Cho High Court Decision 2010Du2052 ( December 01, 2010)

It does not contravene the principle of double taxation prohibition to impose capital gains tax and gift tax when a low price is transferred between related parties.

The transfer income tax is imposed on the transferor by applying the provision of wrongful calculation to the difference between the market price and the transfer value at the time of the low-price transfer between the related parties, and the gift tax is imposed under the legal provision of the Inheritance Tax and Gift Tax Act.

2011Guhap7205 Disposition of revocation of imposition of capital gains tax, etc.

Kim XX et al.

Head of the Cheongju Tax Office and two others

August 23, 2011

October 6, 2011

1. The plaintiffs' claims against the defendants are all dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

1. A. The primary purport of the claim is to revoke the imposition of capital gains tax of KRW 240.529.210 (including additional tax) for the transfer income tax of March 3, 2010 against Plaintiff KimA, which was made by the head of the competent tax office on March 3, 2010.

B. Preliminary claim: (a) the head of the distribution tax office’s imposition of KRW 152,514,570 (including additional tax) on Plaintiff KimB on March 3, 2010 and the imposition of KRW 26,11,460 on Plaintiff KimCC shall be revoked, respectively.

2. On March 1, 2010, the disposition of imposition of KRW 188,170,020 (including additional tax) by the director of the tax office on March 1, 2010 shall be revoked.

1. Details of the disposition;

A. Article XX (hereinafter referred to as "P") transfers 220,00 shares of OOF Co., Ltd. (hereinafter referred to as "OOF") held on November 10, 200 to YE at KRW 1.32,00,000 (the share ratio of KRW 100,000 per share; hereinafter referred to as "first shares") at KRW 6,000,000 (the share of KRW 6,000 per share). On January 24, 2007, E transferred 147,00 shares among the first shares of this case to YB, KRW 72,600 per share to 6,100 won per share, KRW 80,000, KRW 200 per share, KRW 208,000 per share, KRW 208,000 (the shares of this case to Plaintiff 20,000, KRW 208,000 per share).

C. The director of the Seoul Regional Tax Office conducted a tax investigation on the OOF, the plaintiff KimB, and the KimCC and confirmed that the plaintiffs and leE conducted unfair transactions, such as title trust and low-price transfer in the process of transferring and taking over OOF shares, and notified the defendants of the relevant taxation data.

D. Accordingly, the Defendants imposed capital gains tax or gift tax on each of the relevant Plaintiffs, and the specific details are as follows (hereinafter referred to as “each of the instant dispositions”, excluding the remaining dispositions of imposition of leap in the following dispositions).

1) Disposition of imposition by the director of the tax office for the defendant

Although Plaintiff KimA acquired the shares of this case from XX, it was in fact trusted the title of the title of Plaintiff KimB (A) and KimCC (AC) with its related party, and then transferred the shares of this case to Plaintiff KimB (AC) at a lower price (6,100 won per share) compared to the market price (10,378 won per share) constitutes an unfair calculation under Article 101(1) of the former Income Tax Act (amended by Act No. 9270, Dec. 26, 2008; hereinafter the same shall apply) on the ground that it constitutes an unfair calculation under Article 101(1) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 19890, Feb. 28, 200; hereinafter the same shall apply). The appraised value of the shares of this case at the time of transfer (10,378 won) and the appraised value of the shares of this case at the time of acquisition (2,409 won and necessary expenses) at the time of transfer of the shares of this case, 3070,1410.

2) Each disposition taken by the director of the tax office on the distribution of defendants

The acquisition of the shares of this case by the Plaintiff KimB and KimCC from the Plaintiff KimA, a person with a special relationship as above, shall be deemed as the acquisition at the lower price under Article 35(1)1 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter referred to as the “former Inheritance Tax and Gift Tax Act”). The first share company of this case assessed under Article 26 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 20621 of Feb. 22, 2008; hereinafter referred to as the “former Enforcement Decree of the Inheritance Tax and Gift Tax Act”) less the other deduction amount from the difference between the acquisition value (10,00 won per week) and the acquisition value (6.10 won per week) (the additional tax shall be included in the gift tax amount of Plaintiff KimB346,201,600, Plaintiff KimCC89,936,80 won).

3) Each disposition by the chief of the tax office against the defendant

A) On March 1, 2010, Plaintiff KimCC’s transfer of Plaintiff 2 stocks of this case to Plaintiff D constitutes a nominal consignment, 50,600 shares, excluding 22,00 shares again transferred to Plaintiff KimCC within three months of the instant shares, shall be assessed as 12,744 won per share pursuant to Article 63 of the former Inheritance Tax and Gift Tax Act and Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, and 64,846,400 won per share, which is assessed as 12,744 won, shall be deemed as the taxable amount of gift tax, and shall be determined and notified to Plaintiff 2D on March 1, 2010.

B) Under Article 63 of the former Inheritance Tax and Gift Tax Act and Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, Plaintiff KimA deemed that the title trust of the shares of this case was made to MaE, and the amount of KRW 529,980,000 calculated by evaluating the value per share of the shares of this case as KRW 2,409, is determined and notified to MaE by deeming that the amount of gift tax is the taxable amount of gift tax and the gift tax is the taxable amount of gift tax.

E. On May 28, 2010, the Plaintiffs were dissatisfied with each of the dispositions of this case and filed an appeal with the Tax Tribunal on May 28, 2010, but the Tax Tribunal dismissed the Plaintiffs’ appeal on February 2, 2010.

I) Facts without dispute, Gap evidence 1-1, 2, Gap evidence 2, 17, Eul evidence 1-5, Eul evidence 6-1, 2-2, and the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiffs' assertion

1) Plaintiff KimA, KimB, and KimCC’s assertion (hereinafter “instant claim”)

A) The head of the tax office on distribution of the Plaintiff KimB and KimCC deemed that the difference between the market price and the acquisition price arising from the acquisition of the instant shares from the Plaintiff KimA, a related party to the instant shares from the Plaintiff KimA, was donated to the Plaintiff KimB and KimCC, thereby imposing gift tax on the Plaintiff KimB and KimCC. In addition, the imposition of transfer income tax on the Plaintiff KimA is unlawful as double taxation. Accordingly, the imposition of transfer income tax on the Plaintiff KimA by the head of the tax office on the Defendant Cheongju Tax Office should be revoked as double taxation, and if the said imposition of gift tax on the Plaintiff KimB and KimCC is not revoked, it should be revoked as it is unlawful as it is inconsistent with the said imposition of transfer income tax.

B) Plaintiff KimA’s assertion

In imposing the transfer income tax on the Plaintiff Cheongju Tax Office, it is unlawful for the Defendant Cheongju Tax Office to consider the price (6,000 won per share) that Plaintiff Kim Kim acquired and paid shares of this case from XX as the acquisition value and calculated the transfer margin by deeming the appraised value (2,409 won per share) under the former Inheritance Tax and Gift Tax Act as the acquisition value. As such, the part exceeding the transfer income tax amount calculated on the basis of the actual acquisition value (6,000 per share) of shares of this case among the disposition imposing the transfer income tax shall be revoked.

2) Plaintiff AD’s assertion

Pursuant to Article 12 (1) 4 of the Fair Transactions in Franchise Business Act (hereinafter referred to as the "Franchisor"), and its executives and employees held shares of △△△△△ P Co., Ltd. (hereinafter referred to as "△△△△ P Co., Ltd."), which are the same type of business franchise. However, Article 12 (1) 4 of the Fair Transactions in Franchise Business Act was newly established on August 3, 2007 and enforced on February 4, 2008, in violation of a franchise agreement, the act of establishing a store or chain store of the same type of business as that of franchisees (referring to an affiliated company under Article 2 subparagraph 3 of the Monopoly Regulation and Fair Trade Act) within the franchisee's business area during the franchise agreement period, and such act was prohibited from establishing the store or chain store of the same type of business, and thus, it still existed for △△ P Co. 2 to exclude the Plaintiff's shares from the △△△ affiliated company and △△ P Co., Ltd. (hereinafter referred to as its affiliated company).

Therefore, the transfer of the Plaintiff KimCC’s instant 2 shares to Plaintiff AD is not a title trust, and even if it is a title trust, it is intended to avoid the regulation pursuant to the above provisions of the Franchise Business Act, and thus, the provision on deemed donation of title trust under Article 45-2 of the former Inheritance Tax and Gift Tax Act cannot be applied because it does not have any purpose of tax avoidance. Therefore, the imposition of gift tax on Plaintiff AD by the

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Determination as to the primary and conjunctive claim

Considering that the transaction of the instant 1 stock between Plaintiff KimB and Plaintiff KimB, and KimCC is a low-price transfer between related parties, the head of the tax office having jurisdiction over the CD’s Cheongju Tax Office imposes capital gains tax on Plaintiff KimA in relation to the difference between the transfer value and the market value by applying the provision of wrongful calculation under Article 101(1) of the former Income Tax Act (hereinafter “instant denial provision”). At the same time, the head of the tax office imposing capital gains tax on the transferor KimB and KimCC by deeming the difference between the transfer value and the market value as a donation from Plaintiff KimA under Article 35(1)1 of the former Inheritance Tax and Gift Tax Act (hereinafter “instant provision”).

The imposition of capital gains tax on the basis of the market price is necessary to prevent unfair tax avoidance and to induce normal transactions. In addition, in order to induce a taxpayer to engage in certain acts, the imposition of capital gains tax on the economic profit (transfer of profit without any consideration) that is not included in the subject of taxation shall be allowed within a certain scope. In addition, if gift tax is imposed on the basis of free transfer of profit, it would result in double taxation. In this case, it is reasonable to view that the legislators should determine the method of adjustment of double taxation of capital gains tax under the denied Clause of this case and the gift tax under the deemed clause of this case, and what extent should be defined, within the legislative discretion, comprehensively taking into account the necessity for prevention of tax avoidance, ensuring fairness of burden burden, degree of burden burden burden burden burden burden burden burden burden burden, etc.

Article 41 of the former Enforcement Decree of the Income Tax Act, Article 98(1) of the former Enforcement Decree of the Income Tax Act, and Article 26(4) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that the scope of persons having special relations shall be reduced by setting different requirements for application of the same provision, although both provisions apply in duplicate, such as tax credits, are not adopted. In other words, each of the requirements for calculation by wrongful calculation and donation under each of the respective provisions of the same case is different [Article 41 of the former Income Tax Act, Article 98(1) of the former Enforcement Decree of the Income Tax Act, and Article 26(4) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act] The standard for low-price transfer is that the standard for denial of this case, which is ordinarily understood lower than the market price, should be determined on the basis that the legislative discretion of the transferor is significantly less than the market price (see the latter part of Article 98(2)1 of the former Enforcement Decree of the Income Tax Act).

In light of the above, the transfer income tax is imposed on the transferor according to the denial clause regarding the difference between the market price and the transfer price at the time of transfer of the property between the related parties. The imposition of gift tax on the transferee pursuant to the constructive provision of this case brings about double taxation on the source of the same tax-bearing force, and even if it brings about double taxation on the source of the same tax-bearing force, it does not violate the double taxation prohibition principle (see, e.g., Constitutional Court Order 2004HunBa76, Jun. 29, 2006). Therefore, the above imposition disposition of transfer income tax and gift tax cannot be deemed a disposition that is incompatible with the above imposition disposition of transfer income tax, and therefore, this part of the argument of the plaintiff KimA, KimB, and KimCC on a different premise

2) Determination on Plaintiff KimA’s assertion

Article 101 (1) of the former Income Tax Act provides that when a resident’s act or calculation of transfer income is deemed to unreasonably reduce the tax burden on the relevant income due to a transaction with the resident and a related party, the head of the district tax office having jurisdiction over the place of tax payment or the director of the regional tax office having jurisdiction over the place of tax payment may calculate the amount of income in the current year regardless of the resident’s act or calculation. Articles 167 (3) and 98 (2) 1 of the former Enforcement Decree of the Income Tax Act provide that "when the resident purchases assets at a price higher than the market price from the related party, the tax burden shall be reduced unfairly under Article 101 (1) of the former Income Tax Act. In addition, the main sentence of Article 97 (1) 1 (a) of the former Income Tax Act provides that the actual transaction price required for the acquisition of unlisted stocks as one of the necessary expenses to be deducted from the transfer price of the resident’s transfer income, and Article 163 (1) 1 (a) of the former Enforcement Decree of the Income Tax Act provides that the market price calculated by applying mutatis mutandis the following provisions:

In light of the above provisions, in a case where an asset is purchased from a person with a special relationship at a higher price than the market price, it shall be deemed that it is unfair calculation and the market price assessed under the former Inheritance Tax and Gift Tax Act and the former Enforcement Decree of the Inheritance Tax and Gift Tax Act regardless of its actual acquisition value is calculated on the basis of the acquisition value of the asset. As seen earlier, it is legitimate to consider the appraised value under the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (2,409 won per share) as the acquisition value under Article 167(5) of the former Income Tax Act at the time of the acquisition of the stock of this case as the acquisition value of the Plaintiff KimA who purchased the stock of this case at a higher price than the market price under Article 167(5

Therefore, the plaintiff KimA's assertion on this part is without merit.

3) Determination on the Plaintiff’s assertion

A) The legislative purport of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act is to recognize an exception to the principle of substantial taxation to the purport that the act of tax avoidance using the title trust system is effectively prevented, thereby realizing the tax justice. Thus, if the title trust was recognized as having been conducted for any reason other than the purpose of tax avoidance, and it is merely a minor reduction of tax incidental to the said title trust, it cannot be readily concluded that there existed the purpose of tax avoidance in the title trust. However, in light of the legislative purport as seen above, inasmuch as the purpose of the title trust is not included in the purpose of tax avoidance, it cannot be deemed that the purpose of the title trust cannot be deemed as having been deemed as having been donated by applying the proviso of the said provision only in a case where the purpose of the title trust is not included in the purpose of tax avoidance, and it cannot be deemed that there was an intention of tax avoidance. In such case, the burden of proving that there was no purpose of tax avoidance exists a nominal person who asserts it (see

B) the facts of recognition

① On December 31, 2007, Plaintiff KimCC concluded a contract to transfer the instant 2 shares to KRW 700 million with Plaintiff AD and received KRW 70 million down payment from Plaintiff AD with respect to the instant 2 shares. On the same day, Plaintiff KimCC concluded a contract to acquire KRW 80 million shares of the instant 2 shares from Plaintiff AD and completed the transfer of ownership in Plaintiff AD with respect to the instant 2 shares. On the other hand, Plaintiff KimCC concluded a contract to acquire KRW 80 million shares of the instant 2 shares between OF and OF on the same day and paid KRW 70 million shares to Plaintiff KimCC, and completed the transfer of ownership in the instant 200 million shares.

② On February 11, 2008, Plaintiff AD entered into a contract with Plaintiff KimCC on the transfer of KRW 22,000 of the instant shares to KRW 212,102,00. On February 13, 2008, Plaintiff AD paid KRW 100 million out of the purchase price of the instant shares to Plaintiff KimCC, and KRW 530,000,000,000,000,000 for the remaining acquisition price of the instant shares on February 18, 2008.

③ On February 19, 2008, Plaintiff KimCC paid KRW 400,000 as the acquisition price of △△ Food shares to OOF (Plaintiff KimCC paid KRW 70,000 by mistake and stated that it was returned). On the same day, Plaintiff KimCC paid KRW 212,102,00 as the acquisition price of 22,00 shares out of the instant 2 shares.

④ On April 18, 2008, Plaintiff AD entered into a contract to transfer KRW 41,800 out of the instant shares to KRW 403,035,600 on the same day, and received the said transfer proceeds on the same day. On November 6, 2008, Plaintiff AD entered into a contract with Plaintiff KimB on the amount of KRW 8,800 out of the instant shares of KRW 84,849,60 and received the said transfer proceeds on the same day.

⑤ Each sales contract with the Plaintiff KimCC and the Plaintiff Lee DaD with respect to the instant 2 shares, and each sales contract with the Plaintiff Lee Do, KimB, and XX, respectively, was concluded in a way that the Plaintiff Lee Dod affixed the Plaintiff Lee Dod on the sales contract brought by Plaintiff KimA under the direction of Plaintiff Kim Dod, and only the Plaintiff KimB and Kim CC paid the transfer price (Plaintiff KimB and Kim CC) to the Plaintiff Lee Dod (or the Plaintiff KimB and Kim CC) upon deposit with the Plaintiff’s account.

⑥ The Plaintiff KimCC stated that KRW 630 million, out of KRW 700,000,000,000 of the acquisition price of the instant 2 shares, was remitted from many other persons arranged by the Plaintiff KimA (the Plaintiff DaD stated that it borrowed the said 700,000 won as interest-free interest, and that it borrowed the 630,000,000 won, out of the 70,000,000,000,000,000,000,000,000 won, which was paid to the Plaintiff KimA, was later transferred to the bank account of the Plaintiff Y, KimB, and XX. (The Plaintiff DoD stated that the 630,000,000 won, which was deposited as above, was later deposited into the bank account of the OF.

7) The transfer value (9,642 won per share) of Plaintiff DoD’s shares of this case against Plaintiff KimB and XX was lower than the market value (14,459 won per share in the case of Plaintiff KimB, and 12,953 won per share in the case of GATT) at the time.

④ As of December 31, 2007, the ratio of shares in OOF in OF as of December 31, 2007 is 67% by Plaintiff KimB, Plaintiff DoD is 33% by Plaintiff Do, and Plaintiff KimCC’s share ratio in △△D as of December 31, 2007 is 71.11% by Plaintiff KimCC.

(9) The △△△ Food is a franchise company of the same type of business (infinite and self-sale) as the OOsan.

[Ground of recognition] Facts without dispute, Gap 2, Eul 18 evidence, Eul 5-2 through 7, Eul 7-1, 2, Eul 8 evidence, witness MF testimony, the purport of the whole pleadings

C) Determination

The following circumstances revealed by the above facts, i.e., Plaintiff DaD did not specifically know the flow of the transfer price and the transfer price of Plaintiff 2’s shares. On the other hand, Plaintiff Do appears to have led not only to each sales contract related to Plaintiff 2 shares, but also to the number of the transfer price and the transfer price. Plaintiff DoD transferred 22,00 shares out of Plaintiff 2 shares to Plaintiff KimCC under the condition that Plaintiff DoD did not pay the transfer price to Plaintiff 2 shares to Plaintiff 2. After receiving the transfer price of the transfer price of the Plaintiff 2 shares, Plaintiff KimCC paid all the transfer price of the Plaintiff 2 shares to Plaintiff Do 22,00 shares. Plaintiff Do 2 had been paid the transfer price of the Plaintiff Do 2 shares to Plaintiff Do 2 and it appears to be due to Plaintiff 2’s external intent to indicate that each of the above shares transaction did not follow the title trust, and Plaintiff Do 2 was not subject to Plaintiff Do 2’s motive for transfer of the Plaintiff Do 2 shares.

Even if the transfer of the 2nd shares constitutes a title trust, it is difficult to find that the Plaintiff KimCC transferred the 2nd shares from the Plaintiff KimCC to the effect that the regulation pursuant to Article 12 of the Franchise Business Act, which was enforced from February 4, 2008, was applied to OOsan and △△ Food, and it did not have any objective of tax avoidance. However, the Plaintiff KimCC did not directly avoid the regulation of the 2nd shares under the above Franchise Business Act on the ground that the Plaintiff KimCC acquired the 2nd shares from the Plaintiff KimCC. Furthermore, according to the above, most of the acquisition price of the 2nd shares paid by Da to the Plaintiff KimCC were procured by the Plaintiff Kim Yong-A, the father of the Plaintiff KimCC, and it is difficult to find that the 2nd shares were transferred to the Plaintiff, as a way to avoid regulation under the above franchise business Act, without any other persuasive evidence that the Plaintiff 2nd share transfer of the 2nd shares to the Plaintiff, who was not directly related party to the Plaintiff 2nd of the transfer of the 2nd shares.

Therefore, we cannot accept this part of the plaintiff Lee D's assertion.

3. Conclusion

The plaintiffs' claims are dismissed in entirety because they are without merit.