In case where a corporate shareholder acquires new stocks issued by another corporate entity which is a person with a special relationship at a price higher than the market price, whether a corporate shareholder may apply Article 88(1)1 (or Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act by deeming that it falls under “a case where assets are purchased at a price higher than the market price” or “a case equivalent thereto” (negative)

Article 52(1) and (4) of the former Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter “former Corporate Tax Act”); Article 88(1)1 and 8(b) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19891, Feb. 28, 2007; hereinafter “former Enforcement Decree of the Corporate Tax Act”); and Article 15, 17, 19, and 20 of the former Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter “former Corporate Tax Act”), which provides that the increase or decrease in net assets arising from capital transactions shall not be included in gross income or deductible expenses, even if a shareholder acquired new stocks from another corporation as a specially related person at a higher price than the market price, it shall not be deemed as a wrongful calculation and calculation under Article 8(1)1 of the former Enforcement Decree of the Corporate Tax Act (amended by Act).

Articles 15, 17, 19, 20, and 52(1) and (4) of the former Corporate Tax Act (amended by Act No. 7838 of Dec. 31, 2005); Article 88(1)1, 8(b), and 9 of the former Enforcement Decree of Corporate Tax Act (amended by Presidential Decree No. 19891 of Feb. 28, 2007)

East Asia Pharmaceutical Co., Ltd. (Law Firm LLC, Attorneys So-young et al., Counsel for the plaintiff-appellant)

The head of Dong-gu Tax Office (Attorney Kim Young-young, Counsel for defendant-appellant)

Seoul High Court Decision 2012Nu5451 decided September 26, 2012

The appeal is dismissed. The costs of appeal are assessed against the defendant.

The grounds of appeal are examined.

1. Article 52(1) of the former Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter the same) provides that “Where the head of the district tax office having jurisdiction over the place of tax payment or the Commissioner of the competent Regional Tax Office deems that the tax burden on the income of a domestic corporation has been unjustly reduced due to the act of the domestic corporation or transactions with a person with a special relationship as prescribed by the Presidential Decree (hereinafter “specially related person”), he may calculate the income amount of the corporation for each business year regardless of the act or calculation of the income amount of the corporation (hereinafter “Calculation”),” and Article 8(1) of the former Enforcement Decree of the Corporate Tax Act provides that “where the provisions of paragraph (1) are applied, matters necessary for the calculation of the type of wrongful calculation and market price of the corporation shall be prescribed by the Presidential Decree” and Article 88(1) of the former Enforcement Decree of the Corporate Tax Act (amended by the Presidential Decree No. 19891, Feb. 28, 2007) provides that “the following cases where a corporation purchases or part of its market price shall be less”:

In full view of the contents and purport of Articles 15, 17, 19, and 20 of the former Corporate Tax Act, which provide that the increase or decrease in net assets due to capital transactions shall not be included in gross income or deductible expenses, even if a corporate shareholder acquired new stocks at a price higher than the market price from another corporate entity, which is a specially related person, it shall not be deemed as a wrongful calculation by applying Article 88(1)1 (or 9) of the former Enforcement Decree of the Corporate Tax Act, deeming that it constitutes “where assets are purchased at a price higher than the market price” or “cases equivalent thereto,” and thus, it shall not be deemed as a wrongful calculation by applying Article 88(1)1 (or 88(1)8 (b) of the former Enforcement Decree of the Corporate Tax Act, in cases where another shareholder who received profits due to the high-priced acquisition of new stocks is a specially related person.

2. Examining the records in light of the above legal principles, even if the Plaintiff acquired the new stocks at a price higher than their market price from the reported investment development company corresponding to a person with a special relationship under Article 52 (1) of the former Corporate Tax Act, such act by the Plaintiff does not constitute “the purchase of assets at a price higher than their market price” under Article 88 (1) 1 of the former Enforcement Decree of Corporate Tax Act, and on different premise, it is justifiable to revoke the Defendant’s disposition of this case, which applied Article 88 (1) 1 of the former Enforcement Decree of Corporate Tax Act on the ground that it is unlawful. In so doing, contrary to what is alleged in the grounds of appeal, there is no error of law by misapprehending the legal principles as to the unfair

Meanwhile, Supreme Court Decision 2002Du7005 Decided February 13, 2004 cited in the ground of appeal by the defendant is different from the applicable Acts and subordinate statutes, and it is not appropriate to invoke the case in this case.

3. Therefore, the appeal is 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 Kim Chang-suk (Presiding Justice)