Article 40 (1) of the former Inheritance Tax and Gift Tax Act applicable to the acceptance of convertible bonds by the Plaintiff’s status.

The acquisition of convertible bonds at issue falls under Article 40(1)1 (a) of the former Inheritance Tax and Gift Tax Act, and thus, the Plaintiff is obligated to pay gift tax accordingly, and accordingly, the disposition rejecting a request for correction on the assumption that the gift tax is zero is lawful.

Article 40 (1) 1 (a) of the former Inheritance Tax and Gift Tax Act

2017Guhap1521 Disposition of revocation of refusal to correct gift tax

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○ Head of tax office

November 29, 2018

January 10, 2019

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The defendant's rejection of a claim for correction against KRW 179,539,150 and KRW 4,461,330 of the gift tax for the year 2015 owed to the plaintiff on October 15, 2015 shall be revoked.

1. Details of the disposition;

A. The Plaintiff was the largest shareholder and the representative director of ○○, Inc. (hereinafter “instant company”). On January 9, 2013, the Plaintiff lost the status of the largest shareholder, and retired from the office of the representative director on December 16, 2013.

B. On March 31, 2014, the instant company issued convertible bonds with the face value of KRW 20 billion issued to one other than △△ Capital Co., Ltd. (hereinafter referred to as “△△ Capital”) to claim the sale of the instant company or to a third party designated by the instant company from March 31, 2015.

C. The instant company exercised the right to sell part of the said convertible bonds to the Plaintiff, and on March 31, 2015, the Plaintiff acquired the convertible bonds of KRW 1 billion in face value (hereinafter “instant convertible bonds”) from △ Capital Capital on KRW 1,046,454,000 (hereinafter “instant convertible bonds”).

D. The Plaintiff, by exercising the convertible right on April 1, 2015, acquired 346,020 shares of the instant company (hereinafter “acquisition of shares”). The Plaintiff assessed the market price of the instant convertible bonds on June 30, 2015, KRW 2,211,413,820, and the value of the shares at the time of conversion as KRW 6,400 per share. The Plaintiff considered the market price of the instant convertible bonds as KRW 864,959,820 per share (i.e., the market price of convertible bonds 2,211,413,413,820 - KRW 1,046,454,00 - KRW 300,00) - KRW 49,570 [30,000, KRW 50, KRW 1960, KRW 3050, KRW 960, KRW 4005, KRW 916, KRW 51965, KRW 305,294065, etc.

E. On October 14, 2015, the Plaintiff, rather than a specially related person of the instant company, acquired and converted convertible bonds, etc. within the scope that could have been allocated in proportion to the number of shares owned by the instant company. As such, on the ground that the Plaintiff does not constitute a gift under Article 40 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 13557, Dec. 15, 2014; hereinafter “former Inheritance Tax and Gift Tax Act”), filed a claim for the correction of the gift tax on the acquisition of the instant convertible bonds and the gift tax on the acquisition of the instant shares as KRW 0 (hereinafter “instant claim for correction”).

F. On October 15, 2015, the Defendant returned the instant claim for correction on the following grounds (hereinafter “instant disposition”).

- The claim for correction of gift tax claimed by a corporation issuing convertible bonds with a special relationship with the claimant by exercising the right to sell them at a lower price, and thus, it is determined that the claim for correction cannot be accepted since it constitutes "profit acquired by acquiring convertible bonds, etc. from a related party at a lower price than the market price" under Article 40 (1) 1 (a) of the Inheritance Tax and Gift Tax Act.

In addition, Article 40 (1) 1 (b) of the Inheritance Tax and Gift Tax Act provides that "the largest shareholder of a corporation that issued convertible bonds, etc. or his/her specially related person, who is the shareholder" falls under the donee, but the largest shareholder and the claimant are not specially related, and it is judged that

G. On January 6, 2016, the Plaintiff appealed to the Tax Tribunal, but the Tax Tribunal dismissed the Plaintiff’s request on May 31, 2017.

[Reasons for Recognition] Evidence Nos. 1 to 4, Evidence No. 1 to 1, and the purport of the whole pleadings

2. Relevant statutes;

Attached Form 2 shall be as listed in attached Table 2.

3. The plaintiff's assertion

A. The Plaintiff was irrelevant to the largest shareholder at the time of the issuance of convertible bonds and did not constitute a person with special interest of the instant company as a retired officer. The part that referred to in Article 12-2 (1) 3 (a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 26302, Jun. 1, 2015; hereinafter the same shall apply) refers only to an officer of the enterprise group as stipulated by Ordinance of the Ministry of Strategy and Finance, i.e., an officer for whom five years have not passed after his retirement, and an officer for whom five years have not passed after his retirement refers only to all the officers under the former Enforcement Decree of the Inheritance Tax and Gift Tax Act. However, the instant company does not constitute an employee under Article 12-2 (1) 2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, and the Plaintiff’s retirement from the position of an officer of the instant company prior to each of the instant transactions is not subject to the Plaintiff’s special relation under Article 12-2 (1) of the former Enforcement Decree of the Inheritance Tax Act.

B. Even if the Plaintiff and the instant company constitute a specially related person, Article 40(1)1 of the former Inheritance Tax and Gift Tax Act cannot be applied to the acquisition of the instant convertible bonds for the following reasons. Accordingly, Article 40(1)2 of the former Inheritance Tax and Gift Tax Act cannot be applied to the acquisition of the instant shares, and the Plaintiff is not obligated to pay gift tax due to each transaction of the instant case. Accordingly, the instant disposition is unlawful.

1) Article 40(1)1 (b) and (c) of the former Inheritance Tax and Gift Tax Act separately provides for the case of acquiring convertible bonds from the corporation issuing the convertible bonds. Thus, Article 40(1)1 (a) of the former Inheritance Tax and Gift Tax Act shall be construed as providing for the acceptance of convertible bonds from the specially related person, who is not the issuing company. The Plaintiff, as a shareholder of the issuing company of the instant case, purchased the instant convertible bonds, does not fall under Article

2) Article 40 (1) 1 (b) of the former Inheritance Tax and Gift Tax Act provides that "the profits acquired by the largest shareholder of a corporation that issued convertible bonds, etc. or his specially related person, who is the shareholder of the corporation, by acquiring and acquiring the convertible bonds, etc. from the corporation at a price lower than the market price and in excess of the number entitled to be allocated under equal conditions in proportion to the number of its stocks held." Thus, the plaintiff does not constitute the largest shareholder of the company of this case or his specially related person. Thus,

3) At the time of the acquisition of convertible bonds of this case, the Plaintiff did not have a position to exercise its influence on the largest shareholder of the instant company at the time of the acquisition of the instant convertible bonds, and thus, the acceptance of the instant convertible bonds does not constitute “the method, method, and profit-making under subparagraph 1 or 2 of Article 40(1)3 of the former Inheritance Tax and Gift Tax Act.”

C. If the Plaintiff constitutes a specially related person of the instant company, and even if the acquisition of the instant convertible bonds constitutes “a similar case” as stipulated in Article 40(1)3 of the former Inheritance Tax and Gift Tax Act, it should be imposed only on the excess amount that the Plaintiff could have allocated under equal conditions in proportion to the number of stocks at the time of issuance of convertible bonds

D. As to the acquisition of the instant shares, Article 30(5)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides, “The gains stipulated under item (a) through (c) of Article 40(1) of the Inheritance Tax and Gift Tax Act shall be the value under item (a) less the value under item (b), and the amount calculated by subtracting the interest loss portion calculated as prescribed by Ordinance of the Ministry of Strategy and Finance (limited to the case where the relevant amount is in excess of 100 million won) from the value calculated by multiplying the number of stocks under item (c) by the number of stocks under item (c).”

The instant disposition rejecting the instant claim for rectification, which is changed to zero (0) gift tax on this part, is not subject to taxation pursuant to the above provision. Therefore, the instant disposition is unlawful.

4. Determination

A. Whether the Plaintiff is a specially related party to the instant company

1) Article 40 (1) 1 (a) of the former Inheritance Tax and Gift Tax Act provides that "for profits acquired by acquiring convertible bonds, etc. from a related party prescribed by Presidential Decree (hereafter referred to as "related party" in this Article) at a price lower than the market price," and Article 40 (1) 1 (b) of the same Act provides that "the largest shareholder of the corporation that has issued convertible bonds, etc. or his/her related party, who is the shareholder, shall be the amount equivalent to the profits acquired by accepting and acquiring the convertible bonds, etc. from the relevant corporation at a price lower than the market price in proportion to the number of its stocks held by the person who has acquired such profits." Accordingly, Article 30 (1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that "the related party prescribed by Presidential Decree" in Article 40 (1) 1 (a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act refers to the person who has a relation falling under any subparagraph of Article 12-2

According to Article 12-2(1)3 (a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (hereinafter “instant provision”), where a person, other than an employee (including an employee of a corporation under control by investment; hereinafter the same shall apply) or an employee, who maintains his livelihood with his own property, falls under a specially related person. Article 12-2(1)3 (a) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (hereinafter “instant provision”), provides that where the principal or a person in a relationship falling under subparagraph 1, who exercises de facto influence on the management of the enterprise group determined by Ordinance of the Ministry of Strategy and Finance, is an individual: (a) where the principal exercises the right to appoint and dismiss executives, or determines business policies, he or she is an employee of the relevant enterprise group (including an officer (referring to a former officer under Article 20(1)4 of the Enforcement Decree of the Corporate Tax Act who has been an employee; hereinafter the same shall apply). In addition, Article 12-2(2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that

2) Comprehensively taking account of the contents of the pertinent statutes and the purport of the entire pleadings as seen earlier, it is reasonable to interpret that the “specially related person” under Article 30(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act includes a person who was an officer of the pertinent company and for whom five years have not passed since the retirement. As alleged by the Plaintiff, the said officer may not be deemed to be included in the specially related person only in the case of

① Article 20 (1) 4 of the Enforcement Decree of the Corporate Tax Act provides that “executive” refers to an executive officer under Article 20 (1) 4 of the Enforcement Decree of the Corporate Tax Act and a person who was an executive officer in whose case five years have not passed since his/her retirement; hereinafter the same shall apply). Article 12-2 (2) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act and Article 30 (1) of the Enforcement Decree of the former Inheritance Tax and Gift Tax Act, which include an executive officer in the scope of an employee of a specially related person, are all stipulated in the same provision as above.

② As the former Enforcement Decree of the Inheritance Tax and Gift Tax Act was amended by Presidential Decree No. 23591 on February 2, 2012, Article 30(1) was amended to mean that “a related party prescribed by Presidential Decree” refers to a person who has a relationship falling under any of the subparagraphs of Article 12-2(1) and newly established the scope of a related party under Article 12-2. The former Enforcement Decree of the Inheritance Tax and Gift Tax Act (hereinafter “Enforcement Decree of the Inheritance Tax and Gift Tax Act prior to the amendment”) had the definition of “executive” under Article 13(7)13. However, the said provision does not include the contents of an officer of an enterprise group prescribed by Ordinance of the Ministry of Strategy and Finance, and the Enforcement Decree of the Inheritance Tax and Gift Tax Act before the amendment prescribed the scope of a directly related party under Article 30(1)4 of the same Act.

③ In order to clearly define the scope of the specially related persons under the Enforcement Decree of the Inheritance Tax and Gift Tax Act amended by Presidential Decree No. 23591, Feb. 2, 2012, the definition of an officer is deemed to have been stipulated in Article 12-2, which is located prior to Article 13(7)1, and the definition of an officer is not deemed to have been stipulated in this case for the purpose of applying the above definition only to the executives of an enterprise belonging to the enterprise group as prescribed by Ordinance of the Ministry of Strategy and Finance, as alleged by the Plaintiff. Thus, the definition of an officer under the Enforcement Decree of the former Inheritance Tax and Gift Tax Act is reasonable to interpret that the whole provision applies to the officers stipulated in the above provision regardless of before and after the amendment, and considering the language, content and the developments leading up to the establishment thereof, such interpretation does not constitute an extended interpretation beyond the scope of the language.

④ With the exception of the instant provision, the term “enterprise belonging to an enterprise group prescribed by Ordinance of the Ministry of Strategy and Finance” or “enterprise belonging to an enterprise group” under Articles 12-2(3)(b) and 38(12)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, all of them are “affiliated enterprise” (including the executives of the relevant enterprise). However, if an executive officer is limited to an executive officer of the said enterprise group as stated by the Plaintiff’s assertion, it does not need to include the term “in the first place following the executive officer of the said enterprise group” in the first place following the “affiliated enterprise” (including the executive officer of the relevant enterprise (including the former executive officer of the relevant enterprise under Article 20(1)4 of the Enforcement Decree of the Corporate Tax Act) and, in other provisions, it does not need to include “after the said enterprise’s retirement” (including the former executive officer of the relevant enterprise).

⑤ Article 12-2(1)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that “The person concerned shall also be deemed as a specially related person pursuant to the latter part of Article 2 subparag. 20 of the Framework Act on National Taxes.” Therefore, insofar as the Plaintiff’s officers for whom five years have not yet passed since his retirement are deemed as the specially related person of the instant company, the instant company constitutes the Plaintiff’s specially related person under the above provision, and the Plaintiff constitutes the Plaintiff’s specially related person under Article 40(1)1(a) of the former Inheritance Tax and Gift Tax Act, and the instant convertible bonds

3) On December 16, 2013, the Plaintiff resigned from the representative director of the instant company, and the facts that each of the instant transactions occurred on March 31, 2015 and April 1, 2015 were as seen earlier. However, since five years have not elapsed since the Plaintiff retired from the officer of the instant company, the Plaintiff was an employee under Article 12-2 (1) 2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, and the Plaintiff was a specially related person of the instant company at the time of each of the instant transactions. Accordingly, the Plaintiff’s assertion on the premise that the Plaintiff was not a specially related person of the instant company is without merit.

B. As to the assertion that Article 40(1)1 of the former Inheritance Tax and Gift Tax Act cannot apply to the acceptance of the instant convertible bonds

Article 40(1) of the former Inheritance Tax and Gift Tax Act provides that where profits falling under any of the following subparagraphs are acquired by accepting convertible bonds, an amount equivalent to such profits shall be deemed the value of property donated to the person who has acquired such profits, and Article 40(1)1(a) of the same Act provides that "for profits acquired by acquiring convertible bonds, etc. from a related party prescribed by Presidential Decree at a price lower than the market price" shall be deemed as profits under Article 40(

There is no dispute between the Plaintiff and the Defendant that the Plaintiff acquired the instant convertible bonds from the instant company, and the Plaintiff acquired the instant convertible bonds in KRW 1,046,454,00, and reported the market price of the instant convertible bonds in KRW 2,211,413,820 to the Defendant. According to this, the Plaintiff is a specially related person of the instant company as seen earlier. Accordingly, the Plaintiff’s acquisition of the instant convertible bonds constitutes the case where the Plaintiff acquired the convertible bonds at a price lower than the market price from the instant company as a specially related person. Accordingly, the Plaintiff’s acquisition of the instant convertible bonds constitutes Article 40(1)1 (a) of the former Inheritance Tax and Gift Tax Act, and thus, the Plaintiff is obligated to pay gift tax accordingly. Accordingly, the instant disposition rejecting a request for correction on the premise that the gift tax is zero

In regard to this, the Plaintiff asserts that the largest shareholder of the corporation which issued convertible bonds, etc. or his specially related person who is the shareholder is limited to the specially related person who is not a issuing company. However, the above item (b) applies only to the case where the largest shareholder or his specially related person acquires convertible bonds, etc. from the issuing corporation, so the above item (a) can apply to the case where a shareholder who is not the largest shareholder of the issuing corporation of convertible bonds acquires convertible bonds, and there is no ground to interpret the "specially related person" under item (a) of Article 40 (1) of the former Inheritance Tax and Gift Tax Act. Therefore, this part of the Plaintiff's assertion is without merit (as seen earlier, the acceptance of convertible bonds of this case constitutes Article 40 (1) 1 (a) of the former Inheritance Tax and Gift Tax Act. Thus, if the Plaintiff's acceptance of convertible bonds of this case constitutes Article 40 (1) 3 of the former Inheritance Tax and Gift Tax Act, the Plaintiff's claim that the excess amount can be imposed on equal terms in proportion to the number of stocks at the time of the issuance).

C. As to the assertion that gift tax on the acquisition of the instant shares ought to be revised to zero

According to Article 40(1)2(a) of the former Inheritance Tax and Gift Tax Act, where convertible bonds are acquired from a specially related person, the amount equivalent to profits earned by the value of stocks issued by convertible bonds exceeds the value of conversion, exchange, or acceptance (hereinafter “the value of conversion, etc.”) shall be deemed the value of donated assets of the person who obtains profits. The fact that the Plaintiff acquired the instant convertible bonds after acquiring them from the company in a special relationship with the Plaintiff is the same as before. Therefore, it is reasonable to deem that profits under Article 40(1)2(a) of the former Inheritance Tax and Gift Tax

Meanwhile, Article 30(5)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides for the calculation method of profits derived from the acquisition of stocks by convertible bonds as follows. In other words, according to Article 30(5)2 of the Enforcement Decree of the same Act, the amount calculated by subtracting the conversion price per stock from the value of stocks issued by converting convertible bonds into stocks, and then subtracting the interest loss by multiplying the number of stocks received by the number of stocks issued (hereinafter “gains from conversion, etc. of stocks”) and the profits derived from the acquisition of convertible bonds shall be deemed as profits. However, the said amount shall be taxed only when it exceeds KRW 100 million.

The Plaintiff and the Defendant have no dispute between the Plaintiff and the Defendant regarding the amount of 1,214,530,200 won [the amount calculated by subtracting the conversion value per stock from the stock value received by the Plaintiff, multiplied by the number of stocks to be converted (6,400 won - the conversion value per stock - the conversion value per stock 2,890 won) x 346,020 won]. However, there is a dispute between the Plaintiff and the Defendant as to the amount of profit from the acquisition of the instant convertible bonds to be deducted from the said amount. In other words, the Plaintiff asserted that the profits from the acquisition of the instant convertible bonds were KRW 1,164,959,820, as the gift tax on the profits from the acquisition of the instant convertible bonds was reported, and the Defendant asserted that even in calculating profits from the acquisition of the instant convertible bonds, the profits from the acquisition of the instant convertible bonds should be considered as KRW 864,959,820,00.

For the following reasons, it is reasonable to deduct KRW 864,959,820 from the profits derived from the acquisition of the instant convertible bonds as alleged by the Defendant. In such calculation, the Plaintiff’s profits from conversion of the instant convertible bonds are more reasonable: [1,214,570,380 won [2,890 won for each share of shares ( = 6,400 won for shares issued - 2,890 won for each share conversion price of shares)]; - 346,020 shares] - Benefits arising from the acquisition of the instant convertible bonds are subject to taxation exceeding KRW 100,000,000,000, which is more than KRW 100,000,000,000 for the reason that the Plaintiff’s profits from conversion of shares are less than KRW 100,000.

① Since Article 30(5)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that “for the benefit of subparagraph 1” shall be deducted from the acquisition of convertible bonds, if the Plaintiff’s profit from the acquisition of convertible bonds is reported to be KRW 864,959,820, the deduction of the said amount in calculating the profit from the acquisition of the instant shares is consistent with logical trend.

② Article 30(5)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that the “profit under subparagraph 1” shall be deducted from the profits accruing from stock conversion. The reason for deducting the “profit under subparagraph 1” lies in the difference between the market value of the stocks that a purchaser of convertible bonds receives as the conversion of convertible bonds and the acquisition value of the convertible bonds. As to the acquisition value of the convertible bonds acquired as such low-value, gift tax is imposed separately pursuant to Article 40(1) of the former Inheritance Tax and Gift Tax Act, and thus, it becomes a double taxation unless the deduction is made.

Therefore, insofar as the Plaintiff did not include KRW 300 million in the value of donated property among the profits from the acquisition of the instant convertible bonds, the imposition of gift tax on the said profits is consistent with the purport of Article 30(5)2 of the Enforcement Decree, by preventing the Plaintiff from deducting the said KRW 300 million from the profits from stock conversion, etc. in calculating the profits from stock acquisition.

3. Conclusion

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