The purpose of Articles 119(4) and 120(5) of the former Restriction of Special Taxation Act providing for registration tax and exemption from acquisition tax on business property acquired by transfer and acquisition, and the meaning of "net asset value of a place of business converted into a corporation" under Article 29(4) of the former Enforcement Decree of the Restriction of Special Taxation Act where some of the assets and liabilities of an existing place of business

The purport of exempting an individual from registration tax and acquisition tax on property for business acquired through the transfer of business in accordance with Articles 119(4) and 120(5) of the former Restriction of Special Taxation Act (amended by Act No. 9671 of May 21, 2009) is that the same business owner needs to impose registration tax and acquisition tax following the transfer of property only if the corporate form is changed so that the individual owner and the independent corporation are the subject of rights and obligations and manage the enterprise as the subject of rights and obligations. As such, in order for the same business owner to be deemed to be changed only into the type of business operation, the net asset value of the newly established corporation due to the transfer of business must be succeeded as it is to the newly established corporation. If the capital value of the newly established corporation due to the investment of the transferor of business falls short of the net asset value, it is reasonable to interpret the net asset value of the newly established corporation to be exempted from the net asset value of the existing business establishment due to lack of financial resources to pay for the transfer of business.

Articles 119(4) and 120(5) of the former Restriction of Special Taxation Act (amended by Act No. 9671 of May 21, 2009); Article 29(2) and (4) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21545 of June 19, 2009) (see current Article 29(5))

Jho Electronic Co., Ltd. (Attorney Ahn Byung-chul, Counsel for the defendant-appellant)

The head of Ansan-si (Attorney Park Jong-young, Counsel for the plaintiff-appellant)

Seoul High Court Decision 2011Nu27430 decided June 22, 2012

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

The grounds of appeal are examined.

1. Article 32 of the former Restriction of Special Taxation Act (amended by Act No. 9671 of May 21, 2009; hereinafter “the Act”) provides that where a resident is converted into a corporation by investing fixed assets for business in kind or by the method of business transfer as determined by the Presidential Decree, taxation carried forward shall apply to the fixed assets for business (Paragraph 1). However, Article 119(4) of the Act provides that registration tax shall be exempted on registration of assets for business acquired by investing in kind or by the method of business transfer under Article 32 of the Act, and Article 120(5) of the Act provides that the amount of net assets for business transfer should be deducted from the total amount of assets for business transfer, including the amount of assets for business transfer, and Article 29(2) of the former Enforcement Decree of the Restriction of Special Taxation Act (amended by Presidential Decree No. 21545 of Jun. 19, 2009; hereinafter “Enforcement Decree”) shall be the amount of net assets acquired by a person who has been incorporated in kind 3 or more than 4 years from the date of establishment.

2. Based on the evidence adopted, the lower court determined that: (a) the Nonparty’s operation of the Nonparty’s “large Electronic Co., Ltd.,” 168,00,000 won, which was 168,000,000 won, was to comprehensively transfer the assets and liabilities of the “large Electronic Co., Ltd,” to the Plaintiff upon entering into the instant contract for the transfer of business; (b) the net asset value of the “large Electronic Co., Ltd,” 36,302,256 won (i.e., assets 2,030,231,069 - 1,93,928,928,813 won, and 30,302,256 won of the lower judgment’s 30,000 won, which was 10,503,871 won and 147,489,41 won, which was part of the net asset value of the Plaintiff’s business to be transferred to the Plaintiff’s 2627,827,86,

3. However, in this case, although the Plaintiff’s capital following the Nonparty’s investment exceeds the net asset value of the existing place of business, it is difficult to accept for the lower court to determine whether Articles 119(4) and 120(5) of the Act apply on the basis of the net asset value of the existing place of business.

The purport of exempting an individual from registration tax and acquisition tax on business property acquired through the transfer and acquisition of business in Articles 119(4) and 120(5) of the Act is that the same business owner is merely a change in the form of business operation where the individual owner and the independent corporation are the subject of rights and obligations to operate the enterprise. As such, in order for the same business owner to be deemed to be changed only into the type of business operation, the net asset value of the newly established business owner should be succeeded as it is to the newly established corporation. If the capital of the newly established corporation falls short of the net asset value due to the shortage of financial resources to pay for the transfer and acquisition, and thus the newly established corporation cannot succeed to the net asset value of the object of the transfer and acquisition of business in consideration of the fact that part of the assets and liabilities of the existing business establishment cannot be succeeded to the net asset value of the object of the transfer and acquisition, not the net asset value of the existing business establishment converted into the net asset value of Article 29(4) of the Enforcement Decree.

Examining the facts in light of the aforementioned legal principles, since the Plaintiff’s capital 168,00,000,000 won due to the Nonparty’s investment falls short of 173,287,826 won in net asset value of the Plaintiff’s assets included in the subject of the instant transfer and takeover of business, the Plaintiff does not meet the requirements under Article 29(4) of the Enforcement Decree. Therefore, the instant real estate acquired by the Plaintiff through the instant transfer and takeover contract does not fall under the subject of Articles 119(4) and 120(5) of

Nevertheless, the lower court determined otherwise, that the instant real estate constitutes subject to Articles 119(4) and 120(5) of the Act, even if the Nonparty’s investment in the Plaintiff exceeds the net asset value of the instant real estate subject to the transfer and acquisition of business, solely on the ground that the amount of the Nonparty’s investment exceeds the net asset value of the instant real estate subject to the transfer and acquisition of business. In so doing, it erred by misapprehending the legal doctrine on “net asset value of the place of business converted into a corporation” under Article 29(4

The ground of appeal pointing this out is with merit.

4. Therefore, 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 Kim Yong-deok (Presiding Justice)