Cho High-2015-Seoul Government-1851 (Law No. 13, 2017)

When determining whether a related party under Article 42(3) of the former Inheritance Tax and Gift Tax Act is a related party

Article 42(3) of the former Inheritance Tax and Gift Tax Act applies only when a person is not a specially related person at the time of exercising the convertible right as well as the acquisition of convertible bonds.

Article 42 of the Inheritance Tax and Gift Tax Act (Gifts, etc. of Other Benefits)

Seoul Administrative Court 2017Guhap75897

AA

BB Director of the Tax Office

May 11, 2018

June 15, 2018

1. The plaintiff's claim is dismissed.

2. The costs of lawsuit shall be borne by the Plaintiff.

Cheong-gu Office

The Defendant’s imposition of KRW 1,057,866,750 (including additional tax) on the Plaintiff on January 14, 2015 shall be revoked.

1. Details of the disposition;

A. The plaintiff's subscription and conversion of convertible bonds;

1) On February 6, 2012, the Plaintiff concluded a contract with the EE and the non-party company owned by EE to purchase 3,500,000 shares of the non-party company owned by EE together with the right of management for the non-party company as the representative director and the non-party company owned by EE, which is a corporation listed in the KOSDAQ (D Co., Ltd. before the alteration; hereinafter referred to as "non-party company"). On February 10, 2012, the Plaintiff agreed to pay the down payment out of the purchase price and deliver documents necessary for the share certificates and the change of ownership.

2) On February 6, 2012, the Plaintiff entered into a contract with Nonparty Company and Nonparty Company to acquire KRW 1,99,99,700 of the shares issued as capital increase with capital increase (hereinafter “instant new shares”) and KRW 4.4 billion of the convertible bonds issued by Nonparty Company (hereinafter “instant convertible bonds”). On February 9, 2012, the conversion price of the instant convertible bonds is calculated based on the provisions on the issuance and public notice of the Financial Investment Services and Capital Markets Act and securities.

3) According to each of the above contracts, on February 9, 2012, the Plaintiff was the largest shareholder holding 28.06% of the total number of outstanding shares of the non-party company by paying the share price for capital increase and the subscription price for the instant convertible bonds to the non-party company, and paying the down payment to EE on February 10, 2012, and was appointed as the representative director of the non-party company on March 16, 2012.

4) On February 13, 2013, the Plaintiff converted the instant convertible bonds into 5,648,267 shares of the non-party company (hereinafter “instant shares”). At the time of conversion, the value of the instant shares was KRW 1,190 per share.

B. Defendant’s taxation disposition

1) From September 23, 2014 to November 24, 2014, the Commissioner of the FF Regional Tax Office calculated the tax data as the value of donated property and notified the Defendant of the assessment data pursuant to Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2015; hereinafter the same) pursuant to Article 42(1)3 of the same Act, the FF commissioner conducted an investigation of stock fluctuation with respect to the non-party company for the business year from September 23, 2014 to November 24, 2014.

2) Accordingly, on January 14, 2015, the Defendant imposed a gift tax of KRW 1,057,866,750 (including additional tax) on the Plaintiff in 2013 (hereinafter “instant disposition”).

Facts without any dispute, Gap's 1, 4, 7, and Eul's 1 to 4, the purport of the whole pleadings, and the purport of the whole pleadings.

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) The Plaintiff acquired the instant convertible bonds issued by a non-party company, which was not a specially related person, on the ground that the terms and conditions of issuance, such as the conversion price of the instant convertible bonds, were appropriately determined in accordance with the relevant Acts and subordinate statutes at the time of issuance. Therefore, even if the Plaintiff obtained profits from the conversion of the instant convertible bonds, it cannot be deemed that the Plaintiff received assets without compensation without significantly low prices or consideration, and it is unreasonable to impose gift tax on the basis of the fact that

2) Article 40 of the former Inheritance Tax and Gift Tax Act that provides for the method of calculating profits arising from the conversion of convertible bonds, etc. into stocks only provides for the acquisition of convertible bonds, etc. from a related party. As such, profits accrued from the conversion of convertible bonds of this case are not subject to regulation under Article 40 above. Since Article 42 of the former Inheritance Tax and Gift Tax Act has a form of comprehensive principle introduced to impose gift tax on an irregular act, a transaction that does not constitute a modified or circumventive gift among the types of transactions not provided for in Article 40, which is an individual example clause, may not be taxed based on Article 42 above.

3) Article 42(3) of the former Inheritance Tax and Gift Tax Act excludes the application of Article 42(1) of the same Act in cases where a transaction between persons who are not specially related persons is deemed to have justifiable grounds as a transactional practice. Determination as to whether the above specially related persons were related persons should be based on the time of acquiring convertible bonds. The Plaintiff was not related persons by holding less than 30% of the shares of the non-party company at the time of conversion of the instant convertible bonds as well as at the time of conversion of the instant convertible bonds. As seen in the foregoing Section 1, profits arising from the conversion

(b) Related statutes;

The entries in the attached Table shall be as follows.

C. Determination

1) Whether the Plaintiff’s profit is subject to gift tax

A) Article 2(3) of the former Inheritance Tax and Gift Tax Act provides that "donations" shall be transferred without compensation to another person in a direct or indirect manner that can calculate economic value without u300, u300, or shall increase the value of another person's property by the contribution. Article 42(1)3 of the same Act and Article 31-9(1)4 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 24576, Jun. 11, 2013; hereinafter the same) provide that "in addition to the donation provided in Article 40(1) of the former Inheritance Tax and Gift Tax Act, profits acquired from transactions that increase the capital of a corporation, such as convertible bonds, etc., such as conversion of stocks, if the amount obtained by subtracting the value of conversion of stocks from the value of stocks at the time of conversion exceeds KRW 100,000,00,000."

B) Although Articles 32 through 42 of the Inheritance Tax and Gift Tax Act amended by Act No. 5193 of Dec. 30, 1996 were somewhat different from the donation under the Civil Act, the gift type accompanied by the gratuitous transfer of economic benefits was presented and deemed as the donation. However, the above deemed donation provision alone has limitations in blocking the transfer of property without proper taxation due to the lack of gift tax in the case of gratuitous transfer of property by means of new financial techniques or capital transaction, etc., and the inheritance tax and Gift Tax Act amended by Act No. 6301 of Dec. 29, 200 does not conform with the above deemed donation provision, but it is not consistent with the above deemed as donation, and the so-called "the so-called "the so-called "the so-called "the so-called "the first deemed donation" provision of Article 42 of the Inheritance Tax and Gift Tax Act, which was amended by Act No. 7010 of Dec. 30, 203.

Considering such progress of amendment, Article 42 of the former Inheritance Tax and Gift Tax Act is one of the provisions for calculating the value equivalent to Article 40 of the same Act, and can serve as the basis for calculating the value of donated property to the gratuitous transfer due to capital transactions, such as the conversion of convertible bonds not provided for in Article 40 of the same Act.

C) According to the following facts or circumstances acknowledged by comprehensively taking account of the descriptions in subparagraphs B through 7 and the overall purport of the pleadings, profits accruing from the conversion of the instant convertible bonds shall be subject to taxation pursuant to Article 2(3) of the former Inheritance Tax and Gift Tax Act, and the value of donated property may be calculated and taxed pursuant to Article 42(1)3 of the same Act.

① On February 6, 2012, the Plaintiff entered into a contract on the acquisition of new shares and convertible bonds of this case with a non-party company. At the same time, the Plaintiff entered into a contract on the acquisition of the new shares and convertible bonds of the non-party company (hereinafter referred to as “GG”) with the non-party company, which was trusted under the name of III and JJ, totaling KRW 1,143,000,000 per share of KRW 7,000 per share. As above, the ratio of new shares acquired by the Plaintiff to the purchase price of the GG shares to be paid by the non-party company to the Plaintiff is 8,029,99,300 + KRW 5,330,000 + KRW 2,69,99,300 + KRW 2,69,99,000. Furthermore, the ratio of new shares acquired by the Plaintiff is about 74% at the time of the issuance of the convertible bonds, and about 26,8200.

In full view of the timing of concluding the above series of contracts, transaction value, Plaintiff’s new stocks, etc., Nonparty Company purchased GG’s shares for the purpose of business diversification and the expansion of new and renewable energy business, or issued the instant new stocks and convertible bonds for the purpose of raising funds according to the management needs according to the accumulation of deficit.

② On February 2, 2012, the Plaintiff acquired the right of management with the stocks and the shares of the non-party company from HH, a representative director of the non-party company, and acquired the instant new shares, thereby holding not only the largest shareholder and the representative director of the non-party company but also the instant convertible bonds.

In normal sense, it is reasonable for the Plaintiff to take over the convertible bonds of this case at the time of acquisition of the right of management of the non-party company. However, when the Plaintiff acquires the right of management of the non-party company, the Plaintiff acquires the convertible bonds of this case at the time of acquisition of the right of management of the non-party company, thereby gaining profits from the difference between the stock value and the conversion value by exercising the right of conversion, and when the stock value of the non-party company is lower than the conversion value, the Plaintiff would obtain options to secure not only the principal but also the interest equivalent to the interest amount at the maturity of the time when the right of conversion is not exercised.

Therefore, the issuance of convertible bonds of this case was conducted in order to stably distribute the business performance to the plaintiff who is the largest shareholder and the representative director of the non-party company as the largest shareholder of the non-party company. Thus, when profits from the conversion of convertible bonds of this case based on this transaction are transferred without compensation through new financial techniques or capital transactions, etc., it is subject to taxation consistent with the purport of Articles 2(3) and 42 of the former Inheritance Tax and Gift Tax Act to impose gift tax in time.

③ As the Plaintiff’s intellectual property, the portion of profits from capital transactions, such as convertible bonds, was deleted under Article 42, as the former Inheritance Tax and Gift Tax Act was amended by Act No. 13557, Dec. 15, 2015. In the individual value calculation provision, where regulating a specific type of transaction or act, profits from a transaction that does not fall under such a type cannot be taxed by the complete universal principle under Article 2(3) of the Inheritance Tax and Gift Tax Act (see Supreme Court Decision 2013Du13266, Oct. 15, 2015). Ultimately, due to the amendment, profits from the conversion, etc. of convertible bonds, etc., newly established at the time of the amendment and Article 40 of the Inheritance Tax and Gift Tax Act (Donation of profits from listing, etc.) and Article 41-3(8) are excluded from taxable objects.

However, as at the time of the conversion of the instant convertible bonds, Article 42 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 40) provides for the method of calculating the value of donated property for profits arising from the conversion, etc. of other types of convertible bonds which are not clearly provided for in Article 40 of the said Act, the instant disposition cannot be deemed unlawful on the

D) Therefore, the Plaintiff’s profits derived from the conversion of the instant convertible bonds constitute subject to gift tax, and the Plaintiff’s assertion in part 2) is without merit.

2) Whether the object of taxation is excluded under Article 42(3) of the former Inheritance Tax and Gift Tax Act

A) Time to determine whether a related party is a related party under Article 42(3) of the former Inheritance Tax and Gift Tax Act

(1) Article 42(3) of the former Inheritance Tax and Gift Tax Act provides that "Where a transaction between persons who are not specially related persons determined by Presidential Decree is deemed to have legitimate grounds in light of transaction practices, Article 42(1) shall not apply."

(2) Considering the provisions of the relevant statutes and the amendment process, it is reasonable to view Article 42(3) of the former Inheritance Tax and Gift Tax Act as applicable only when not only the acquisition of convertible bonds but also the exercise of convertible rights on the following grounds.

① Article 42(1)3 of the former Inheritance Tax and Gift Tax Act provides that profits derived from the “conversion of convertible bonds” phase shall be subject to taxation. In such cases, such profits shall be calculated by subtracting the “value of conversion, etc. of stocks” from the “value of stocks at the time of conversion of stocks.” Under the statutory text of Article 42(1) of the same Act, a donee is a person who has converted stocks at a price lower than the “value of stocks at the time of conversion of stocks, etc.” and a donor is a company that issues stocks at a price lower than the “value of stocks at the time of conversion of stocks.” Although there was no change in the company’s profits or losses other than the change of liabilities to the capital at the time of conversion, it cannot be deemed that the issuing company has lost the opportunity to procure more capital by offering new stocks at the time of conversion to the “value of stocks at the time of conversion.”

② Article 40 of the former Inheritance Tax and Gift Tax Act, amended by Act No. 5193 on December 30, 1996, imposed only the difference between the value of stocks and the value of conversion to be delivered at the time of acquisition of convertible bonds, etc. However, since profits from convertible bonds, etc. accrue even when conversion is actually made, the profits from the exercise of convertible rights begins to impose the profits from the conversion of convertible bonds, etc., Article 40 of the former Inheritance Tax and Gift Tax Act, amended by Act No. 6301 on December 29, 200, starts to impose the profits from the conversion of convertible bonds, etc.

In light of the above amendment progress, in relation to the gift profits at the distribution stage, such as the conversion of convertible bonds, if a related party is at the time of exercising the convertible rights, it is reasonable to view that such relation constitutes a related party under Article 42(3) of the former Inheritance Tax and Gift Tax Act.

③ As indicated in the Plaintiff’s pointed out, convertible bonds are issued upon confirmation of the conversion condition, conversion price, agreed interest rate, etc., and are converted, only the conversion is made under the conditions granted at the time of acquisition. However, as seen earlier, the Nonparty Company immediately issued the instant convertible bonds in order to allocate profits to the Plaintiff, who is the largest shareholder and representative director of the Nonparty Company, if the increase in the stock value of the Nonparty Company occurs in the future. As can be seen, even if the acquisition of convertible bonds was not a specially related person, there may always be cases where there is a risk arising from the transaction between the specially related person at the time of exercising the conversion right. Therefore, it is unreasonable to apply Article 42(3) of the former

B) Whether a transaction is between unrelated persons

(1) Article 31-9(3) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that "any related person prescribed by Ordinance of the Ministry of Strategy and Finance" refers to a person having a relation falling under any of the subparagraphs of Article 12-2(1) with a person who has gained profits. Article 12-2(1)3 of the former Inheritance Tax and Gift Tax Act provides that "any person falling under any of the following items is in the relation of a related person" and "any enterprise of an enterprise group prescribed by Ordinance of the Ministry of Strategy and Finance, which exercises de facto influence on its management, is an individual," and "enterprise belonging to an enterprise group prescribed by Ordinance of the Ministry of Strategy and Finance" refers to an affiliate belonging to an enterprise group falling under any of the subparagraphs of Article 3 of the Enforcement Decree of the Monopoly Regulation and Fair Trade Act (hereinafter referred to as "Fair Trade Act") [Article 9 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 412, Mar. 14, 2014]

(2) It is apparent that Article 12-2 (1) 3 (a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act uses the expression "enterprise belonging to an enterprise group as stipulated by Ordinance of the Ministry of Strategy and Finance" only to expand the scope of related parties if the individual is an individual, as well as the enterprise that actually exercises influence on the individual, and also the affiliate belonging to an enterprise group as defined by the Fair Trade Act. Furthermore, Article 12-2 (1) 6 of the former Inheritance Tax and Gift Tax Act that Article 12-2 (1) 3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act that "a corporation, at least 30/10 of the total number of issued and outstanding shares, holds at least

C. Therefore, an individual is related to an enterprise exercising de facto influence over management regardless of whether it holds not less than 30/100 of the total number of issued and outstanding shares.

(3) According to the above facts, the Plaintiff, as the representative director and the largest shareholder of the non-party company at the time of exercising the right to convert the instant convertible bonds, was exercising influence over the management of the non-party company. Therefore, regardless of whether the Plaintiff held 30/10 or more of the total number of the non-party company’s issued stocks at the time of conversion of the instant convertible bonds, the Plaintiff was related to the non-party company under Article 12-2(1)3 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, and thus,

C) Sub-determination

Therefore, the plaintiff's assertion on the part of 2. A. 3 is without merit.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit. It is so decided as per Disposition.