessment method under the Inheritance Tax and Gift Tax Act; and (d) the Plaintiff’s act of acquiring the new shares in this case from BB (a person with a special relationship) and distributing the difference between the market price and the value of the new shares to BB (a person with a special relationship) constitutes a case where the assets were purchased at a higher price than the market price; and accordingly, (d) determined that the Defendant’s disposition of this case was lawful for the Plaintiff’s fiscal year.

3. However, we cannot accept such a determination by the court below.

In light of the language and purport of Articles 15, 17, 19, and 20 of the former Corporate Tax Act and each item of Article 88(1)1 and 8 of the former Enforcement Decree of the Corporate Tax Act, which provide that an increase or decrease in net assets due to capital transactions shall not be included in gross income or deductible expenses, in cases where a corporation, such as a stockholder, etc. distributes profits to other stockholders, etc. who are a specially related person, etc., as a whole, the stockholders, etc. shall not be deemed as a wrongful calculation by applying Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act, even if a corporation, such as a stockholder, etc., purchased assets at a price higher than the market price of the new stocks issued from another corporation, which is a specially related person, and thus, it shall not be deemed as a wrongful calculation by applying Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act (see Supreme Court Decision 2012Du3888, Jun. 26, 2014).

Therefore, even if the Plaintiff acquired the instant new shares from BB, a person with a special relationship at a higher price than the market price, it does not constitute “the purchase of the assets subject to the avoidance of wrongful calculation under Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act at a higher price than the market

Nevertheless, the lower court determined otherwise that the Plaintiff’s acquisition of the instant new shares constitutes the subject of the avoidance of wrongful calculation under Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act. In so doing, the lower court erred by misapprehending the legal doctrine on the subject of the avoidance of wrongful calculation under Article 88(1)1 of the Enforcement Decree of the said Act

4. Therefore, without examining the remaining grounds of appeal, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench