Seoul High Court 2012Nu28034 (Law No. 19, 2013)

Whether gift tax may be imposed on the increase in the stock value held by the shareholders of the corporation following the donation of real estate

In light of the legislative intent of Article 41(1) of the former Inheritance Tax and Gift Tax Act and Article 31 of the Enforcement Decree of the same Act, gift tax is not imposed on shareholders, etc. on profits from transactions with corporations other than corporations subject to deficit or profits from transactions with corporations other than corporations subject to temporary or permanent closure of business based on Article 2(3) of the former Inheritance Tax and Gift Tax

2013Du14184 Revocation of Disposition of Imposition of Gift Tax

IsaA

The director of the tax office.

Seoul High Court Decision 2012Nu28034 Decided 16, 2013

October 15, 2015

The appeal is dismissed.

The costs of appeal are assessed against the defendant.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Relevant statutes;

Article 2 (1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter referred to as the "Act") provides that gift tax shall be imposed on a donated property of another person. Article 2 (3) of the former Inheritance Tax and Gift Tax Act provides that "The act or the name, form, purpose, etc. of the transaction shall, notwithstanding the name, purpose, etc. of the transaction, transfer without compensation (including the case of transfer at a remarkably low price) any tangible or intangible property which can calculate economic values to another person or increase the value of another person's property by directly or indirectly." Article 31 (1) of the Act provides that "The donated property pursuant to the provisions of Article 2 of the Act shall include all things belonging to the donee and all de facto or all de facto rights having property value."

Article 41 (1) of the Act provides that "where a person who has a special relationship with a shareholder or investor (hereinafter referred to as "shareholders, etc.") of a corporation (hereinafter referred to as "specified corporation") who has any deficit or suspended or closed its business, obtains profits from a shareholder, etc. of a specified corporation through transactions falling under any of the following subparagraphs with the specified corporation, the amount equivalent to such profits shall be deemed the value of property donated to the shareholder, etc. of the specified corporation," and subparagraph 1 of Article 41 provides "the transaction of providing the property

In addition to donations under Articles 33 through 41, 41-3 through 41-5, 44 and 45, where profits falling under any of the following subparagraphs and above the standard prescribed by the Presidential Decree have been acquired, such profits shall be deemed the value of property donated to the person who has acquired such profits." In subparagraph 3 of Article 42 of the Act, the profits acquired by the increase or decrease of the corporation's capital such as investment, reduction of capital, merger, division, conversion, and exchange of stocks by convertible bonds, etc. under Article 40 (1) (hereinafter referred to as "stock conversion, etc.") or the profits acquired by the increase or decrease of the corporation's capital, such as transfer, acquisition, and exchange of stocks, or changes in the corporation's organization, etc., the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 22042, Feb. 18, 2010; hereinafter referred to as the "Enforcement Decree"), after the change in the value of property acquired by transfer from 300 percent or more.

2. Regarding ground of appeal No. 1

In full view of the circumstances stated in its holding, the court below is just in holding that the gift (hereinafter referred to as "the gift of this case") of this case, which a land owner used for the lease business, was merely a donation of real estate and does not constitute the acquisition by transfer as stipulated in the latter part of Article 42 (1) 3 of the Act, and contrary to what is alleged in the grounds of appeal, there were no errors of misapprehending the legal principles as to the interpretation of the above provision, failing to exhaust all necessary deliberations, or exceeding the bounds of the principle of free evaluation of evidence against logical and empirical rules.

3. As to the grounds of appeal Nos. 2 through 4

(a) the introduction and limitation of the complete taxation system of gift tax;

(1) The former Inheritance Tax and Gift Tax Act (amended by Act No. 7010 of Dec. 30, 2003) does not stipulate any unique definition on the concept of "donations", and instead borrows the concept of "donations under the Civil Act," one of the parties expresses his/her intention to grant property to the other party without compensation and approves it by the other party, subject to gift tax in principle. However, with respect to the transfer of a gift without compensation between the parties, the provision on the legal fiction of donation (Articles 32 through 42) was separately prepared and imposed. As a result, in the case of gratuitous transfer of a gift by means of new financial techniques or capital transactions, etc. which are not listed in the regulations on the legal fiction of donation, there was a limit to block the transfer of a gift without any appropriate tax burden.

Therefore, the Inheritance Tax and Gift Tax Act amended by Act No. 7010, Dec. 30, 2003, in order to realize fair taxation by allowing the taxation authority to impose gift tax on not only the taxable object originally intended but also the transaction and act that is identical or similar to that of the economic substance as well as the original taxable object in lieu of the provision of tax law, was introduced by comprehensively defining the taxable object of gift tax including not only the donation under the Civil Act, but also the direct and indirect free transfer of the property, and the increase in the value of the property by another person's contribution.

In light of the fact that the concept of comprehensive gift under tax law is introduced in order to cope with it in advance, and that the previous provision on deemed donation is uniformly converted into the value calculation provision, in principle, if any transaction or act constitutes the concept of gift under Article 2 (3) of the Act, it is possible to levy gift tax in accordance with Article 2 (1) of the Act.

(2) On the other hand, the conversion of the regulation on the calculation of the value of a donation into the provision on the deemed donation changes the title of Section 2 of Chapter 3 from "the legal fiction of donation, etc. to "Calculation of the value of the donated property", and changes the title of the regulation on individual deemed donation from "the legal fiction of donation" to "the value of the donated property" into "the value of each provision is deemed "the value of the donated property", and due to that, the content related to the taxation requirements such as the taxable object and the scope of taxation regulated in the previous provision on the deemed donation remains. In other words, the regulation on the calculation of individual value requires that a special relationship between the parties to a transaction exists between a certain type of transaction and a transaction, or the difference between market price, etc. and the value of the donated property is more than a certain amount, and the matters related to such taxable object or scope of taxation have been amended from time to time to time. This is to ensure predictability of taxpayers and stability of tax relations, and to prevent confusion in the previous regulation on the deemed donation and the scope of taxation.

Therefore, in order to ensure the predictability of taxpayers, the individual value calculation regulation limits only a certain transaction and act to be subject to gift tax and limits the scope of taxation of gift tax by prescribing the scope and limit of taxation of gift tax in a limited manner, the gift tax can not be imposed even if the transaction and act excluded from the subject or scope of gift tax among the transaction and act regulated by the individual value calculation regulation conforms to the concept of gift under Article 2 (3) of the Act.

(b) limitations on taxation of profit gifts through transactions with specific corporations;

Article 41(1) of the Act and Article 31(6) of the Enforcement Decree of the Act provide for the calculation of the value of donated property where profits acquired by stockholders, etc. are at least KRW 100 million by making transactions, such as free provision of property to a specific corporation, by a corporation having losses (hereinafter referred to as "contributed corporation") and a person having a special relationship with stockholders, etc. of a corporation under temporary or permanent closure of business, etc., are subject to gift tax in cases where the profits earned by such stockholders, etc. are at least KRW 100 million. This purport is to impose gift tax on an irregular donation that gives profits to stockholders, etc. of a specific corporation without bearing corporate tax on the donated value by means of offsetting the donated value as losses (see Supreme Court Decision 2008Du6813, Apr. 14, 201). In other words, each of the aforementioned provisions is limited to a corporation subject to temporary or permanent closure in cases where it is a corporation

This is clear that the legislative intent of intending to exclude profits acquired by stockholders, etc. from taxable subject to gift tax is based on transactions with corporations that bear corporate tax on assets increase profits, etc. while running a business normally, and it cannot be deemed that such legislative intent has been changed due to the introduction of the full-scale comprehensive taxation system. Therefore, it should be deemed that the limitation was established to prevent shareholders, etc. from imposing gift tax on the profits from transactions with corporations that do not have losses, or on profits from transactions with corporations that do not have losses other than corporations that suspend and discontinue business. Therefore, the said profits cannot be taxed on the grounds of Article 2(3) of the Act, unless there are special circumstances such as the provision on gift tax imposition.

C. Determination

According to the reasoning of the judgment below, the plaintiff acquired the real estate of this case on February 27, 2006 among the shares issued by ○○○○○○○ from among the shares issued by ○○○○○○○○ on February 27, 2006, ② the plaintiff’s external assistant department donated the real estate to △△△△ Construction on February 28, 2006, and completed the registration of transfer of ownership on March 3, 2006, ③ the △△△ Construction shall include the assets increase profit from the gift of this case in the gross income and reported and paid the corporate tax of 2006 to ○○○○○○○○○○○○○○○○ on July 4, 201. ④ The defendant imposed the gift tax by applying Articles 2(3) and 42(1)3 of the Act to the Plaintiff on July 4, 201 by deeming that the real estate donation of this case was a donation equivalent to the increase in the value of the shares in question, ⑤ even if there is no profits or no profits accrued within 31.

Examining these facts in light of the provisions and legal principles as seen earlier, even if AA made an indirect contribution to increase the value of stocks held by the Plaintiff, a shareholder of the △△ building business, by indirectly donating the instant real estate to the △△ building business, the instant real estate donation constitutes a donation of property to a corporation without deficit or a donation of property to the extent that it does not fall under a taxable object of loss, and thus, △△ case bears corporate tax on the profits accruing from the donation of assets. As such, gift tax cannot be imposed on the profits accrued to the Plaintiff pursuant to Article 2(3) of the Act, and the instant real estate donation does not fall under the “business acquisition limit, etc.” under Article 42(1)3 of the Act, and thus, the instant disposition imposing gift tax on the Plaintiff by applying Articles 2(3) and 42(1)3 of the Act is unlawful as it goes beyond the limit of imposing gift tax

The judgment below to the same purport is just, and contrary to the allegations in the grounds of appeal, there are no errors in the misapprehension of legal principles as to the interpretation and application of Articles 2(3), 41(1) and 42(1)3 of the Act.

4. Conclusion

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.