New Stock Unemployment Co., Ltd. (Attorney Ba-sik et al., Counsel for the defendant-appellant)

The head of Seocheon District Office (Government Law Firm Corporation, Attorney Kim Tae-hun, Counsel for the plaintiff-appellant)

July 24, 2015

1. All of the plaintiff's claims are dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

The Defendant’s disposition of imposition of KRW 67,653,270 of corporate tax for the business year 201 against the Plaintiff on June 10, 2013, the disposition of imposition of KRW 133,200,520 of corporate tax for the business year 201, and the disposition of collection of KRW 736,674,150 of dividend income for the business year 2012 is revoked.

1. Details of the disposition;

A. On July 16, 1973, the Plaintiff was established as 50,000,000 capital (5,000 won in face value, 10,000 won in total, and 10,000 shares in total) and operated a textile product manufacturing business. From November 2005, the Plaintiff converted the place of business (10,247,60 square meters in Seo-gu (247,6 square meters in land for factory) into a real estate rental business.

B. The shareholder status of the Plaintiff is as listed in the following table.

A person shall be appointed.

C. Since the establishment of the Plaintiff, the Plaintiff did not change shareholders for 35 years, and did not distribute dividends. On May 31, 2008, Nonparty 1 and Nonparty 2, the heir of Nonparty 10, owned 1,200 shares issued by Nonparty 10.

D. On October 15, 2010, the Plaintiff entered into a real estate sales contract with the Plaintiff to sell 5,272 square meters of the above factory site owned by the Plaintiff (hereinafter “instant land”) from the Plaintiff on November 15, 2010 (the minutes state that “the Plaintiff sells part of the company’s land under the circumstances of the Plaintiff”) and the Plaintiff divided the instant land from the factory site on January 12, 201, and then transferred the registration of ownership transfer to the Plaintiff on the same day [this case’s land is 247,320,000 square meters of the above factory site owned by the Plaintiff (hereinafter “instant land”).

E. On January 12, 201, the date of transfer of the above purchase price, Nonparty 1, Nonparty 2, Nonparty 3, Nonparty 4, and Nonparty 5 (hereinafter “transfer shareholders”) submitted an application for purchase of shares to the Plaintiff on January 12, 201, which is the date of transfer of the above purchase price. On the same day, the Plaintiff purchased 4,980 shares (hereinafter “the shares of this case”) totaling 4,980 shares (hereinafter “the shares of this case”) from the transferor shareholders (the minutes stipulate that “the shares shall be acquired by shareholders under the circumstances of the Plaintiff”) and transferred the purchase price to the transferor shareholders on the same day.

F. On the ground that KRW 1,143,60 per share paid to the transferor shareholders in return for the acquisition of the instant shares exceeds KRW 945,278 per share, which is a supplementary appraised value under the Inheritance Tax and Gift Tax Act (hereinafter “Inheritance Tax Act”), the Plaintiff included KRW 987,534,000, which is an amount equivalent to the difference under Article 52 (Avoidance of Wrongful Calculation) of the Corporate Tax Act, in gross income, and voluntarily reported and paid KRW 217,257,00,000, which is corporate tax therefor. In addition, the transferor shareholders reported and paid KRW 53,296,000 after transferring the instant shares to the Plaintiff, and paid KRW 134,617,000,000 as gift tax according to the disposition of income generated by the application of Article 52 of the Corporate Tax Act.

G. On April 5, 2012, the Plaintiff passed a resolution to retire the instant shares acquired from the transferor shareholders by holding a temporary shareholders’ meeting, and registered the capital reduction on May 10, 2012.

H. Since there is no ground to acquire treasury shares under Article 341 of the former Commercial Act (amended by Act No. 10600, Apr. 14, 2011; hereinafter “former Commercial Act”) on the Plaintiff’s acquisition of the instant shares, a mid-term regional tax office conducted a tax investigation with respect to the Plaintiff, and accordingly, notified the Defendant of the outcome of the investigation to impose corporate tax and dividend income as a withholding agent, which reflects that the payment of the purchase price of the instant shares was made in advance for the reduction of capital.

I. Accordingly, by applying Article 52 of the Corporate Tax Act on June 10, 2013 to the Plaintiff, the Defendant respectively corrected and notified the Plaintiff of KRW 736,674,150 of the dividend income tax for the business year 201 and KRW 200,853,790 of the corporate tax for the business year 201 and 2012 (in the business year 2011, corporate tax of KRW 67,653,270 + corporate tax of KRW 13,200,520 of the business year 2012 + corporate tax of KRW 13,200,520 of the corporate tax for the business year 2012) and the amount of deemed dividend that the Plaintiff’s shareholder acquired and sold to the Plaintiff according to Article 17 of the Income Tax Act as to the difference in the purchase price (hereinafter “instant disposition”).

(j) On September 17, 2013, the Plaintiff filed an appeal with the Tax Tribunal on September 17, 2013, but was dismissed on July 7, 2014.

[Ground of recognition] Facts without dispute, Gap evidence 1 through 5, Eul evidence 1 to 3, 7, and 8 (including branch numbers; hereinafter the same shall apply) and the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

The Plaintiff acquired the shares of this case at the request of the transferor shareholders for purchase of the shares, and thereafter sold them to the new investor again for one year and three months to start the business, but did not acquire the shares of this case from the beginning for the purpose of retiring the shares or refunding the capital. Nevertheless, the Defendant presumed the assets transaction of acquiring the shares as capital without clear grounds and disposed of the shares of this case as the capital transaction, which is unlawful and thus should be revoked.

In addition, even if the acquisition of the instant shares constitutes capital transactions, the timing of attribution of the constructive dividend is not the 2012 business year to which the time when the capital reduction was adopted, but the 2011 business year to which the date when the acquisition of the instant shares could be deemed to have been actually resolved, and thus, the instant disposition is unlawful and revoked in that it did not exist subject to taxation or misunderstanding the receipt time of income.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Whether a sale of stocks constitutes a transfer of stocks which are assets transaction, or a retirement of stocks or a refund of capital which are capital transactions, is a matter of interpretation of legal acts, and should be determined based on the substance and intent of the parties concerned. However, in light of the substance over form principle, the entire process of the transaction, including the content and form of the contract in question as well as the circumstances leading up to the conclusion of the contract in question, the method of determining the price, and the progress of the transaction, should be actually identified and determined (see Supreme Court Decision 2012Du27091, May

In light of the following circumstances, it is reasonable to view that the transaction of the instant shares was made as part of the capital reduction procedure by means of stock retirement in light of the health care room and the entire purport of the oral argument as seen earlier.

A) Although the payment of the purchase price and the acquisition of the instant shares and the payment of the purchase price were in urgent on the same day, it seems that the Plaintiff did not have any measures to dispose of the instant shares at the time. However, in light of the fact that the Plaintiff, who was engaged in the real estate rental business, obtained the money prepared by transferring a half of the land which became the source of the business, and immediately did not establish any measures to dispose of the shares, for which the acquisition of which is limited under the former Commercial Act was immediately conducted, while acquiring the treasury shares whose acquisition is limited under the former Commercial Act; and that Nonparty 1, one of the buyers of the instant land, not the purchaser, was the representative director and the largest shareholder, it is doubtful whether the instant shares transaction was merely excessive.

B) It is insufficient to view that the Plaintiff, as a small non-permanent company, whose shareholders were all members of the board of directors, and whose shareholders did not change once since its incorporation, made considerable efforts to dispose of the instant shares, for a period of one year and three months after the acquisition of the entire shares, which became 49.8% of the total shares, as well as one year and three months after its incorporation, and there is no other evidence to acknowledge such fact.

C) It does not state a sales contract between the Plaintiff and the transferor, the minutes of the temporary general meeting for acquiring the instant shares, etc., but does not state the details on the future disposal (e.g., retirement) of the instant shares. However, the period up to the time the Plaintiff acquired the instant shares and retired shares shall not be readily concluded that the Plaintiff had no purpose of stock retirement or capital refund at the time of acquiring the instant shares, solely on such circumstances.

D) In fact, as the instant shares were retired, there was a decrease in capital as much as possible.

Therefore, there is no illegality in the disposition of this case where the corporate tax was notified by deeming the transfer margin accruing to the transferor shareholders as dividend income and notifying the Plaintiff of the dividend income withheld at source, and considering the amount equivalent to the refund amount as a temporary payment unrelated to business, the recognition interest and the amount equivalent to the refund amount as the temporary payment.

2) Meanwhile, according to Article 46 Subparag. 4 of the Enforcement Decree of the Income Tax Act, the receipt time of dividend income resulting from constructive dividend is deemed the date of determining the retirement of stocks, the reduction of capital, or the transfer of capital. As seen earlier, the fact that the date on which the Plaintiff decided the retirement of the instant stocks was April 5, 2012 is the same as the date of the receipt of dividend income. As such, on April 5, 2012, the time of realizing income becomes the time of receipt of dividend income. Therefore, the income tax arising from constructive dividend in the 2012 business year to which the said time of realizing income belongs is imposed, and the stock price paid prior to the realization of the said income is an advance payment, and there is no error of law in the disposition of this case imposing corporate tax by including the recognized interest and the amount equivalent thereto.

As the Plaintiff actually decided to invalidate shares or reduce capital on January 12, 201, which is the date of the instant stock transaction and the date of the sale price, the Plaintiff asserts that the time when deemed dividend income accrue should be deemed as January 12, 201. However, as seen earlier, inasmuch as the Plaintiff and the transferor shareholders on the instant shares determine that the transaction between the Plaintiff and the Plaintiff is capital transaction, the mere date of the payment of the purchase price by taking the form of stock transaction cannot be deemed as the date of actual retirement of shares or the date of capital reduction. The Plaintiff’s above assertion is without merit.

3. Conclusion

The plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.

[Attachment]

Judges Ansan-dong (Presiding Judge)