In a case where Gap et al., a non-listed corporation Gap corporation as shareholders of Eul et al., entrusted Gap corporation to sell their shares to participate in the old stock sales at the time of listing Gap corporation's stocks, Gap corporation deposited the above shares in the account under the name of Byung bank, a foreign depository institution, and Byung bank delivered the above shares to the foreign depository institution Byung bank as the original stock, and the tax authorities imposed capital gains tax on Eul et al. on the ground that Eul et al. transferred the overseas depository receipts issued based on the shares to the overseas depository, the case holding that the above disposition was unlawful on the ground that Eul et al. transferred the above shares, not the above depository receipts, but the above shares, which served as the basis for the issuance, to Byung bank Byung.

In a case where: (a) Party A, a non-listed corporation, delegated Company A to sell its stocks to participate in the old stock sale at the time of listing the stocks of Company A; (b) Company A transferred the said stocks to the Korea Securities Depository; and (c) Company C issued depository receipts in the name of a foreign bank Byung which is a foreign depository; and (d) Company C transferred the said stocks to the foreign depository; (b) Company B, upon reporting and paying transfer income tax on the premise that Company B, etc. transferred the stocks which are domestic assets after receiving the purchase price to the foreign depository; and (c) Company C, the Korea Securities Depository, which was a foreign depository institution, was deemed to have issued or transferred overseas depository receipts based on the stocks issued by the tax authority B, etc. to the foreign depository; and (d) Company C, the said stocks were deemed to have been issued or transferred to the foreign depository institution under the name of the foreign depository institution; and (d) the said stocks were presumed to have been returned to the Korea Securities Depository under Article 17-4 of the Securities and Exchange Act at any time on the ground that the foreign depository institution was deposited.

Articles 94(1)3(c), 104(1)4(b), 118-2 subparag. 3, and 118-5(1)3 of the former Income Tax Act (Amended by Act No. 8144, Dec. 30, 2006); Article 178-2(2) of the former Enforcement Decree of the Income Tax Act (Amended by Presidential Decree No. 21301, Feb. 4, 2009); Article 174-4(1) of the former Securities and Exchange Act (Amended by Act No. 8315, Mar. 29, 2007; see current Article 312(1) and (2) of the Financial Investment Services and Capital Markets Act (see current Article 312(2) of the Financial Investment Services and Capital Markets Act)

See Attached List of Plaintiffs (Attorney Jeong Byung-chul et al., Counsel for the plaintiff-appellant)

Head of Gangnam District Tax Office and 15 others

Seoul High Court Decision 2010Nu39917 decided July 5, 2011

All appeals are dismissed. The costs of appeal are assessed against the Defendants.

The grounds of appeal are examined.

1. Article 94(1)3(c) of the former Income Tax Act (amended by Act No. 8144, Dec. 30, 2006; hereinafter “Income Tax Act”) provides that one of the taxable objects of capital gains tax refers to “income accruing from the transfer of stocks, equity shares, or preemptive rights to new stocks of a corporation which is not a stock-listed corporation or a KOSDAQ-listed corporation” and Article 104(1)4(b) of the same Act provides that the capital gains tax rate for the stocks, etc. of a small and medium enterprise among the assets under Article 94(1)3(c) of the same Act provides that “10/100 of the tax base of capital gains tax” shall be “10/100

Meanwhile, Article 118-2 of the Income Tax Act provides that “The income accruing from the transfer of assets abroad in the corresponding year shall be the income falling under any of the following subparagraphs which accrue from the transfer of assets abroad in the corresponding year.” Article 118-5(1)3 of the Income Tax Act provides that “The income accruing from the transfer of stocks or equity shares as determined by the Presidential Decree.” Article 118-2(2) of the same Act provides that “The tax rate of capital gains tax on the assets under subparagraph 3 of Article 118-2 shall be 20/100 of the tax base of capital gains tax.” In addition, Article 178-2(2) of the former Enforcement Decree of the Income Tax Act (amended by Presidential Decree No. 21301, Feb. 4, 2009; hereinafter “Enforcement Decree of the Income Tax Act”) means stocks or equity shares issued by a domestic corporation and other stocks listed in a foreign market similar to the securities market or the Association brokerage market under the Securities and Exchange Act.”

2. Review of the reasoning of the judgment of the first instance cited by the lower court and the evidence duly admitted reveals the following facts.

(1) A domestic corporation, an unlisted corporation, as a domestic corporation, intended to disclose its business to the public by listing depository receipts (DR and Deposary Recepts) on a Nascam, a market for stock transactions outside the United States, around 2006, which is a market for stocks transaction outside the United States.

(2) In relation to this, on June 1, 2006, the plaintiffs, who are shareholders of the branch market, concluded a delegation contract with the branch market as to the sale of the shares issued in the branch market owned by the plaintiffs. The main contents are as follows.

① The Plaintiffs promised to sell part of their shares to the Plaintiffs in order to participate in the old-market sales at the time of the opening of the company, and agree that the sales price per share is determined at the time of the opening of the company, and that whether to sell and the quantity of each share may be adjusted by the weekly company (Article 2).

② The Plaintiffs are fully responsible for the weekly sales commission, taxes, and all other necessary expenses incurred in connection with the former weekly sales (Article 3).

③ The Plaintiffs shall have the authority to prepare and conclude all documents, such as the acceptance contract entered into with respect to the disclosure of a company in the market, the protection contract and all confirmations, written consents, and reports necessary for the progress and termination of the disclosure of the company in the market, and shall delegate the authority to send and receive all notifications, etc. made in the course of performing the above duties to the market (Article 5).

(3) On June 28, 2006, the branch market opened the board of directors on the issuance of new stocks and depository receipts for the issuance of depository receipts as follows.

① New shares issued at USD 15.25 per share are issued at USD 6,079,710 per share, and all new shares issued are scheduled to be deposited in an account opened in the name of a foreign depository institution in the Korea Securities Depository (Ciiban N.A.) after keeping them in the Korea Securities Depository, a depository institution, and are expected to be issued and sold to foreign investors (new shares are allocated to a third party who is a depository institution other than a shareholder pursuant to Article 9(2)5 of the articles of incorporation).

② The issuance form of depository receipts is US 139,073,366.25 US dollars (1DR). Of them, US$92,715,57.50 US dollars 92,715,57.50 US$39,03,855 US depository receipts (ADR) are issued as depository receipts (IDR) and the total issue amount is US$139,073,366.25 (1DR issuance price). Among them, US$9,715,57.50 US$3,039,855 U.S. shares are issued as depository receipts.

③ The total number of depository receipts issued are 9,119,565DRs (1DRs). Among them, the 6,079,710 shares of new depository receipts issued in Posing to Posing to 3,039,855 shares issued in Posing to Posing to 19,119,565 shares, and 3,039,855 shares issued in Posing to Pos to Posing to 19

(4) After that, on July 5, 2006, 3,039,855 shares issued by 39 shareholders, including the plaintiffs, were delivered to the Korea Securities Depository and deposited in an account opened in the name of the U.S. CTC, a foreign depository institution. The Korea Securities Depository notified the fact to the U.S. CTC.

(5) On July 5, 2006, Madman, etc., the main company, etc., received USD 43,112,743.54 of the sales price for the said shares (2,738,400 shares owned by the Plaintiffs; hereinafter “the instant shares”) from Madman, etc., and on July 6, 2006, Madman Bank issued the instant stock depository receipts and delivered them to an overseas person.

(6) After receiving the purchase price from a branch market in proportion to its shares, the Plaintiffs reported and paid the transfer income tax calculated by applying 10/100, which is the tax rate under Article 104(1)4(b) of the Income Tax Act, to the tax base for the transfer income of the instant shares, on the premise that the Plaintiffs transferred the instant shares, which are domestic assets, to a foreign depository institution.

(7) The Defendants deemed that the instant depository receipts issued on the basis of the instant shares, not the instant shares, were transferred to a foreign person, and accordingly, applied 20/10 of the tax rate under Article 118-5(1)3 of the Income Tax Act, and imposed the instant capital gains tax on the Plaintiffs from March 2009 to July 2009, respectively.

3. The following circumstances revealed in light of the above facts and the relevant provisions of the former Securities and Exchange Act (amended by Act No. 8315, Mar. 29, 2007; hereinafter “Securities and Exchange Act”), i.e., (i) it is presumed that CFF bank would have a co-ownership share in the instant shares as a depositor after the instant shares were deposited in the name of the Korea Securities and Exchange (Article 174-4(1) of the Securities and Exchange Act). (ii) Accordingly, CF Bank may at any time request the Korea Securities Depository to return the instant shares corresponding to its co-ownership share (Article 174-4(2) of the Securities and Exchange Act). However, the Plaintiffs cannot request the return thereof; (iii) it is reasonable to view that CFF bank received the purchase price of the instant depository receipts from its overseas holders; and (iv) the Plaintiffs acquired the instant shares of the instant securities depository receipts from its overseas depository, which are the securities depository receipts, and thus, the Plaintiffs were deemed to have otherwise acquired the instant securities issued and deposited securities, instead of the instant securities issued.

4. The lower court is somewhat inappropriate to determine whether the Plaintiff’s assets were the instant stocks or the instant depository receipts, but so long as the lower court determined that each of the instant disposition of imposing capital gains tax was unlawful on the grounds that “this case’s depository receipts do not constitute an asset subject to capital gains tax under Article 118-2 subparag. 3 of the Income Tax Act and Article 178-2(2) of the Enforcement Decree of the Income Tax Act,” the lower court’s conclusion is justifiable. Therefore, contrary to what is alleged in the grounds of appeal, the lower court did not err by misapprehending the legal doctrine on taxable objects

5. 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.

[Attachment] List of Plaintiffs: Omitted

Justices Lee In-bok (Presiding Justice)