[1] In a case where a certain transaction or act constitutes the concept of gift under Article 2(3) of the former Inheritance Tax and Gift Tax Act, whether a gift tax may be levied pursuant to Article 2(1) of the same Act (affirmative in principle)

[2] In a case where an individual value computation provision regulates a specific type of transaction or act, which limits only certain transaction or act as subject to gift tax, and limits the scope of taxation, thereby setting the scope and limitation of gift tax, whether gift tax may be levied if the transaction or act excluded from the taxable subject or scope of gift tax among the transaction or act regulated by the individual value calculation provision accords with the concept of gift under Article 2(3) of the former Inheritance Tax and Gift Tax Act (negative)

[3] Whether gift tax may be imposed on profits earned by a person who borrowed money through transactions such as gratuitous lending between unrelated parties based on Article 2(3) of the former Inheritance Tax and Gift Tax Act (negative in principle)

[1] Article 2(1) and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 201) / [2] Article 2(1) and (3) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 201) / [3] Articles 2(3) and 41-4(1) of the former Inheritance Tax and Gift Tax Act (Amended by Act No. 11130, Dec. 31, 2011)

[2] Supreme Court Decision 2013Du13266 Decided October 15, 2015 (Gong2015Ha, 1683) / [3] Supreme Court Decision 2014Du37924 Decided October 15, 2015

Plaintiff 1 and one other (Law Firm LLC, Attorneys Kang Han-hun et al., Counsel for the plaintiff-appellant)

Head of Seocho Tax Office and one other

Seoul High Court Decision 2014Nu54 decided July 30, 2014

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

The grounds of appeal are examined.

1. As to the second ground for appeal

Article 37(1) and Article 41-4(1)1 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter “the Act”) provide for the donation of profits from the free use and lease of real estate and money, respectively, as to the donation of profits from the free use of the remaining property other than real estate and money, and Article 42(1)1 of the former Inheritance Tax and Gift Tax Act separately provides for the donation of profits from the free provision of services under Article 42(1)2 of the same Act. In light of the fact that Article 41-4(1)1 of the Act separately prescribes the donation of profits from the free use of property separate from the donation of profits from the provision of services, the profits from the appropriate interest rate on the free lending of money stipulated under Article 41-4(1)2 of the Act does not constitute “profit from the provision of services without compensation” (see, e.g., Supreme Court Decision 2015Du374, Apr. 27, 2014).

In the same purport, the court below is just in holding that the profit equivalent to the interest amount calculated by multiplying the money that the plaintiffs received from the non-party who did not have any special relation by the interest rate of 8.5% or 9% per annum under Article 41-4 (1) 1 of the Act does not constitute the "profit obtained by receiving services without compensation" under Article 42 (1) 2 of the Act, and there is no error in the misapprehension of legal principles as to the interpretation and application of Article 42 (1) 2 of the Act, which led to the failure to exhaust all necessary deliberations.

2. Regarding ground of appeal No. 1

A. In light of the fact that the comprehensive gift taxation system was introduced in order to cope with an irregular inheritance and donation in advance, and the concept of comprehensive gift taxation unique to the tax law was introduced under Article 2(3) of the Act and the previous provision on the calculation of donated property (Articles 32 through 42) was uniformly converted into the former provision on the calculation of donated property (hereinafter “value calculation provision”), in principle, if a certain transaction or act constitutes the concept of gift stipulated under Article 2(3) of the Act, it shall be deemed that gift tax may be levied pursuant to Article 2(1) of the Act. However, in order to ensure the predictability of taxpayers and to promote the stability of tax law relations, where individual value calculation regulation limits only a specific transaction or act among them to be subject to gift tax, and the scope of taxation can be deemed to have set a limit on the scope and limit of gift tax by prescribing the scope of taxation of gift tax, it shall not be deemed that taxation of gift tax is consistent with the concept of gift tax under Article 2(3) of the Act.

Article 41-4(1) of the Act provides that where money exceeding KRW 100 million is given to a person having a special relationship without compensation, an amount calculated by multiplying the relevant amount of loan by the appropriate interest rate, and where money is given at an interest rate lower than the appropriate interest rate, an amount obtained by subtracting the amount equivalent to the interest actually paid from the amount obtained by multiplying the relevant amount of loan by the appropriate interest rate shall be deemed the value of donated property of each lender. This is to exclude transactions such as lending of money between persons having no special relationship from the subject of gift tax, and thereby establishing a limit not to impose gift tax on the profits earned by the borrower due to such transactions, barring special circumstances, such as where there is a separate provision that imposes gift tax on such profits, gift tax cannot be imposed on the grounds of Article 2(3) of the Act (see, e.g., Supreme Court Decision 2014Du37924, Oct. 15, 2015).

B. According to the reasoning of the judgment below, the non-party who does not have a special relationship with the plaintiffs (hereinafter referred to as the "non-party") lent a total of KRW 18,754,00,000 to the plaintiff 1 from May 14, 2007 to June 30, 2010, and KRW 5,00,000 to the plaintiff 2 on November 7, 2007; and ② the defendants received a donation of an amount equivalent to interest calculated by multiplying each of the above loans by the appropriate interest rate of 8.5% or 9% per annum; thus, by applying Articles 2(3), 41-4(1)1, and 42(1)2 of the Act, the head of Seocho District Tax Office decided the total of KRW 2,624,415,90,00 to the plaintiff 1 on November 11, 201, and decided the gift tax amount of KRW 30,008,270.27.

Examining these facts in light of the aforementioned provisions and legal principles, since the Plaintiffs received a free loan of money from a person having no special relationship, gift tax cannot be imposed on the profits accrued to the Plaintiffs pursuant to Article 2(3) of the Act, etc., and as seen earlier, such profits do not constitute “profit accruing from the provision of services without compensation” under Article 42(1)2 of the Act, each disposition of this case on which gift tax is imposed on the Plaintiffs by applying Articles 2(3), 41-4(1)1 and 42(1)2 of the Act, etc. Accordingly, each disposition of this case is unlawful since it goes beyond the limit of imposing gift tax.

The judgment below to the same purport is just, and contrary to the allegations in the grounds of appeal, there were no errors in the misapprehension of legal principles as to the interpretation and application of Articles 2(3), 41-4(1)1, and 42(1)2 of the Act.

3. 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.

Justices Ko Young-han (Presiding Justice)