Seoul High Court 2013Nu1772 (22 January 22, 2014)

No gift tax shall be imposed on the profits donated to a corporation other than a closed or closed corporation.

Since the corporate tax is imposed on the profits accruing from the receipt of assets, the gift tax is not imposed on the profits earned by the shareholders of the corporation pursuant to Article 2(3) of the Inheritance Tax and Gift Tax Act, and the donation of real estate, stocks, etc. to the corporation is merely a simple asset transaction, and it cannot be viewed as a "business acquisition limit, organizational change, etc." under Article 42 of the Act

Article 41 of the Inheritance Tax and Gift Tax Act: Donation of Profits through Transactions with Specified Corporations

Gift, etc. of other profits under Article 42 of the Inheritance Tax and Gift Tax Act

2014Du3648 Disposition of revocation of Disposition of Gift Tax Imposition

1. MediationA2. B3. GCC

O Head of tax office

Seoul High Court Decision 2013Nu17772 Decided January 22, 2014

October 15, 2015

All appeals are dismissed.

The costs of appeal are assessed against the Defendants.

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 of Dec. 31, 2007; hereinafter referred to as the "Act") provides that gift tax shall be imposed on donated property of another person. Article 2 (3) of the former Inheritance Tax and Gift Tax Act provides that "The term "donation" includes a transfer of tangible or intangible property free of charge (including a case of transfer at a remarkably low price) by direct or indirect means (including a case of transfer at a substantially low price) or an increase in the value of another person's property, which is a property belonging to the donee and has economic value that can be realized in money and all de facto or de facto rights having property value, regardless of the name, form, purpose, etc. of such act or transaction."

Article 41 (1) of the Act provides that "where 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 "specified corporation") who has any deficit or suspended or closed its business, obtains profits from a shareholder, etc. of a specified corporation through transactions falling under any of the following subparagraphs with the specified corporation, the amount equivalent to such profits shall be deemed the value of property donated to the shareholder, etc. of the specified corporation," and subparagraph 1 of Article 41 provides "the transaction of providing the property

In addition to donations under Articles 33 through 41, 41-3 through 41-5, 44 and 45, where profits falling under any of the following subparagraphs and above the standard prescribed by the Presidential Decree have been acquired, such profits shall be deemed the value of property donated to the person who has acquired such profits." subparagraph 3 of Article 42 of the Act provides that "in cases where profits are acquired by the increase or decrease of the corporation's capital, such as investment, reduction of capital, merger, division, and conversion, acquisition, and exchange of stocks by convertible bonds, etc. under Article 40 (1) (hereinafter referred to as "stock conversion, etc.") or the profits acquired by the increase or decrease of the corporation's capital through transactions such as transfer, acquisition, business exchange, business exchange, or change of the corporation's organization, etc., the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010; hereinafter referred to as "the change in the value of property before the transfer or exchange is more than 300

2. Regarding ground of appeal No. 2

In full view of the circumstances stated in its reasoning, the court below is just in holding that Park DoD’s donation of the real estate of this case and YOOOO shares of YY Co., Ltd. (hereinafter “the real estate and shares donation”) to the P (hereinafter “P”), only constitutes the donation of real estate and shares, and does not constitute “business acquisition or business change, etc.” as provided in the latter part of Article 42(1)3 of the Act, and contrary to what is alleged in the grounds of appeal, there is no error of law by misapprehending the legal principles on the interpretation of the above provision, or by failing to exhaust all necessary deliberations.

3. As to the grounds of appeal Nos. 1, 3, and 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 of Dec. 30, 2003) does not stipulate any unique definition on the concept of "donations", and instead borrows the concept of "donations under the Civil Act," one of the parties expresses his/her intention to grant property to the other party without compensation and approves it by the other party, subject to gift tax in principle. However, with respect to the transfer of a division without compensation between the parties, a separate provision on deemed donation (Articles 32 through 42) was formulated and imposed on the transfer of a division without compensation, which is not stipulated in the regulations on deemed donation. As a result, there was a limit to block the transfer of a division without appropriate tax burden because it is impossible to impose gift tax on the timely transfer of a division without compensation, in the event of gratuitous transfer of a division by means of new

Therefore, the Inheritance Tax and Gift Tax Act amended by Act No. 7010, Dec. 30, 2003, in order to realize fair taxation by allowing the taxation authority to levy gift tax on transactions and acts that are identical or similar to the original object of taxation instead of the provision of tax law on daily taxable subject of gift tax, by comprehensively defining the subject of gift tax including not only the donation under the Civil Act, but also the direct and indirect free transfer of the property, and the increase in the value of the property by another person's contribution, and by converting the previous provision on deemed donation into the provision on the timing of donation and calculation of the value of the property (hereinafter referred to as "the provision on calculation of the value of the gift") by comprehensively defining the subject of gift tax including the concept of donation.

In light of the fact that the concept of comprehensive gift under tax law is introduced in order to cope with it in advance, and that the previous provision on deemed donation is uniformly converted into the value calculation provision, in principle, if any transaction or act constitutes the concept of gift under Article 2 (3) of the Act, it is possible to levy gift tax in accordance with 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 calculation of the value of a gift under Chapter 3 Section 2 is changed from "the legal fiction of donation, etc." to "Calculation of the value of property", and the title of the provision on the deemed donation is changed from "the legal fiction of donation" to "the value of property which is the end of each provision" as "the value of property which is the donation." As a result, the provision on the calculation of the value of a donation remains as it remains related to taxation requirements, such as the taxable amount and the scope of taxation, which have been regulated in the previous provision on the deemed donation. In other words, the provision on the calculation of the value of a gift requires the existence of special relationship between parties to a transaction with a certain type of transaction or the difference between market price, etc. or the value of the gift is more than a certain amount, and the matters on the scope of taxation or scope of taxation are amended from time to time to time. This is to be viewed as the legislative intent to prevent confusion in the scope of taxation under the previous provision on the taxation.

Therefore, in order to ensure the predictability of taxpayers, the individual value calculation rule limits only a certain transaction and act as subject to gift tax, and limits the scope of taxation by prescribing the scope and limit of taxation of gift tax, the gift tax can not be imposed even if the transaction and act excluded from the subject or scope of gift tax among the transaction and act regulated by the individual value calculation rule conforms to the concept of gift under Article 2(3) of the Act.

(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 profits acquired by stockholders, etc. are at least KRW 100 million by making transactions, such as free provision of property to a specific corporation, by a corporation having losses (hereinafter referred to as "contributed corporation") and a person having a special relationship with stockholders, etc. of a corporation under suspension or closure of business, etc., are subject to gift tax in cases where the profits earned by such stockholders, etc. are at least KRW 100 million. The purpose of this provision is to impose gift tax on illegal donations that give profits to shareholders, etc. of a specific corporation without bearing 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 for a corporation other

This is clear that the legislative intent of intending to exclude profits acquired by stockholders, etc. from taxable subject to gift tax is based on transactions with corporations that bear corporate tax on assets increase profits, etc. while running a business normally, and it cannot be deemed that such legislative intent has been changed due to the introduction of the full-scale comprehensive taxation system. As such, the limitation should be set up not to impose gift tax on stockholders, etc. on the profits from transactions with corporations that do not have losses, or on profits from transactions with corporations that do not have losses other than temporary and permanent corporations. Therefore, the said profits cannot be taxed on the grounds of Article 2(3) of the Act, unless there are special circumstances such as the provision on gift tax imposition.

C. Determination

According to the reasoning of the judgment below, GaD donated the instant real estate in XX on May 29, 2007, and the instant shares on September 21, 2007, respectively. At the time, GaD’s fraudulent act, Plaintiff ChoB, each of the OOO shares issued in XX, and GaB held the OO shares among OOO shares issued in XX. ② The instant real estate and shares donation included the OOO shares in the gross income and paid KRW OOO of the corporate tax for the business year of 2007. ③ The Defendants were not aware that the Plaintiffs received the gift tax was not subject to Article 2(3) and 42(1)3 of the Enforcement Decree of the Act, or that the gift tax was imposed on each of the Plaintiffs by applying Article 4(1)3 of the Enforcement Decree of the Act.

Examining these facts in light of the provisions and legal principles as seen earlier, even if DoD indirectly donated the instant real estate and stocks to XX, and thereby indirectly contributed to an increase in the value of the shares owned by the Plaintiffs, the instant real estate and stock donation constitutes a case where the instant real estate and stocks are donated to a juristic person with no deficit, or property donation to the extent that it does not fall under the category of loss subject to taxation. As such, inasmuch as Article 2(3) of the Act imposes corporate tax on the interests of the Plaintiffs derived from the donation, gift tax may not be imposed on the interests of the Plaintiffs pursuant to Article 42(1)3 of the Act, and the instant real estate and stock donation do not fall under the category of “business acquisition by transfer or organizational change, etc.” under Articles 2(3) and 42(1)3 of the Act, each disposition of this case imposed on the Plaintiffs by applying the gift tax imposition limit is unlawful.

The judgment below to the same purport is partially insufficient, but it is just to conclude that each disposition of this case, which imposes gift tax on the profits earned by the plaintiffs due to the real estate and stock donation, is unlawful. In so doing, contrary to what is alleged 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, or the method of calculating the point of time of determining a specific corporation or

4. Conclusion

Therefore, all appeals are 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 on the bench.