[1] In a case where a certain transaction or act constitutes the concept of gift under Article 2(3) of the former Inheritance Tax and Gift Tax Act, whether a gift tax may be levied pursuant to Article 2(1) of the same Act (affirmative in principle)

[2] In a case where an individual value computation provision regulates a specific type of transaction or act, which limits only certain transaction or act as subject to gift tax, and limits the scope of taxation, thereby setting the scope and limitation of gift tax, whether gift tax may be levied if the transaction or act excluded from the taxable subject or scope of gift tax among the transaction or act regulated by the individual value calculation provision accords with the concept of gift under Article 2(3) of the former Inheritance Tax and Gift Tax Act (negative)

[3] Legislative intent of Article 41(1) of the former Inheritance Tax and Gift Tax Act; Article 31(6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act / Whether gift tax may be imposed on a shareholder, etc. on “the portion exceeding losses out of profits from a transaction with a loss corporation,” or “profit from a transaction with a corporation other than a corporation that has no loss due to business suspension or discontinuance,” based on Article 2(3) of the former Inheritance Tax and Gift Tax Act (negative in principle)

[1] In light of the fact that the concept of comprehensive gift under tax law is introduced to cope with an irregular inheritance or donation in advance, and that the previous provision on deemed donation is uniformly converted into the time of donation and the provision on calculation of donated property, in principle, if a certain transaction or act constitutes the concept of gift under Article 2 (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007), gift tax can be levied pursuant to Article 2 (1) of the same Act.

[2] The conversion of the provision on deemed donation into the provision on the time of donation and calculation of the value of donated property (hereinafter “the provision on calculation of the value of donated property”) is changing from “the legal fiction, etc. of donation” to “Calculation of the value of donated property.” The title of the provision on deemed donation was changed from “the legal fiction of donation” to “donation,” and each provision was changed to “the value of donated property” as “the value of donated property.” As a result, the content relating to taxation requirements, such as the scope of taxation and the scope of taxation, which have been regulated by the previous provision on deemed donation, remains. In other words, the provision on calculation of individual value is required to have a special relationship between parties to a transaction with a certain type of transaction or at least 30% of the market price, or the difference between the market price, etc. and the value of the donated property is required to be more than a certain amount, and the matters relating to the scope of taxation or scope of taxation at any time is amended from time to time to time by reflecting the taxpayer’s predictability and stability of tax relations and stability.

Therefore, in a case where a provision on the assessment of individual value limits only a certain transaction or act as subject to gift tax and limits the scope of taxation by prescribing the scope and scope of taxation of gift tax in order to ensure taxpayers’ predictability, etc., even if a transaction or act excluded from the scope and scope of taxation of gift tax among the transaction or act governed by the provision on the assessment of individual value accords with the concept of gift under Article 2(3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007), gift tax cannot be levied on such transaction or act.

[3] Article 41(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter the same shall apply); Article 31(6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010); where a person having a special relationship with a corporation with a deficit (hereinafter referred to as “contributed corporation”) or a stockholder or investor of a corporation under temporary closure or permanent closure of business (hereinafter “shareholders, etc.”) engages in such transactions as providing property free of charge to a corporation under temporary closure or permanent closure of business, and thereby the profits earned by the shareholders, etc. are 10 million won or more subject to gift tax, such transactions shall be limited to the calculation of the value of donated property. In other words, the purpose of imposing gift tax on the change of donation by donation of property to the corporation’s stockholders, etc.

This is based on the legislative intent to exclude profits acquired by stockholders, etc. from taxable subject to gift tax as transactions with a legal entity that imposes corporate tax on assets increase profits, etc. while running a business normally, and such legislative intent cannot be deemed to have been changed due to the introduction of the complete comprehensive taxation system. As such, the limitation was established not to impose gift tax on stockholders, etc. on “profit from transactions with a legal entity that does not have losses among profits arising from transactions with a legal entity, other than temporary or permanent business suspension or permanent business suspension” or “profit from transactions with a legal entity that does not have losses.” Therefore, the gift tax may not be imposed on such profits based on Article 2(3) of the Act, barring any special circumstance such as

[1] Article 2(1) and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007) / [2] Article 2(1) and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007) / [3] Articles 2(3) and 41(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 8828, Dec. 31, 2007); Article 31(6) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (Amended by Presidential Decree No. 22042, Feb. 18, 2010)

[3] Supreme Court Decision 2008Du6813 decided Apr. 14, 201 (Gong2011Sang, 941)

Plaintiff (Law Firm KEL, Attorneys Kim Yong-hoon et al., Counsel for the plaintiff-appellant)

The director of the tax office of distribution (Law Firm LLC, Attorneys Lee Si-le et al., Counsel for the defendant-appellant)

Seoul High Court Decision 2012Nu28041 decided June 7, 2013

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

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

1. Relevant statutes;

Article 2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “the Act”) provides that gift tax shall be imposed on donated property from another person’s donation. Article 2(3) of the same Act provides that “The term “donation” means a free transfer (including a transfer at a remarkably low price) of tangible or intangible property (including a transfer at a remarkably low price) by direct or indirect means, or an increase in the value of another’s property by means of contribution, of a tangible or intangible property, the economic value of which can be calculated, regardless of the name, form, purpose, etc. of such act or transaction.” Article 31(1) of the Act provides that “The donated property pursuant to the provisions of Article 2 of the Act includes all things belonging to the donee and all de facto or de facto rights with property value which can be realized in money.”

Article 41(1) of the Act provides that “If a person who has a special relationship with a shareholder or investor (hereinafter referred to as “shareholders, etc.”) of a corporation (hereinafter referred to as “specific corporation”) who has any deficit or suspended or closed its business, obtains profits from the shareholder, etc. of a specific corporation through transactions falling under any of the following subparagraphs with the specific corporation, the amount equivalent to such profits shall be deemed as the value of donated property to the shareholder, etc. of the specific corporation.” Article 41(1)1 provides that “The transaction of providing property

Article 42(1) of the Act provides, “In cases where profits falling under any of the following subparagraphs, other than donations under the provisions of Articles 33 through 41, 41-3 through 41-5, 44 and 45, are accrued, such profits shall be deemed the value of donated property to the person who has acquired such profits.” subparagraph 3 provides, “in cases where profits have been accrued more than the standard prescribed by the Presidential Decree, such as investment, reduction of capital, merger, division, and conversion, acquisition, exchange, etc. of stocks by convertible bonds, etc. under Article 40(1) (hereinafter “stock conversion, etc.”) or other transactions which increase or decrease the corporation’s capital, such as the conversion, acquisition, exchange, etc. of stocks, or profits accruing from the change of the corporation’s equity or value due to the change of the corporation’s organization, etc.” Provided, That the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010; hereinafter “the change in property value”) is more than 3000

2. Regarding ground of appeal No. 1

In full view of the circumstances indicated in its holding, the lower court determined that: (a) the gift (hereinafter referred to as “the instant real estate donation”) of the instant real estate used by the Nonparty for the leasing business to the heading construction company, etc. (the trade name was changed to the heading construction company, Jan. 20, 2010; hereinafter “heading construction company”); (b) merely constitutes a mere gift of real estate; and (c) it does not constitute the acquisition by transfer as stipulated in the latter part of Article 42(1)3 of the Act. In so doing, the lower court did not err by misapprehending the legal doctrine on the interpretation of the said provision, thereby failing to exhaust all necessary deliberations, or by misapprehending the legal doctrine on the interpretation of

3. As to the grounds of appeal Nos. 2 through 4

(a) the introduction and limitation of the complete taxation system of gift tax;

(1) The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010, Dec. 30, 2003) did not provide for the unique definition of the concept of donation under the Civil Act, and borrowed the concept of donation under the Civil Act, and thus, “where one of the parties expresses his/her intention to grant property to the other party without compensation and the other party agrees to give property by accepting it.” However, with respect to the gratuitous transfer of a portion not under a contract between the parties, the provision on deemed donation (Articles 32 through 42) was separately prepared and imposed. As a result, in the case of gratuitous transfer of a portion by means of new financial techniques or capital transactions, etc. which are not listed in the regulations on deemed donation, gift tax cannot be imposed on the timely transfer, and there was a limit to blocking the transfer of portion without any appropriate tax burden.

Therefore, in order to realize fair taxation, the Inheritance Tax and Gift Tax Act amended by Act No. 7010, Dec. 30, 2003, in order to realize fair taxation by allowing not only the taxable subject of gift tax originally intended but also the transaction or act similar to the same or similar economic substance as well as the original taxable subject of gift tax, by comprehensively defining not only the gift under the Civil Act, but also the “direct and indirect free transfer of property” and “increased property value by another person’s contribution,” including the concept of donation, subject to gift tax, including the concept of donation, and by converting the former provision on deemed donation into the provision on the time of donation and calculation of donated property (hereinafter “value calculation provision”), the so-called complete comprehensive taxation system of gift tax was introduced.

In light of the fact that the concept of comprehensive gift under tax law is introduced in order to cope with the changing inheritance and donation in advance, and that the previous provision on deemed donation is uniformly converted into the value calculation provision, in principle, in a case where a certain transaction or act constitutes the concept of gift under Article 2(3) of the Act, it is possible to levy gift tax according to Article 2(1) of the Act.

(2) However, the conversion of the provision on the calculation of the value of a deemed donation into the provision on the deemed donation requires that the title of Section 2 of Chapter 3 on the deemed donation be changed from “the deemed donation, etc.” to “Calculation of the value of donated property”, and the title of the provision on individual deemed donation should be changed from “the deemed donation” to “the value of donated property” as “the value of donated property.” As a result, the provision on the calculation of the value of individual donated donation remains as it remains in relation to taxation requirements, such as taxable objects and scope of taxation, which have been regulated in the previous provision on the deemed donation. In other words, the individual provision on the calculation of the value requires that a special relationship exists between parties to a transaction exists, or that the difference between market price, etc. and market price, etc. is more than 30% of the market price, and matters relating to such taxable objects or scope of taxation have been amended from time to time. This ought to be seen as having been reflected in the previous provision on the scope of taxation of donated gift in order to promote predictability and stability of tax relations and prevent confusion in the introduction of comprehensive taxation system.

Therefore, in a case where a provision on the assessment of individual value limits only a certain transaction or act to the subject of gift tax and limits the scope of taxation of gift tax by prescribing the scope and limit of taxation of gift tax in order to ensure taxpayers’ predictability, etc., even if the transaction or act excluded from the subject or scope of gift tax among the transaction or act regulated by the provision on the assessment of individual value conforms to the concept of gift under Article 2(3) of the Act, gift tax cannot be imposed.

(b) limitations on taxation of profit gifts through transactions with specific corporations;

Article 41(1) of the Act and Article 31(6) of the Enforcement Decree of the Act provide for the calculation of the value of donated property where any person having a special relationship with shareholders, etc. of a corporation having losses (hereinafter referred to as “contributed corporation”) or stockholders, etc. of a corporation under temporary closure or permanent closure makes transactions, such as gratuitous provision of property to a specific corporation, and the profits earned by such shareholders, etc. are at least KRW 100 million, subject to gift tax. This purpose is to impose gift tax on an irregular donation that gives profits to shareholders, etc. of a specific corporation without paying corporate tax on the donated value by means of offsetting the donated value as losses (see Supreme Court Decision 2008Du6813, Apr. 14, 201). In other words, each of the above provisions provides for the calculation of the value of donated property to the extent of losses in the case of a corporation subject to temporary closure or permanent closure in the case of a corporation other than a deficit.

This is based on the legislative intent of intending to exclude profits acquired by stockholders, etc. from taxable subject to gift tax due to transactions with a legal entity that imposes corporate tax on assets increase profits, etc. while running a business normally, and such legislative intent cannot be deemed to have been changed due to the introduction of the complete universal taxation system. As such, “the portion of profits from transactions with a legal entity that exceeds losses or profits from transactions with a legal entity that does not have losses other than temporary or permanent business suspension or permanent business closure” should be deemed to have set the limit not to impose gift tax on stockholders, etc. Therefore, gift tax shall not be imposed on such profits, etc. on the basis of Article 2(3) of the Act, unless there are special circumstances such as the provision that is subject to gift tax

C. Determination

According to the reasoning of the judgment of the court below, the plaintiff acquired 391 shares of 5,00 shares issued by the family building business on February 27, 2006; ② the non-party, the non-party, who is the external assistant of the plaintiff, donated the real estate to the family building business on February 28, 2006; completed the registration of transfer of ownership on March 3, 2006; ③ the family building business included the income of 6,379,127,750 won from the gift of the real estate of this case, and reported and paid corporate tax of 1,567,90,230 won for the business year 206; ④ the defendant, even if the donation of this case was made on July 4, 2011, deemed the profits equivalent to the increase in the value of shares held by the plaintiff to be donated to the family building business on February 28, 2006; and ④ the losses from the gift tax of this case was imposed on the plaintiff within the limit of 1060 days.

Examining these facts in light of the aforementioned provisions and legal principles, even if the non-party indirectly donated the real estate in this case to the heading building business, which is the shareholder of the Plaintiff, indirectly increased the value of the Plaintiff’s stocks, the real estate donation in this case constitutes a donation of property to a juristic person with no deficit or a donation of property within the scope that does not constitute a taxable object of loss, and thus, the heading building business bears the corporate tax on the profits accruing from the acquisition of its assets. Accordingly, gift tax cannot be imposed on the profits accrued to the Plaintiff pursuant to Article 2(3) of the Act, and the real estate donation in this case does not fall under the “business acquisition, etc.” under Article 42(1)3 of the Act. Accordingly, the disposition of this case, which was imposed on the Plaintiff by applying Articles 2(3) and 42(1)3 of the Act, is unlawful as it goes beyond the limit of taxation of gift tax.

The judgment below to the same purport is correct, and contrary to the allegations in the grounds of appeal, the court below did not err by misapprehending the legal principles on the interpretation and application of Articles 2(3), 41(1), and 42(1)3 of the Act.

4. Conclusion

Therefore, the appeal is dismissed, 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 Yong-deok (Presiding Justice)