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

Head of Eastern Tax Office

August 22, 2012

Seoul Administrative Court Decision 2011Guhap23436 decided January 18, 2012

1. Revocation of a judgment of the first instance;

2. The Defendant’s disposition of imposing corporate tax of KRW 2,872,07,560 for the business year 2005 against the Plaintiff on November 1, 2009 and corporate tax of KRW 906,139,260 for the business year 2006 shall be revoked.

3. All costs of the lawsuit shall be borne by the defendant.

The same shall apply to the order.

1. Details of disposition;

A. The Plaintiff is the largest shareholder who holds 1,854,00 shares of 1,854,000 shares in Reporting Investment Development Co., Ltd. (hereinafter “Reporting Investment Development”), and paid a payment guarantee of up to 18 billion won in respect of the obligations owed by Reporting Investment Development from a mutual savings bank to which it is mobilized (hereinafter “instant obligations”).

B. On October 15, 2004, 200 won and 5,000 won and 5,000 won per share (hereinafter “instant new shares”). On October 25, 2004, the Plaintiff acquired the forfeited shares of other shareholders, such as Nonparty 1 (hereinafter “instant forfeited shares”) (hereinafter “instant forfeited shares”) and paid 1.5 billion won in total, including 1,60,641 shares and 1,39,359 shares and 3,000 won in acquisition price. Accordingly, the Plaintiff’s shareholding ratio increased to 74.9% by 74.9%.

C. Around October 27, 2004, reporting investment development used 15 billion won in full payment of the instant debt, which the Plaintiff received from the Plaintiff.

D. At the time of filing a corporate tax return for 2004, the Plaintiff disposed of the forfeited stocks of this case 1,39,359 shares that were acquired from the issued stocks of this case as follows: Article 52(1) of the former Corporate Tax Act (amended by Act No. 10423, Dec. 30, 2010; hereinafter the same shall apply) and Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19891, Feb. 28, 2007; hereinafter the same shall apply) as a wrongful calculation of the subscription price; and (3,242,076,020 won (amended by Presidential Decree No. 19891, Feb. 28, 2007; 5,000 won per share); and (4),754,718,980 won as income or other losses from the company at the same time.

E. On September 1, 2005, the Plaintiff sold to Nonparty 2 the 2,239,802 shares out of the instant new shares to Nonparty 2 for KRW 22,711,592 (10.14 won per share). On January 17, 2006, the Plaintiff decreased the 684,178 shares by 1/10, and on November 15, 2006, sold the remaining 76,020 shares to Nonparty 3 for KRW 7,708,408 (10.4 won per share).

F. The Plaintiff sold shares as above and added the disposal loss of KRW 14,969,580,00 ( KRW 11,176,298,408, and KRW 3,793,793,281,592 in the business year of 2005) to the gross income and added the reserved disposition of KRW 3,754,718,980 in the business year of 2005 to the gross income ( KRW 2,803,275,975 in the business year of 2005, KRW 951,43,05 in the business year of 2006), and reported corporate tax for the business year of 2005 and the business year of 206.

G. The Defendant determined that the Plaintiff purchased new shares at a high price in the form of capital increase with a capital increase and distributed profits for investment development by selling them at a high price in the form of capital increase with a capital increase, and calculated profits by deducting KRW 3,754,718,980 from the difference calculated by the Defendant’s acquisition price of KRW 5,00,00 per share after capital increase with a capital increase, the Defendant added KRW 10,081,349,815 when calculating the amount of income for the business year 2005, and applied Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act to the Plaintiff on November 1, 2009 by adding KRW 3,421,650,185 when calculating the amount of income for the business year 2006, when calculating the amount of income for the business year 2005 (hereinafter “instant disposition”).

H. On January 29, 2010, the Plaintiff filed an appeal with the Tax Tribunal on the instant disposition, but was dismissed on April 20, 201.

【Ground for Recognition: Facts without dispute, Gap evidence 1 to 10, Eul evidence 1 to 5 (including additional numbers), the purport of the whole pleadings】

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

The plaintiff asserts that the disposition of this case is unlawful on the following grounds.

1) The acquisition of new shares issued by another corporation is a capital transaction and subject to Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act, and Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act does not apply. The instant disposition based on the premise that Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act applies is unlawful.

2) Even if it is not so, the Plaintiff participated in the capital increase increase to avoid the business risk that the Plaintiff may go bankrupt with the development of investment by resolving the regradation of reported investment development funds, setting its wording, and thereby gaining profits of KRW 3 billion compared to the time of bankruptcy. Thus, the Plaintiff’s act is an act of economic rationality and is not subject to unfair calculation.

3) The market price of the instant new shares under Article 52(2) and (4) of the former Corporate Tax Act is not KRW 499, but KRW 2,317 calculated pursuant to Article 89(6) of the former Enforcement Decree of Corporate Tax Act.

B. Relevant statutes

The entries in the attached Table-related statutes are as follows.

C. Determination as to whether Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act applies

1) The Defendant: (a) deemed that the apportionment of economic benefits from the high-priced acquisition of forfeited stocks was between the Plaintiff and the forfeited stock-listed corporation, and thus, took the instant disposition by applying Article 52(4) of the former Corporate Tax Act and Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act. However, from the high-priced acquisition of forfeited stocks, the allocation of economic benefits from the forfeited stock-listed stocks causes between the forfeited stock underwriter and the forfeited stock-listed corporation; and (b) the corporation that issued forfeited stock-listed stocks cannot be a party to exchange such benefits. Therefore, the instant disposition to which Article 88(1)1 of the former Enforcement Decree of the Corporate Tax Act applies is unlawful on a different premise. The reasons are as follows.

(1) The fact that a corporation issues forfeited stocks more than the appraised value, no benefit does accrue in relation to the shareholder who is the underwriter for forfeited stocks. This is because, in the case of a forfeited stock issuance corporation, the equity capital remaining at the time of liquidation by being contributed to the subscription price without compensation at the time of such issuance is transferred to shareholders according to their shares ratio. Therefore, there is no benefit from the corporation in the process.

(2) In such a transaction, gains or losses may arise among shareholders. This is because the liquidation amount that can be distributed per share of the forfeited stocks to shareholders who have accepted the forfeited stocks at a high price or to other shareholders who have renounced the forfeited stocks, or to shares held by them, is the same.

③ Article 52(4) of the former Corporate Tax Act provides that matters necessary for the type of wrongful calculation and the assessment of market price shall be prescribed by Presidential Decree. Article 88(1)8(b) of the former Enforcement Decree of the Corporate Tax Act provides that where a corporate shareholder, etc. fully or partially waives the right to receive new stocks in the increase of corporate capital or acquires new stocks at a price higher than their market price, a corporate shareholder, etc. distributes profits to other stockholders, etc., who are persons with a special relationship, due to capital transactions that fall under a case where the former Enforcement Decree of the Corporate Tax Act delegated by the former provides that tax burden shall be reduced unreasonably. The above provision explicitly provides that where forfeited stocks are acquired at a higher price as seen earlier, the other party to the apportionment of profits shall be “other stockholders, etc., who are a person with a special relationship.” Therefore,

2) Since the instant disposition is unlawful by applying the laws and regulations, the remainder of the Plaintiff’s assertion is not determined separately.

3. Conclusion

The judgment of the court of first instance that the instant disposition is lawful is inappropriate. The judgment of the court of first instance is revoked, and the instant disposition is revoked.

[Attachment Form 5]

Justices Kim Jong-ho (Presiding Justice)