In a case where multiple persons operate a joint business by leasing a house jointly owned by them, whether each joint owner shall be deemed to lease the house when calculating the number of houses of the rental house under Article 97(1) of the Restriction of Special Taxation Act and Article 97(1) of the Enforcement Decree of the Restriction of Special Taxation Act (affirmative in principle)

Where a joint business is conducted by leasing a house jointly owned by several persons, each joint owner shall be deemed to lease such house, except in extenuating circumstances, when calculating the number of houses of rental housing under Article 97 (1) of the former Restriction of Special Taxation Act (amended by Act No. 13499, Aug. 28, 2015) and Article 97 (1) of the Enforcement Decree of the Restriction of Special Taxation Act (hereinafter referred to as “special provisions”). The reasons are as follows.

In a case where a joint business is operated by leasing a house jointly owned by several persons, the said rental house belongs to the partnership-ownership of the joint business proprietor constituting the partnership under the Civil Act, and each joint business proprietor’s right to the entire rental house (see Article 271(1) of the Civil Act). Therefore, each joint business proprietor may be deemed to have leased the entire rental house through the partnership irrespective of his/her share ratio. This legal doctrine applies to a case where a co-inheritors

The Special Provision grants benefits from capital gains tax reduction or exemption to long-term rental houses for the purpose of facilitating the residential stability of homeless people by promoting the supply of small-sized rental housing for a certain period, and at the same time promoting the housing construction economy. Even in cases of a long-term lease of at least 5 rental houses owned by many people, there is no difference between the cases where one person makes a long-term lease of at least 5 rental houses owned by one person, by promoting the supply of rental houses, thereby contributing to stabilizing the residential life of homeless people and promoting the housing construction economy. Therefore, the Special Provision is in accord with the legislative purport, unless the Special Provision is abused by having only the formal appearance of a

There is no provision regarding the method of calculating the number of units of rental housing prescribed by the Special Provision. In the application of the Special Provision, even though there is no clear legal basis, the calculation of the number of units of rental housing is not allowed by aggregating the ratios of shares of rental housing for each joint business proprietor when applying the Special Provision. Even if the value of each rental house is different according to the location, area, management status, etc. of each rental house, it is unreasonable to simply calculate the number of units of rental housing by adding up

Meanwhile, Article 154-2 of the Enforcement Decree of the Income Tax Act provides that “If several persons jointly own one house, each joint owner shall be deemed to own the house when calculating the number of houses except as otherwise provided in this Decree.” This reflects the existing Supreme Court’s interpretation and tax practice in relation to Article 155 of the Enforcement Decree of the Income Tax Act that provides special cases concerning non-taxation for one household, however, it is desirable to draw the same conclusion in calculating the number of houses of rental housing prescribed by the Special Provision, taking into account the legislative structure and purport of the said provision

Article 97(1) of the former Restriction of Special Taxation Act (Amended by Act No. 13499, Aug. 28, 2015); Article 97(1) of the Enforcement Decree of the Restriction of Special Taxation Act; Articles 154-2 and 155 of the Enforcement Decree of the Income Tax Act; Article 271(1) of the Civil Act

Plaintiff (Law Firm Sejong, et al., Counsel for the plaintiff-appellant)

Head of Yongsan Tax Office

Seoul High Court Decision 2014Nu43822 decided September 17, 2014

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined.

1. Article 97(1) of the former Restriction of Special Taxation Act (amended by Act No. 13499, Aug. 28, 2015) and Article 97(1) of the Enforcement Decree of the Restriction of Special Taxation Act (hereinafter collectively referred to as the “Special Provision”) stipulate that where a resident who leases at least 5 units of a rental house transfers the newly constructed national housing, etc. during the period from January 1, 1986 to December 31, 200 after the lease of at least 10 years after commencing the lease on or before December 31, 200, the transfer income tax on the transfer of such rental house shall be exempted.

Where a joint business is conducted by leasing housing jointly owned by several persons, each joint owner shall be deemed to have leased such rental housing, barring any special circumstance, when calculating the number of houses of rental housing in the Special Provision. The reasons are as follows.

A. In a case where a joint business is operated by leasing a house owned by many persons, the said rental house belongs to the partnership-ownership of a joint business proprietor, which constitutes a partnership under the Civil Act, and each joint business proprietor’s right to the entire rental house (see Article 271(1) of the Civil Act). Therefore, each joint business proprietor may be deemed to have leased the entire rental house through the partnership irrespective of his/her share ratio. This legal doctrine applies to a case where a joint heir, after

B. The Special Provision provides benefits from capital gains tax reduction or exemption for long-term rental houses with a view to facilitating the stable residential life of homeless people by promoting the supply of small-sized rental housing for a certain period of time, and at the same time promoting housing construction games. Even in the case of a long-term lease of at least 5 units of rental houses owned by many people, there is no difference between the cases where one person rents at least 5 units of rental houses owned by one person for a long-term lease. Therefore, the Special Provision is in accord with the legislative purport, unless the Special Provision is abused, by having only the formal appearance of joint rental in order to benefit from capital gains tax reduction or exemption.

C. There is no provision regarding the method of calculating the number of units of rental housing stipulated in the Special Provision. Even though there is no clear legal basis, the calculation of the number of units of rental housing should not be permitted by adding up the shares of each rental housing to the number of units of business when applying the Special Provision. Even if the value of each rental housing is different depending on the location, area, management status, etc. of each rental housing, it is unreasonable to simply calculate the number of units of rental housing owned by a joint proprietor, and there is no legal basis as well.

Meanwhile, Article 154-2 of the Enforcement Decree of the Income Tax Act provides that “If several persons jointly own one house, each joint owner shall be deemed to own the house when calculating the number of houses except as otherwise provided in this Decree.” This reflects the existing Supreme Court’s interpretation and tax practice in relation to Article 155 of the Enforcement Decree of the Income Tax Act that provides special cases concerning non-taxation for one household, however, it is desirable to draw the same conclusion in calculating the number of houses of rental housing stipulated in the Special Provision, taking into account the legislative background and purport of the said provision.

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

A. Nonparty 1 newly constructed a multi-family house under subparagraph 5 and a multi-household house under subparagraph 13 (hereinafter collectively referred to as “each of the instant houses”) on the ground of Yongsan-gu Seoul ( Address 1 omitted) and ( Address 2 omitted) on the ground, and operated a housing rental business from October 16, 1994.

B. As Nonparty 1 died on November 20, 203, Nonparty 2, his spouse, succeeded to 3/9 shares of each of the instant housing, Nonparty 3, Nonparty 4, and the Plaintiff’s 2/9 shares, and continued the housing lease business jointly by inheritance.

C. Thereafter, on December 8, 2010, Nonparty 2, Nonparty 3, and the Plaintiff transferred 7/9 shares owned by them in relation to each of the instant housing to Hashes, etc.

3. Examining these facts in light of the legal principles as seen earlier, the Plaintiff’s lease of each of the instant housing units No. 18 for about nine years, died, and the Plaintiff jointly leased the instant housing units with other co-inheritors for about seven years. As such, it constitutes a case where at least five units of rental housing units prescribed in the Special Provision has been leased for at least ten years.

Nevertheless, on a different premise, the lower court determined that the instant taxation was lawful on the premise that the number of rental housing leased by the Plaintiff would be 4 (i.e., the number of rental housing leased by the Plaintiff (i.e., 18 x 2/9) and does not meet the requirements of the Special Provision. In so determining, the lower court erred by misapprehending the legal doctrine on the method of calculating the number of rental housing units of the Special Provision, thereby adversely affecting the conclusion of the judgment.

4. The Plaintiff’s appeal is with merit, and the case is remanded to the court below for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Kim Chang-suk (Presiding Justice)