Daegu District Court-2017-Gu Partnership-24365 ( December 05, 2018)

Cho Jae-2017-Gu-3297 (2017.07)

It is not necessary to apply special taxation for gift tax to succession to a family business if the donor has to hold the relevant stocks for at least ten years.

"The donor shall hold the shares for at least 10 years" cannot be a requirement for applying special taxation of gift tax to succession to a family business under Article 30-6 (1) of the former Restriction of Special Taxation Act.

Article 15 of the Restriction of Special Taxation Act (Special Taxation on Succession to Family Business)

Daegu High Court-2018-Nu-5278

○ ○

○ Head of tax office

.04.26

.05.31

1. Revocation of a judgment of the first instance;

2. The Defendant’s imposition of KRW 117,105,450 (including additional taxes) on the Plaintiff on March 31, 2017 shall be revoked.

3. All costs of the lawsuit are borne by the Defendant.

The same shall apply to the order.

1. Details of the disposition;

A. Status of the parties

1) AAA (hereinafter referred to as “AA prior to the merger”) was established on November 16, 1993 for the purpose of manufacturing and selling V and was merged into AA metal Co., Ltd. on July 4, 2016.

Since July 15, 2016, AAM, a corporation, was changed to "AA" (hereinafter referred to as "AA after the merger"), "AA" (hereinafter referred to as "AA after the merger," and "AA" only when it is referred to as "AA" before and after the merger.

2) BB, the father of the Plaintiff, was established on November 16, 1993 by AA prior to the merger, and was in office as a representative director and a director thereafter, from March 31, 2009 to March 31, 2009, and was in office as a director of AA after the merger. As above, after the merger of the company, the company is in office as a director of AA after the merger.

3) From March 31, 2009, the Plaintiff served as the representative director of AA prior to the merger, and after the merger, the Plaintiff serves as the representative director of AA after the merger.

4) The Plaintiff’s mother, the Plaintiff’s mother, was registered as an auditor of the AA prior to the merger from the time the AA was established to the time of the merger with the said time.

B. Return on gift tax by the Plaintiff

1) On April 30, 2012, BB donated 67,023 shares of AA (hereinafter “instant shares”) from CCC, a spouse, and donated 160,150 shares (hereinafter “the instant shares”) to the Plaintiff on May 1, 2012, including 93,127 shares of AA and 67,023 shares (hereinafter “the instant shares”) donated to the Plaintiff on May 1, 2012.

2) On July 18, 2012, the Plaintiff reported and paid KRW 80,586,310 to the Defendant by applying special taxation for gift tax on the succession to family business pursuant to Article 30-6(1) of the former Restriction of Special Taxation Act (amended by Act No. 12173, Jan. 1, 2014; hereinafter the same).

C. Defendant’s correction and notification of gift tax

On March 31, 2017, the Defendant issued a correction and notification of gift tax amounting to KRW 117,105,450 (including additional tax) (hereinafter “instant disposition”) to the Plaintiff on the ground that “the instant shares do not constitute shares donated from the parents over the age of 60 who continuously operated the family business for at least 10 years for the purpose of succession to the pertinent family business” (hereinafter “instant disposition”).

(d) Procedures of the previous trial; and

The Plaintiff dissatisfied with the instant disposition and filed an appeal with the Tax Tribunal on June 29, 2017, but the appeal was dismissed on September 7, 2017.

Facts without any dispute over recognition, Gap's evidence Nos. 1, 2, 8, 9, 11, Eul's evidence Nos. 1 and 2, and the purport of the whole pleadings.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The instant disposition should be revoked on the grounds that it is unlawful for the following reasons.

1) Based on the following established rules of the Ministry of Strategy and Finance, the Defendant disposed of the instant shares on the ground that the instant shares were donated by CCC, the spouse of which was not a donor, and for which ten years have not passed since it was not run a family business.

Property tax system and 385 ( May 14, 2014) of the Ministry of Strategy and Finance

A person who runs a family business under Article 18 (2) 1 of the Inheritance Tax and Gift Tax Act shall operate a family business;

For stocks donated by a spouse who has not been a spouse and for which ten years have not passed since such donation, Article 18 of the same Act;

(2) Inheritance tax deductions for family business succession pursuant to paragraph (2) of this Article and donations to family business succession pursuant to Article 30-6 of the Restriction of Special Taxation Act

Tax exemption does not apply to taxation.

2) However, Article 30-6(1) of the former Restriction of Special Taxation Act requires the application of special taxation of gift tax on succession to a family business: ① A donee is a resident of 18 years of age or older; ② a donor is a parent of 60 years of age or older who has run a family business for 10 years or more; ③ a donor is a major shareholder, and a donor and his/her related parties are to continuously hold at least 50/10 of the total number of shares issued by the donor and his/her related parties, and the donor does not stipulate that “B shall hold gift shares for 10 years or more;” thus, the instant disposition on the ground that BB (the donor) did not hold the shares of this case for 10 years or more is contrary to the principle of no taxation without law, statutory principle, and strict interpretation.

3) In addition, since CCC had actively participated in a family business management since it had been employed as an auditor since the establishment of AA, it constitutes “stocks donated by the parents who continued to operate a family business for at least 10 consecutive years.”

4) Since the above established rules were established after the Plaintiff was donated the instant shares from BB, applying them to the gift of the instant shares violates the principle of prohibition of retroactive taxation.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Organization of issues

1) According to Article 30-6(1) of the former Restriction of Special Taxation Act and Article 27-6(1) of the Enforcement Decree thereof (amended by Presidential Decree No. 25211, Feb. 21, 2014; hereinafter the same shall apply), a parent who is 60 years of age or older (including a father or mother who died at the time of donation, and his/her father or mother’s parents are included) who continuously engages in the family business under Article 18(2)1 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11609, Jan. 1, 2013; hereinafter the same shall apply) with the intention of succeeding the family business from the largest shareholder at the time of donation (referring to the maximum amount of KRW 3 billion of gift tax; hereinafter referred to as “stocks, etc.”) and whose aggregate amount of stocks or contribution shares (referring to a donor and a person who succeeds to the gift tax at the time of donation is 10 billion won or less within 20 years after the reporting period of gift tax).

Meanwhile, pursuant to Article 18(2)1 of the former Inheritance Tax and Gift Tax Act and Article 15(3) of the Enforcement Decree thereof (amended by Presidential Decree No. 24358, Feb. 15, 2013; hereinafter the same), “family business” means a small or medium enterprise prescribed by Presidential Decree [referring to a small or medium enterprise under Article 5(1) of the Restriction of Special Taxation Act (referring to a small or medium enterprise under Article 2(1) of the Enforcement Decree of the Restriction of Special Taxation Act as of the end of the taxable year immediately preceding the taxable year in which the commencement date of inheritance falls under a small or medium enterprise under the relevant Acts and subordinate statutes; hereafter the same shall apply in this case] or a company that has ceased to be a small or medium enterprise due to the expansion of its size (excluding a company whose sales in the immediately preceding business year in which the inheritance commences exceed 150 billion won and an enterprise within the enterprise group subject to limitations on mutual investment; 2.00% or more of the total number of shares issued by an ancestor are owned by the Korea Exchange.

2) In full view of the language, content, form, and system of the foregoing provision, it is clear that the requirements of applying special taxation of gift tax on succession to a family business include ① a donee is a resident aged 18 or older; ② a donor is a parent aged 60 or older who has been continuously engaged in a family business for at least 10 consecutive years; ③ a donor parent is a largest shareholder, etc. who has continuously been engaged in a special relationship for at least 10 consecutive years (see, e.g., Supreme Court Decision 2013Du17206, Mar. 13, 2014).

However, the defendant, in addition to these requirements, made the disposition of this case on the premise that the requirement that the donor holds the pertinent shares for not less than 10 years is necessary, while the plaintiff asserts that such requirement is not a requirement for the special taxation of gift tax on the succession to the family business (for 10 years prior to the date of the donation of this case, there is no dispute between the parties on the fact that the total amount of shares AA shares issued before the merger held by BB and its related parties is not less than 50/100 of the total number of shares generated before the merger)

3) If it is necessary for the donor to hold the pertinent shares for at least 10 years as the requirement for the application of special taxation of gift tax on the inheritance of family business as alleged by the Defendant, the instant shares do not constitute shares held by BB for at least 10 years, and thus, the instant disposition is legitimate regardless of whether CCC actually operates AA with BB.

4) Therefore, the issue of the instant case is whether the donor should hold the pertinent shares for at least ten years in order to apply the special taxation of gift tax on the succession to family business as stipulated in Article 30-6(1) of the former Restriction of Special Taxation Act.

D. Determination

"The donor shall hold the shares for at least 10 years" is not a requirement for applying special taxation of gift tax to succession to family business as provided in Article 30-6 (1) of the former Restriction of Special Taxation Act. The reasons are as follows.

1) Under the principle of no taxation without law, or under the principle of no taxation without law, the interpretation of tax laws and regulations shall be interpreted in accordance with the law, barring special circumstances, and it shall not be permitted to expand or analogically interpret without reasonable grounds (see, e.g., Supreme Court Decision 97Nu20090, Mar. 27, 1998).

2) The purport of Article 30-6(1) of the former Restriction of Special Taxation Act, Article 18(2)1 of the former Inheritance Tax and Gift Tax Act, and Article 15(3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, which provides for the special taxation of gift tax or inheritance tax on the succession of family business, is to provide tax support on the donation and succession of a certain family business so as to maintain the continuity of a small and medium enterprise and promote economic vitality. However, in order to constitute a "family business subject to the special taxation of gift tax", if the donor's parents are the largest shareholder or the largest investor and have been holding not less than 10 years in total by adding the shares or equity shares of the donor's specially related persons, i.e., holding not less than 50/100 of the total number of issued shares or total amount of investment, it is not necessary to satisfy the requirement that the donor will continue to hold the

3) The Defendant asserts that, as the Plaintiff’s assertion, the special taxation of gift tax is applied at any time regardless of the period of possession of the pertinent shares, if the parent’s parents, who are the donor, were to interpret that the special taxation of gift tax is applicable to the donation of shares acquired by the donor’s parents as of the date immediately preceding the donation date, and that this would be unfair because they can be abused as a means of tax avoidance by clarifying the legislative intent of the special taxation of gift tax, which provides for the taxation of gift tax to the succession to a family business that has been continuously operated for not less than 10 years by their parents. However, it cannot be said that the donor’s parents, as the largest shareholder or largest investor, hold not less than 50/10 of the total number of shares issued and outstanding shares and manage the relevant company for more than 10 years by adding the shares or equity shares of their related parties, which meet the requirements of the special taxation of gift tax.

4) According to the proviso of Article 30-6 (1) of the former Restriction of Special Taxation Act, the special taxation of gift tax is not applicable to the case of donation from a donor or a person who falls under the largest shareholder at the time of succession to a family business after succession to a family business. The above proviso was newly established as a result of the amendment of Article 30-6 (1) of the Restriction of Special Taxation Act by Act No. 10406 on December 27, 2010. This provision is designed to apply the special taxation of gift tax only to the case where a donor of a single donor first donates shares to succeed to a family business for the first time.However, it cannot be deemed that the requirements for the special taxation of gift tax for a family business succession, such as "the donor shall hold shares for at least 10 years."

Ultimately, in order to apply special taxation of gift tax on succession to a family business under Article 30-6 (1) of the former Restriction of Special Taxation Act, the disposition of this case on the premise that the donor shall hold the relevant stocks for at least ten years must be revoked illegally.

3. Conclusion

Therefore, the plaintiff's claim of this case shall be accepted for the reasons, and since the judgment of the court of first instance differs from this conclusion, the plaintiff's appeal is accepted and the judgment of the court of first instance is revoked, and it is so decided as per Disposition with the decision to revoke the disposition