[1] Whether the transfer of shares issued by a domestic corporation following a merger between foreign corporations constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act (affirmative), and whether the same applies to cases where a merged corporation owns all shares of a merged corporation before the merger (affirmative)

[2] Whether the transfer of shares due to a merger constitutes “transfer of share certificates” under the main sentence of Article 1 and Article 2(3) of the former Securities Transaction Tax Act (affirmative)

[3] The meaning of the “non-discrimination doctrine” as stipulated in Article 24(1) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect

[4] In a case where Gap corporation established under the German law was transferred to Eul corporation as a result of the merger of Eul corporation while holding 100% of the shares of Eul corporation which is the same foreign corporation Eul, and Gap corporation did not issue new shares or pay for mergers to Eul corporation or its shareholders, and the tax authorities determined and notified corporate tax and securities transaction tax on the ground that the transfer of shares by merger between Gap corporation and Eul corporation constitutes the transfer of securities issued by the above domestic corporation, the case holding that the transfer of listed shares by Eul corporation, which was held by Eul corporation as assets of Eul corporation, constitutes "transfer of shares" and "share certificates" under Article 93 subparagraph 10 (a) of the former Corporate Tax Act and Article 2 (3) of the former Securities Transaction Tax Act, and such taxation does not violate the principle of non-discrimination under Article 24 (1) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital

[1] Whether transferring shares issued by a domestic corporation, which is extinguished by a merger between foreign corporations, to a merged corporation surviving the merger, constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter the same) should be determined based on the interpretation of the former Corporate Tax Act by deeming that the increase in inherent value of the above shares was realized as gains from the transfer of the shares following the merger, and whether such increase in inherent value of the above shares can be deemed as income subject to taxation.

However, in the case of a domestic corporation, Articles 80(1) and (4), 16(1)5, and (2) of the former Corporate Tax Act and Articles 122(1), 14(1)1(a), and (c) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006) consider that the transfer of assets following a merger also constitutes the transfer of assets for which gains from transfer are realized, and thus, the method of calculating gains from transfer is prescribed, only in cases where the requirements under Article 44(1)1 and 2 of the former Corporate Tax Act are met, to prevent the actual calculation of gains from transfer by deeming the face value of stocks received in return for the merger as the cost of transfer. However, in the case of a foreign corporation, Article 93 subparag. 10(a) and (c) of the former Corporate Tax Act provides for a policy special exception to taxation on the transfer of stocks between a domestic corporation and a corporation subject to taxation.

In addition, there is no reasonable reason not to regard the transfer of domestic assets following a merger between foreign corporations as the transfer of domestic assets between domestic corporations, unlike the transfer of assets between domestic corporations.

Therefore, the transfer of shares issued by a domestic corporation following a merger between foreign corporations is deemed to fall under the “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act as the transfer of assets in which gains from transfer are realized. As long as such, the case where the merged corporation owns all the shares of the merged corporation before the merger does not change because the merged corporation owns the entire shares of the merged corporation. In addition, the same holds true even where the merged corporation’s

[2] In light of the text and purport of Articles 1 and 2(3) of the former Securities Transaction Tax Act (amended by Act No. 8838, Jan. 9, 2008; hereinafter the same), and the language and purport of Article 117(1)14 of the Restriction of Special Taxation Act (amended by Act No. 6538, Dec. 29, 2001; hereinafter the same), “where stocks are transferred for the purpose of a merger satisfying the requirements under each subparagraph of Article 44(1) of the Corporate Tax Act” as the object of exemption from securities transaction tax, there is no reason to deem that the transfer of stocks by a merger does not constitute “share transfer” under the main text of Articles 1 and 2(3) of the former Securities Transaction Tax Act.

[3] Article 24(1) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital provides for the so-called principle of non-discrimination that “the nationals of a Contracting State, inter alia, shall not bear or bear taxes which are, or are not related to, those borne or payable by the nationals of the other Contracting State in the same situation with respect to

The principle of non-discrimination is that if a national of a Contracting State is in the same situation as a national of the other Contracting State or performs the same activity in the other Contracting State, he or she should not be at a disadvantage in tax system solely on the ground that nationality differs

[4] In a case where, while a foreign corporation Gap established under German law owned 100% of the shares of the same foreign corporation Eul, Eul was transferred to Eul corporation, and Gap corporation issued new shares or did not pay for the merger, and the tax authority determined and notified corporate tax and securities transaction tax on the ground that the transfer of shares constitutes the transfer of securities issued by the above domestic corporation, the case holding that even if Gap corporation and Eul corporation owned the entire shares of Eul corporation before the merger between Eul corporation and Eul corporation, transferring the listed shares of Eul corporation owned as assets of Eul corporation to Eul corporation as a matter of the former Corporate Tax Act (amended by Act No. 7838 of Dec. 31, 2005) and Article 2(3) of the former Act (amended by Act No. 838 of Jan. 9, 2008) and Article 2(3) of the former Act (amended by Act No. 838 of Jan. 9, 2008), the transfer of shares to Gap corporation cannot be deemed as the transfer of shares between Gap corporation and Eul corporation.

[1] Article 16 (1) 5 and (2), Article 44 (1) 1 (see current Article 44 (2) 1), Article 2 (see current Article 44 (2) 2), Article 80 (1) (4) and Article 93 subparagraph 10 (a) (see current Article 93 subparagraph 9 (a)) of the former Corporate Tax Act (Amended by Act No. 7838, Dec. 31, 2005); Article 14 (1) 1 (a) of the former Enforcement Decree of the Corporate Tax Act (Amended by Presidential Decree No. 19328, Feb. 9, 2006); Article 14 (1) 1 (c) of the former Act on the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes (Amended by Act No. 19328, Feb. 1, 2006); Article 80 (2) 1 (d) of the former Tax Act (Amended by Act No. 9780, Dec. 12, 128, 97) of the former Act

[1] [2] Supreme Court Decision 2010Du7208 Decided November 28, 2013 (Gong2014Sang, 104) / [3] Supreme Court Decision 2010Du15179 Decided April 26, 2012, Supreme Court Decision 2014Du40166 Decided August 19, 2015

Fast MM (Attorneys Son Ji-yol et al., Counsel for the defendant-appellant)

Head of the District Tax Office

Seoul High Court Decision 2014Nu4667 decided March 31, 2015

All appeals are dismissed. The costs of appeal are assessed against each appellant.

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

1. Plaintiff’s ground of appeal

A. Of the grounds of appeal Nos. 1 and 2, as to the realization of gains on transfer due to the cost of merger

(1) Article 93 Subparag. 10(a) of the former Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter the same) provides for “income accruing from the transfer of stocks issued by a domestic corporation” as one of the domestic source income of a foreign corporation that is subject to corporate tax. Meanwhile, the main text of Article 1 of the former Securities Transaction Tax Act (amended by Act No. 8838, Jan. 9, 2008; hereinafter the same) provides that “securities transaction tax is imposed on the transfer of stock certificates” and Article 2(3) provides for “transfer” as “the transfer of ownership at cost by contract or legal cause.”

Whether the transfer of shares issued by a domestic corporation, which is extinguished by a merger between foreign corporations, to a merged corporation surviving a merger, constitutes “transfer of shares” under Article 93 subparag. 10(a) of the former Corporate Tax Act should be determined by the interpretation of the former Corporate Tax Act in light of the fact that the increase in the value of the above shares, based on the merger, was realized as gains from transfer, and whether such increase in value can be considered as taxable income.

However, in the case of a domestic corporation, Articles 80(1) and (4), 16(1)5, and (2) of the former Corporate Tax Act, and Articles 122(1), 14(1)1(a), and (c) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006; hereinafter the same) provide for policy exceptions to the method of calculating gains on transfer by deeming that the transfer of assets following a merger falls under the transfer of assets for which gains on transfer are realized. Only in the case meeting the requirements under Article 4(1)1 and 2 of the former Corporate Tax Act, the face value of stocks received in return for the merger should not be calculated as the price for transfer of the stocks so that the merged corporation does not have actual gains on transfer. However, in the case of a foreign corporation, Article 93 subparag. 10(a) of the former Corporate Tax Act only provides for special provisions on the transfer of stocks between the domestic corporation and the domestic corporation subject to taxation.

In addition, there is no reasonable reason not to regard the transfer of domestic assets following a merger between foreign corporations as the transfer of domestic assets between domestic corporations, unlike the transfer of assets between domestic corporations.

Therefore, as the transfer of shares issued by a domestic corporation following a merger between foreign corporations is the transfer of assets in which gains from transfer are realized, it shall be deemed that such transfer constitutes “share transfer” under Article 93 subparag. 10(a) of the former Corporate Tax Act (see Supreme Court Decision 2010Du7208, Nov. 28, 2013). As such, insofar as deemed otherwise, it does not mean that the merged corporation owns all the shares of the merged corporation before the merger, and in such a case, the merged corporation’s shares or merger subsidies are not granted to the shareholders of the extinguished corporation.

In addition, in light of the language and text and purport of Articles 1 and 2(3) of the former Securities Transaction Tax Act, and Article 117(1)14 of the Restriction of Special Taxation Act (amended by Act No. 6538, Dec. 29, 2001; hereinafter “where stocks are transferred for the purpose of a merger satisfying the requirements under each subparagraph of Article 44(1) of the Corporate Tax Act” as the object of exemption from securities transaction tax, etc., there is no reason to deem that the transfer of stocks due to a merger does not constitute “transfer of stock certificates” under the main text of Article 1 and Article 2(3) of the former Securities Transaction Tax Act (see the above Decision 2010Du7208, supra).

(2) The reasoning of the lower judgment and the evidence duly admitted reveal the following.

(A) On November 7, 2005, the Plaintiff, a foreign corporation established in accordance with German law, owned 100% of the shares of Aventis Pama Holdings (hereinafter “Merger Corporation”), a same foreign corporation, and merged a merged corporation on November 22, 2005 by concluding a merger contract with a merged corporation.

(B) Accordingly, the listed shares 5,800,000 shares of the Korean Pharmaceutical Drugs Co., Ltd. owned by a merged corporation (hereinafter “instant shares”) were transferred to the Plaintiff. In relation to this, the Plaintiff did not pay a realistic price, such as issuing new shares or cash payment, to the shareholders of the extinguished corporation or the extinguished corporation.

(C) On November 15, 2010, the Defendant calculated the transfer value by applying KRW 15,450 per share, which is the final market price of the Korea Securities and Futures Exchange (hereinafter “Stock Exchange”) at the time of the merger, on the grounds that the transfer of the instant shares constitutes the transfer of securities issued by a domestic corporation, and accordingly corrected and decided corporate tax of KRW 9,857,100,000 (including the penalty tax in bad faith in filing a report) for the business year 2005 (hereinafter “instant corporate tax collection disposition”).

(D) In addition, the Defendant calculated the transfer value by applying the final transaction value of the stock exchange immediately before the date of the merger to the Plaintiff on the same day, and determined and notified the securities transaction tax of KRW 741,800,280 (including the penalty tax in bad faith) based on the calculation of the transfer value (hereinafter “assessment disposition of securities transaction tax of this case” and “the instant disposition” in addition to the collection disposition of the corporate tax of this case).

(3) Examining these facts in light of the legal principles as seen earlier, even if the Plaintiff had owned all shares of the merged corporation before the merger between the Plaintiff and the merged corporation, the transfer of the instant shares held by the merged corporation’s assets to the Plaintiff constitutes “transfer of shares” and “transfer of share certificates” under Article 93 subparag. 10(a) of the former Corporate Tax Act and Article 2(3) of the former Securities Transaction Tax Act. Therefore, the lower court is justifiable to have determined that the transfer of the instant shares following the merger constituted the transfer of shares. In so doing, contrary to what is alleged in the grounds of appeal, there were no errors by misapprehending the legal principles on the concept of transfer of shares subject to taxation, merger cost, capital gains, no taxation without law

The Supreme Court precedents cited in the grounds of final appeal are different from this case, and thus are inappropriate to be invoked in this case.

B. As to the ground of appeal No. 2 related to the principle of non-discrimination

(1) Article 24(1) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital (hereinafter “Korea- Germany Tax Treaty”) provides for the so-called principle of non-discrimination that “the nationals of one Contracting State, inter alia, shall not bear or bear taxes that are, or are not related to, those borne or payable by the nationals of the other Contracting State in the same situation with respect to residence, or bear excessive

Such principle of non-discrimination is that a national of a Contracting State shall not be disadvantaged by tax system solely on the ground that the nationality differs in cases where a national of the other Contracting State is in the same situation as that of a national of the other Contracting State or performs the same activity (see Supreme Court Decision 2010Du15179, Apr. 26, 2012, etc.).

(2) Examining these legal principles in light of the factual relations as seen earlier, even if the transfer of the instant shares following the merger between the Plaintiff and the merged corporation is deemed to have been imposed differently from the merger between the domestic corporation, the foreign corporation cannot be deemed to have the same situation as that of the domestic corporation in principle, and the foreign corporation cannot be deemed to have committed discrimination based on the reason that the applicable law of the establishment differs from that of the domestic corporation, and thus, it cannot be deemed to have violated the principle of non-discrimination under the Korea-U.S. Tax Treaty. Therefore, the lower court’s determination on the same purport is justifiable, and contrary to what is alleged in the grounds of appeal, the lower

C. Regarding ground of appeal No. 3

Article 92(2)3 of the former Corporate Tax Act, Article 131(1) and (3) of the former Enforcement Decree of the Corporate Tax Act provides that “The amount of domestic source income from the transfer of stocks issued by a domestic corporation with no domestic place of business shall, in principle, be the value calculated by applying mutatis mutandis the method under Article 5 of the Adjustment of International Taxes Act and Article 4 of the Enforcement Decree thereof where the transaction price is below the arm’s length price, among foreign corporations with no domestic place of business and related foreign corporations prescribed by the Presidential Decree. However, only in cases where such arm’s length price cannot be calculated, the price assessed by applying mutatis mutandis Article 99(1)3 through

Meanwhile, Article 7(1)2(b) of the former Securities Transaction Tax Act provides that where the transfer value of stocks, etc. is unknown, the tax base of securities transaction tax shall be the value appraised by the method of appraisal of transfer value as prescribed by the Presidential Decree, and Article 4(2) of the former Enforcement Decree of the Securities Transaction Tax Act (amended by Presidential Decree No. 20629, Feb. 22, 2008; hereinafter the same) provides that “where a listed corporation under the Securities and Exchange Act transfers stock certificates, etc. outside the securities market” (Article 1); “where the stock certificates, etc. of an Association-registered corporation under the Securities and Exchange Act are transferred outside the securities market (Article 2); “where the Securities Business Association transfers stock certificates, etc. designated as the type of stocks, etc. traded pursuant to the standards pursuant to Article 84-27(5) of the Enforcement Decree of the Securities and Exchange Act by means other than those under the same paragraph” (Article 4).

For the reasons indicated in the reasoning of the judgment of the court below, citing the reasoning of the judgment of the court of first instance, the court below determined that the amount of domestic source income from the transfer of the stocks of this case is the final market price on November 22, 2005, which is the merger date, based on 15,450 won per share, which is the normal price of the stocks of this case, as the final market price on November 22, 2005, and that the tax base of securities transaction tax is the stocks of this case; (ii) as the stocks of the listed corporation, the securities transaction tax base is the transaction price at the transfer date announced by the Korea Stock Exchange under the Securities and Exchange Act pursuant to Article 4 (2) 1 of the former Enforcement Decree of the Securities Transaction Tax Act, namely, the Enforcement Rule of the Securities Transaction Business Regulations (amended by Presidential Decree No. 458 of Feb. 3, 2009) (amended by Presidential Decree No. 150 won per share on November 21, 2005,

Examining the reasoning of the lower judgment in light of the above provisions, the lower court did not err by misapprehending the legal doctrine on the calculation of share transfer value, which is the tax base of the former Corporate Tax Act and the former Securities and Exchange Act.

2. As to the Defendant’s ground of appeal

For the reasons indicated in its holding, the lower court determined that: (a) there was a defect in the entries required by the relevant statutes, such as the type of penalty tax or the basis for calculation; and (b) there was no reason to deem that the defect was corrected or cured; and (b) there was a justifiable reason for the Plaintiff to have failed to perform its duty to report and pay the corporate tax and securities transaction tax of this case.

Although the lower court alleged as the grounds of appeal that there was an error by misapprehending the legal doctrine on the legitimate grounds for exempting from penalty tax, insofar as the part of the lower court’s determination that there was a procedural defect in the duty payment notice of the penalty tax portion is not unlawful, the propriety of the above grounds of appeal cannot affect the conclusion of judgment, and thus, the above grounds of appeal cannot be accepted. Furthermore, even if examining the above grounds of appeal in light of the relevant legal principles and records in the lower judgment, the lower

3. Conclusion

Therefore, all appeals are dismissed, and the costs of appeal are assessed against each appellant. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Park Sang-ok (Presiding Justice)