Whether the ELW transactions and the OTC can be deemed as a single transaction

ELW issued and sold to investors, and instead received the ELW issued by the issuer in the position of the liquidity supplier as it is does not constitute a unreasonable form or appearance that differs from its substance.

2014Guhap74800 Revocation of Disposition of Imposing corporate tax

AA Corporation

BB Director of the Tax Office

on December 25, 2015

October 30, 2015

1. On October 11, 2013, the Defendant revoked the imposition of KRW 13,685,05,057,912 for the business year 2009 against the Plaintiff, and the imposition of KRW 7,694,978,606 for the business year 2010 for the corporate tax (including the additional tax) and KRW 11,632,146,295 for the business year 201.

The same shall apply to the order of the Gu office.

1. Details of the disposition;

A. The plaintiff's status

The plaintiff is a foreign securities company that runs the securities business in the United States with the law of the United States of America as the governing law. On December 18, 1998, the plaintiff established a business office in the form of a branch office in the Republic of Korea to conduct the sale and purchase of securities, stock index, futures and options, etc., and the present business office is in Jongno-gu Seoul, Jongno-gu.

(b) Stock warranty securities and liquidity suppliers;

1) The term “stocks warranty securities” (hereinafter referred to as “ELW”) means ① the former Enforcement Decree of the Securities and Exchange Act (amended by Presidential Decree No. 20974, Jul. 29, 2008; Presidential Decree No. 2 of the Addenda to the Enforcement Decree of the Financial Investment Services and Capital Markets Act, amended by Presidential Decree No. 20974) according to the standards set by the Enforcement Rule of the Securities and Exchange Act.

(2) Securities representing a right to establish a transaction of trading stocks or giving and receiving money in the securities market or foreign securities market as provided in Article 125(2)6 (c) of the Enforcement Decree of the Financial Investment Services and Capital Markets Act (excluding collective investment securities) or securities depository receipts (limited to those related to equity securities) traded in the securities market or foreign securities depository receipts in accordance with predetermined methods in connection with fluctuations in the price of specific stocks traded on the securities market, the KOSDAQ, or a foreign market similar thereto (hereinafter referred to as "basic assets") by either party's unilateral declaration of intention, or in accordance with predetermined methods in connection with fluctuations in the price of stocks or securities depository receipts traded in the securities market or foreign securities depository receipts (excluding collective investment securities), or in connection with changes in the index based thereon.

2) Article 41-2(1) of the former Securities Market Listing Regulations (wholly amended by the Korea Exchange Regulations, No. 891, Feb. 22, 2013) of the liquidity supplier (LLW) requires an issuer to enter into a liquidity supply contract including the matters stipulated by the rules with at least one company among the liquidity suppliers. However, where an issuer who is the liquidity supplier directly provides liquidity, a liquidity supplier requires an issuer to submit a liquidity supply plan. The Plaintiff’s status as the liquidity supplier and the outline of transactions.

1) The Plaintiff is a liquidity supplier of the ELW, and (1) is a transaction in which the ELW is received from investors after accepting the ELW from the ELW issuer and is repaid from the issuer with the ELW, and (2) is traded with the ELW issuer in which the ELW and the content of the goods (basic asset, issue price, exercise price, maturity, etc.) are identical to those of the ELW and the ELW has been sold to the issuer at maturity and redeemed to the issuer at maturity.

2) The Plaintiff, upon issuance by an issuer which entered into a liquidity supply contract, sold the ELW to the securities market after acquiring all of them. Specifically, during the beginning of the first transaction day of the ELW, the Plaintiff supplied liquidity within a long-term transaction period by presenting the sale price offered and the purchase price offered again within the scope of the quantity sold.

(d) Accounting of the plaintiff who is a liquidity supplier;

1) Accounting for the business year to which the date of the first sale belongs;

From 2008, the Plaintiff was engaged in transactions such as the acquisition of ELW and the sale of over-the-counter derivatives. In the business year after acquiring the ELW at the issue price and selling it at the market price for the first time to investors, the Plaintiff was aware of the amount calculated by multiplying the acquisition price by the number of ELW sold.

(ii) accounting for the business year in which the due date of ELW arrives;

In the business year to which the date of maturity falls, the Plaintiff handled each account as losses for the business year to which the maturity belongs, in the amount calculated by multiplying the number of OTC derivatives held by the 'amount obtained by subtracting the difference of exercise of rights from the selling price of OTC derivatives sold to the issuer's company by the number of OTC derivatives held by the 'the amount calculated by subtracting the difference of exercise of rights from the acquisition price or the repurchase price of ELW'.

E. The Defendant’s tax adjustment and disposition 1 of this case are as follows: (a) the Plaintiff, a liquidity supplier, performed the same role as the issuer of the ELW; (b) the Plaintiff recognized the amount calculated according to the market price of the ELW only when the issuer issued the EL and sold it to investors; and (c) subsequently purchased the EW again after recognizing it as the debt amount, the difference between the market price at the time of recognizing the debt and the market price at the time of new purchase of the ELW at the same time as the transaction loss of the ELW; and (d) treat the difference between the market price at the time of recognizing the debt and the market price at the time of new purchase of the ELW as the profit. However, in the Plaintiff’s first sale to investors, the difference between the acquisition price and the market price at the time of initial sale was included in the loss for the pertinent business year; and (e) thus, it was unreasonable for the Plaintiff to include the amount calculated as the loss at the time of initial sale of the EL in the loss for the pertinent business year.

2) The specific details of the tax adjustment are as follows (units): business year:

209

201020112012 Non-deductible Expenses

38,298,344,42 65,954,825,979 326,428,580,385 52,91,732,593

△△△38,298,344,422 △△65,954,825,979 △△326,428,580,385

38,298,344,422 27,656,481,57 260,473,754,406 △△△273,516,847,792

3) On October 11, 2013, the Defendant, reflecting the details of the above tax adjustment, filed a request with the Tax Tribunal for a trial seeking revocation of the above taxation disposition, 2009 corporate tax (including additional tax, 25% of the applicable rate), 15,023,5,050 won, corporate tax for the business year 2010 (including additional tax, 22% of the applicable rate), 8,510,08,540 won, corporate tax for the business year 2011 (including additional tax, 22% of the applicable rate), 12,975,647,660 won, respectively, and 30% of corporate tax for the business year 2015 (excluding additional tax, 30% of the applicable rate), but the Plaintiff corrected the remaining amount of corporate tax for the business year 2015, 1030% of the additional tax for additional payment for the business year 2014 (30% of the aforementioned amount for additional payment for additional payment for the business year 2015).203

[Reasons for Recognition] Facts without dispute, Gap evidence 1, 3, Eul evidence 1 and 2 (including various numbers for each type of evidence), the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The parties' assertion

1) The defendant's assertion

A) According to Article 40 of the Corporate Tax Act of the principle of the confirmation of rights and obligations, the business year of accrual of earnings and losses for each business year of a corporation shall be the business year which includes the date on which the relevant earnings and losses are determined, and this shall also apply mutatis mutandis to a foreign corporation pursuant to Article 92(1) of the former Corporate Tax Act (amended by Act No. 11128, Dec. 31, 201). Since the Plaintiff cannot be deemed to have been able to realize the portion of the price formed regardless of the market price of the price he/she received from the issuer, or to have been considerably mature in the possibility of the realization of such profits and losses, the portion which

B) Actual principle

(1) Although the Plaintiff is in the position of a liquidity supplier (LP), the Plaintiff has the same economic substance as the case where the issuer concurrently serves as a liquidity supplier. However, unlike the accounting accounts when the issuer concurrently serves as a liquidity supplier, the Plaintiff included the difference between the acquisition price and the market price when the issuer first sells the ELW to investors as losses for the pertinent business year. This includes not only the inclusion of the acquisition price and the market price in the deductible expenses for the pertinent business year, but also the inclusion of the difference between the ELW and the acquisition price in excess of the profits and losses for the pertinent business year. If the business year in which the ELW acquired and the ELW maturity differ, it is unreasonable to avoid taxation by strategic ELW to lower the income for a specific business year. Accordingly, it is reasonable to view the Plaintiff as the case where the issuer concurrently serves as a liquidity supplier, as well as the case where the issuer sells the ELW to investors after taking over the ELW, it is reasonable to estimate the profit and loss of the non-existent financial product as a whole under Article 14(2) of the Framework Act.

(2) In particular, although the Plaintiff had no choice but to sell the ELW at the market price at the time of selling it to investors, it was accepted at a high price regardless of the market price. The Plaintiff’s acquisition of the ELW from the issuer at a high price that is not feasible should be denied in light of the substance over form principle under Article 14(2) of the Framework Act on National Taxes, since it is a virtual loss that is not actually nonexistent. (3) Even if the instant disposition is not justified in accordance with the substance over form principle under Article 14(2) of the Framework Act on National Taxes, the Plaintiff unfairly obtained the benefits of the ELW disposal loss in advance of one year, and further, on June 3, 2008, the Plaintiff obtained the benefits of the corporation’s tax rate reduced by the corporation’s tax rate reported through the media, and thus, the instant disposition is legitimate pursuant to Article 14(3) of the Framework Act on National Taxes from 208 to 209% of the average daily amount of 209% from 2008.

2) The plaintiff's assertion

① There is no legal basis for adjusting Plaintiff’s taxable income as seen in the instant disposition; ② The Plaintiff’s accounting of the ELW transaction and over-the-counter derivatives transaction conforms to the period of attribution of profit and loss under the Corporate Tax Act; ③ the ELW transaction and over-the-counter derivatives transaction are basically different from the characteristics of the product; ④ the scope of transaction partner, legal liability, etc.; ④ the ELW transaction of a liquidity supplier and over-the-counter derivatives transaction combined with the liquidity supplier are completely different from the economic substance; ④ the economic substance of the transaction are entirely different; ⑤ the Plaintiff cannot be treated equally; ⑤ the Plaintiff is not in a position to choose such form of transaction; thus, the disposition in this case is unlawful.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

1) Determination as to the principle of confirmation of rights and obligations

A) Definition of gross income and deductible expenses

(1) Article 14(1) of the Corporate Tax Act provides that “The income of a domestic corporation for each business year shall be limited to only the amount calculated by deducting the total amount of losses incurred during the pertinent business year from the total amount of earnings accrued during the pertinent business year,” and the aforementioned provision shall apply mutatis mutandis to the total amount of income generated in Korea by a foreign corporation with a domestic place of business pursuant to Article 92(1) of the former Corporate Tax Act (amended by Act No. 11128, Dec. 31, 201) (hereinafter the same shall apply mutatis mutandis to Articles 15(1), 19(1), 22(1), main sentence of Article 40(2), and the main sentence of Article 41(1)1, and the main sentence of Article 42(1) of the same

(2) First of all, Article 15(1) of the Corporate Tax Act provides that "the amount of profit shall be the amount of profit generated by transactions which increase the net assets of the corporation, except as provided for in this Act, such as capital or financing and financing," and Article 15(3) of the same Act provides that "necessary matters concerning the scope and classification of profit pursuant to paragraph (1) shall be prescribed by Presidential Decree," and Article 11(2) of the Enforcement Decree of the Corporate Tax Act provides that "transfer amount of asset" shall be included in the gross income in the calculation of earnings. Accordingly, if the Plaintiff sells ELW, which is asset, to investors, the transfer amount shall be included in the gross income

(3) As to the following losses, Article 19(1) of the Corporate Tax Act provides that "deductible expenses shall be the amount of losses incurred from transactions which reduce the net assets of the corporation except as otherwise provided for in this Act, such as refund of capital or financing, disposal of surplus funds, and disposal." Paragraph (4) of the same Article provides that "the necessary matters concerning the scope and classification of losses under paragraph (1) shall be prescribed by Presidential Decree." Article 19 subparagraph 2 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 23589, Feb. 2, 2012) provides that "the book value at the time of transfer of transferred assets shall be included in deductible expenses." Furthermore, the main sentence of Article 22 of the Corporate Tax Act provides that "the appraised value of assets shall not be included in deductible expenses in calculating the income amount for each business year," Article 42(1) main sentence of the same Act provides that the acquisition value of assets before the acquisition value of the assets shall be calculated by adding it to the acquisition value of the assets for the business year in question 28.

B) Article 40(1) of the Corporate Tax Act provides that "the business year to which the profits and losses accrue for each business year of a domestic corporation shall be the business year to which the date on which the profits and losses are determined belongs" (Article 40(1) of the Corporate Tax Act adopts the principle of confirmation of rights and obligations concerning the time when the profits

On the other hand, Article 40(2) of the same Act provides that "the matters necessary for the scope of the year of the business to which the profits and losses accrue under paragraph (1) shall be determined by the Presidential Decree", and Article 68(1)3 and 1 of the Enforcement Decree of the Corporate Tax Act provides that "the date of the fiscal year to which the profits and losses accrue due to the transfer of assets excluding goods, products, or other products" shall be "the date of the fiscal year to which the proceeds accrue". In light of such provisions, it is reasonable to include all the transfer amount and the value of the acquisition in which the Plaintiff was included in the calculation of earnings and losses due to the first sale to investors of the ELW, in which the sales amount for

However, as recognized earlier, the Plaintiff, while selling ELW to investors, recognized the amount of loss calculated by subtracting the sale price from the acquisition price of ELW as the loss for the business year to which the time of sale belongs, and included the sale price of ELW in the business year to which the time of sale belongs as the gross income and the acquisition price as the deductible expenses. Unless there seems to be any difference between the business year to which the time of sale belongs and the business year to which the date of liquidation belongs, such inclusion in gross income and deductible expenses is consistent with the Corporate Tax Act.

2) Determination as to substance over form principle

A) Article 14(1) of the Framework Act on National Taxes provides that "if the ownership of income, profit, property, act or transaction subject to taxation is nominal and there is another person to whom such ownership belongs, the person to whom such ownership belongs shall be liable for tax payment." Article 14(2) provides that "The provisions on the calculation of tax base in the tax-related Acts shall apply according to the substance regardless of the name or form of the income, profit, property, act or transaction," and Paragraph (3) of the same Article provides that "in cases where it is deemed to be aimed at unfairly receiving benefits under this Act or other tax-related Acts by indirect method via a third party, or by going through two or more acts or transactions, it shall be deemed that the party directly engaged in such transaction or by continuous single act or transaction, and thus this Act or other tax-related Acts shall apply."

The substance over form principle is a practical principle for realizing the principle of equality, which is the basic ideology of the Constitution. In a case where unreasonable form or appearance that differs from the substance of a taxation requirement is taken for the purpose of evading tax burden, the main purpose of this principle is to regulate unfair tax avoidance acts and enhance equity in taxation by imposing tax on a place with a taxation capacity, regardless of its form or appearance. This does not conflict with the basic principle of the tax law, but rather with the principle of the no taxation without law, to the extent that predictability and legal stability are not undermined in the application of economic living relationship with various changes in tax laws and regulations, dispositions are complementary and indivisible with the principle of no taxation without law in that it prevents the realization of the substance of the no taxation without law and ensure effectiveness (see, e.g., Supreme Court Decision 2008Du8499, Jan. 19, 2012). Considering the difference between the issue and the issue price of the e-mail and the issue price offered by the Plaintiff for the same purpose as that of the e-mail supplier, the Plaintiff’s acquisition and sale price of the e-form.

(1) Comprehensively taking account of the following circumstances, it is reasonable to determine that the Plaintiff has the status of a liquidity supplier (LP) who does not generate the ELW (hereinafter referred to as “third party”) but has almost the same economic substance as the case where the issuer concurrently serves as a liquidity supplier (hereinafter referred to as “ issuer”) and that the issuer has the economic substance. (a) The economic substance of the issuer’s position as an issuer is to acquire the ELW sales proceeds acquired by selling the ELW to investors, and if the maturity price exceeds the exercise price, the ELW holder bears the risk of incurring loss in the amount equivalent to the exercise of the right to pay the amount arising from the exercise of the right.

(B) As seen earlier, the Plaintiff, as a third party LP, took over all ESW issued by an issuer which entered into a liquidity supply contract in connection with the contract, and sold the same OTC derivatives (such as the original asset, issue price, exercise price, and maturity) to the issuer.

As a result of these forms of transactions, the issuer would not enjoy economic benefits of the amount equivalent to the ELW sales price received from the Plaintiff while selling ELW to the Plaintiff as the purchase price of OTC derivatives, and even if the issuer is obligated to pay the price of underlying assets at the maturity, the appraisal price of underlying assets would be higher than the exercise price and the price of underlying assets would be higher than that of the exercise price, the issuer would be paid from the Plaintiff the exercise of the right equivalent to the amount of money due to the exercise of the right to the OTC derivatives purchased from the Plaintiff, thereby making the Plaintiff be paid from the Plaintiff the exercise price of the right equivalent to the amount of money due to the exercise of the right.

On the other hand, in relation to the economic substance of the Plaintiff, the Plaintiff acquired the ELW sales proceeds acquired by selling ELW to investors by receiving the sales proceeds of over-the-counter derivatives equivalent to the ELW acquisition price from the issuer, and, if the maturity evaluation price of underlying assets exceeds the exercise price, the issuer of the OTC derivatives, who owns the OTC derivatives, bears the risk of incurring a loss equivalent to the exercise price arising from the exercise of rights arising from the exercise of rights incorporated into the OTC derivatives by the issuer.

(C) Ultimately, all the economic benefits acquired by the ELW issuer and the economic risks borne by the ELW issuer are transferred to the Plaintiff, and the Plaintiff has almost the same economic substance as the LP.

(2) However, in full view of the following circumstances, in order for the Plaintiff, a third party, to have almost the same economic substance as that of the issuer, it cannot be deemed that the Plaintiff’s acquisition by the issuer at the issue price, sold over-the-counter derivatives of the same content as the ELW to the issuer, was conducted for the purpose of avoiding tax burden, or took an unreasonable form or appearance that is distinguishable from the substance of the taxation requirement.

(A) According to Article 28-2(1) and (4) of the former Securities and Exchange Act (repealed by Article 2 of the Addenda to the Financial Investment Services and Capital Markets Act, enacted by Act No. 8635 of Aug. 3, 2007), when a foreign securities company intends to establish a branch or other business office in order to conduct the securities business in Korea, it shall obtain permission from the Financial Services Commission for each type of business and such other business office shall be deemed a securities company. As such, the Plaintiff’s business office is not a securities company, but the Plaintiff’s securities company shall be deemed a securities company under the former Securities and Exchange Act. Therefore, it is problematic whether the Plaintiff’s business office considered as a securities company is possible to issue ELW, but the Ministry of Justice did not interpret that the branch office in Korea of a foreign securities company cannot issue securities such as ELW under the name of the third party, because it is not a legal entity to which the legal effect of the legal act with the third party belongs. Ultimately, the Plaintiff was not a securities company under the former Securities and Exchange Act.

(B) Therefore, in order for the Plaintiff to have almost the same economic substance as the issuer, the Plaintiff’s acquisition of the ELW from the issuer and sales of the OTC derivatives identical with the ELW to the issuer, thereby practically taking the risk of profit and loss arising from the fluctuation in the price of underlying assets. In other words, if OTC derivatives transactions are not accompanied, the possibility of profit and loss arising from the fluctuation in the price of underlying assets remains in the issuer. The Plaintiff sells ELW to investors in the position of the liquidity supplier and then purchases it again to obtain profit and loss arising from the fluctuation in the ELW, only the economic substance, which is not substantially different from the economic substance of ordinary investors, can be seen as having only the economic substance that is not significantly different from the economic substance of ordinary investors.

(C) The Defendant pointed out that the issuer’s transaction with the Plaintiff may not enjoy any economic benefits, but it is a result of issuing ELW and is a non-reasonable form of transaction. However, even from the issuer’s standpoint, the issuer may not enjoy the benefits arising from the decline in the price of underlying assets, rather than enjoying a fixed fee due to the decline in the price of underlying assets, and thus, it would result in the failure of the issuer to incur losses due to the decline in the price of underlying assets. Therefore, it is unreasonable to conduct such a form of transaction.

(D) Comprehensively taking account of the following circumstances, the Plaintiff’s acquisition of the ELW at issue price other than the market price does not constitute either for tax avoidance or unreasonable transactions.

If the purport of the entire pleadings is added to each entry in the evidence Nos. 3 and 4 (including virtual numbers), one country Exchange has acknowledged that it did not approve the listing if the issue value of the ELW is below the lowest limit set by the Korea Exchange until November 2014. In light of the circumstances that the Korea Exchange affected the decision of the issue price, it did not have a structure for the current liquidity supplier or issuer, such as the Plaintiff, to arbitrarily determine the issue price.

In addition, Article 13-2 subparag. 3 of the former Enforcement Rule of the Securities Market Listing Regulations (wholly amended by the Korea Exchange Regulation No. 917, May 13, 2013) stipulates documents to prove the payment of the ELW as one of the documents attached to the application for new listing. If a liquidity supplier accepts the ELW at a price lower than the issue price, the issuer is required to pay the difference between the issue price and the subscription price in lieu of the price. However, there is no reason to accept the ELW at a price lower than the issue price when the issuer is unable to expect any profits other than the fixed issue price due to over-the-counter derivatives, and there is no reason to accept the ELW at a price lower than the issue price when the Plaintiff sells it to the first investor at the later stage of accepting the ELW. In full view of the above, it cannot be deemed that the Plaintiff acquired the ELW at a price higher than the market price in order to avoid tax evasion.

(3) There are other indirect facts that may obstruct the recognition of the purpose of tax avoidance.

(A) Even according to the Defendant’s taxation logic itself, if the Defendant disregards the factors such as the difference of corporate tax rate for each business year, and the issue fee additionally included in deductible expenses in the course of income adjustment, the total business year is deemed to be total, and as a result, the year to which profits and losses are attributed and the year to which corporate tax base is attributed, the principal tax to be additionally paid in total for the entire business year is not a problem, and only the additional tax

(B) As alleged by the Defendant, if the Plaintiff intended to avoid tax burden by recognizing a large-scale loss as early as a result of the Plaintiff’s occurrence of a large number of losses in the business year in which the maturity comes, the Plaintiff should have concentrated on the business year in which the Plaintiff acquired the ELW and the business year in which the maturity comes. However, considering that the maturity of the ELW acquired by the Plaintiff was the short-term period of 3 to 6 months and most of the cases where the maturity comes within a single business year, it cannot be deemed that the Plaintiff intended to avoid tax avoidance through the ELW transaction and the overseas derivatives financial product transaction.

(C) As claimed by the Defendant, even though the difference between the corporate tax rate for the business year 2009 and the business year 2010 has been partly caused, it is deemed that the following circumstances are merely the result of the exceptional and incidental circumstances, such as the change of the corporate tax rate, and it is difficult to deem that the Plaintiff had the purpose of avoiding the tax burden by using it.

According to the statements in Eul evidence 5 and 6 (including each number), media reports on the reduction of corporate tax have been recognized on or around June 3, 2008. However, considering the following circumstances, considering the fact that the Plaintiff had sold ELW whose maturity has not yet arrived until the end of the pertinent business year until December 3, 2008, which was under the Corporate Tax Act (Act No. 9267) amended on December 26, 2008, which was amended on December 26, 2008, and ② as alleged by the defendant, if the Plaintiff intended to avoid tax by using the corporate tax reduction in the business year 2010, which was prior to the reduction of corporate tax rate, the Plaintiff had sold ELW whose corporate tax rate was not arrived at the maturity of the pertinent business year and whose corporate tax rate was not yet arrived until the end of the pertinent business year, there is no evidence to acknowledge otherwise that there was insufficient evidence to acknowledge that the Plaintiff had made a transaction to estimate the reduction of corporate tax rate in advance and to achieve the result of the corporate tax avoidance and over-the OTC derivatives.

3) Sub-decisions

Ultimately, the instant disposition should be revoked as it is unlawful because there is no legitimate ground for disposition.

3. Conclusion

The plaintiff's claim is justified, and it is so decided as per Disposition.