Cho High-2017-China-4884 ( April 24, 2018)

The transfer of abnormal low price which lacks economic rationality between corporations with a special relationship is subject to calculation of unfair practices.

It is reasonable to view that the transfer of shares to the face value of the shares at a low-price is an abnormal transaction lacking economic rationality when there is no managerial difficulties to sell shares at a low-price. Therefore, the disposition that calculates the denial of unfair practices is legitimate.

Article 52 of the Corporate Tax Act: Denial of Wrongful Calculation

2018Guhap14474 Revocation of Disposition of Corporate Tax Imposition

○○ Co., Ltd.

○ Head of tax office

April 16, 2019

June 4, 2019

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

Each disposition imposing corporate tax of KRW 3,38,530, corporate tax of KRW 64,510,730, corporate tax of the business year 2014, corporate tax of KRW 56,008,330, which the Defendant imposed on the Plaintiff on September 13, 2017, shall be revoked.

1. Details of the disposition;

A. The Plaintiff is a shareholder of ○○ Group Co., Ltd. (hereinafter referred to as “○○ Group”) established on April 7, 201. Kim○○ holding 60% of the total number of outstanding shares of the Plaintiff and holding 66% of the total number of outstanding shares of ○○ case Co., Ltd. (hereinafter referred to as “○○ case”). At the same time, the Plaintiff, ○○ Group, and the Plaintiff and ○○ case are the specially related parties as prescribed by Article 87 of the former Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 27828, Feb. 3, 2017; hereinafter the same).

B. On April 7, 2011, ○○○ Group purchased “○○CC golf course” (hereinafter “instant golf course”) from ○○○-dong, 000-0 Ga, 27,782 square meters and 15 lots of land, and completed the registration of ownership transfer on May 4, 201.

C. On April 7, 201 and on the 27th day of the same month, the Plaintiff acquired 120,000 shares of ○○ Group (hereinafter “instant shares”) in the face value of KRW 5,000 per share (total of KRW 600 million), and transferred the said shares to ○○ case on February 24, 2012 (hereinafter “instant shares transfer”).

D. Pursuant to Article 63 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 14388, Dec. 20, 2016; hereinafter referred to as "Inheritance Tax and Gift Tax Act") and Article 54(2) and (4) of the Enforcement Decree of the same Act (amended by Presidential Decree No. 26960, Feb. 5, 2016; hereinafter the same shall apply), the Defendant determined that the Plaintiff transferred the instant shares to ○○○○ at a lower price than the market price of the instant shares at a lower price than 9,712 won per share after evaluating the market price of the instant shares as net asset value, and that the Plaintiff transferred the instant shares at a lower price than 365,440,000 won to the Plaintiff in the calculation of the income amount in the business year of 2012; hereinafter the same shall apply), the difference between the Plaintiff’s initial notice of 305,500 won in the calculation of the corporate tax, and the Plaintiff’s previous notice of 20301,515.

2. Whether the instant disposition is lawful

A. Summary of the plaintiff's assertion

1) Although the transfer of the instant shares cannot be deemed as transferring the same amount as the acquisition value after about 10 months from the time the Plaintiff acquired the instant shares, the Defendant’s disposal of the instant shares by applying the supplementary evaluation method under the Inheritance Tax and Gift Tax Act and the Enforcement Decree thereof, instead of recognizing the acquisition value or transfer value of the instant shares as the market price, is unlawful.

2) As a result of a free transaction with ○○ Group, the instant golf course was acquired in KRW 6,821,00,000,000 as a result of the free transaction with ○○ Group, its acquisition value shall be deemed the market price of the instant golf course, and the Defendant applied the officially assessed individual land price in evaluating the instant golf course

It is unreasonable to reflect the market price of shares.

3) Even if the transfer value of the instant shares is somewhat different from the market value, the transfer of the instant shares to KRW 5,00 per share with face value cannot be deemed as a transaction that disregards economic rationality, and thus, it does not constitute the subject of avoidance of wrongful calculation.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Determination on the assertion that the shares in this case were transferred at the market price

A) Article 52(2) and (4) of the former Corporate Tax Act provides that "as to the market price in the denial of wrongful calculation, sound social norms, commercial practices, and prices applied or deemed applicable to a normal transaction between persons who are not related parties," and matters necessary for the calculation of the market price are delegated to the Presidential Decree. According to delegation, Article 88(1)3 of the former Enforcement Decree of the Corporate Tax Act provides that "where an asset is transferred or invested in kind without compensation or at a price lower than the market price, among the types of wrongful calculation," and Article 89(1) provides that "where the market price is similar to the transaction in question, the relevant corporation shall be deemed as the market price in a situation similar to the transaction in question, and Article 89(2)2 provides that "Where the market price is unclear, it shall be determined by applying mutatis mutandis the provisions of Articles 61 through 66 of the former Inheritance Tax and Gift Tax Act."

B) On February 24, 2012, the instant shares were non-listed shares and can not be found to have known the price of continuous transaction with many and unspecified persons other than specially related persons or the price of the instant shares traded among third parties who are not specially related parties (the Plaintiff appears to have paid the share price at the time of establishment of ○○ Group and take over the instant shares; the price of the shares continuously traded with many and unspecified persons other than specially related persons or the price of the instant shares traded among third parties who are not specially related parties). Even if the instant shares were traded without listing on the Korea Stock Exchange, if there are circumstances to view that the transaction was conducted in a general and normal manner and thus, it would be reasonable to reflect the objective exchange value at the time of the transaction (see, e.g., Supreme Court Decision 86Nu408, May 26, 1987).

C) Therefore, since the shares of this case fall under a case where the market price is unclear, it shall be assessed by the supplementary assessment method as stipulated in Article 63 of the former Inheritance Tax and Gift Tax Act and Article 54 of the Enforcement Decree of the same Act. Accordingly, the market price of the shares of this case is as seen in Article 165,440,000 (the market price of the shares of this case is KRW 1,165,40,000). Thus, the transfer of the shares of this case to KRW 60 million below that market price constitutes an unfair act due to a transfer at a low price under Article 88(1)3

2) Determination as to the allegation that it was unlawful to evaluate the instant golf course as a publicly assessed individual land price

A) As the instant shares are already determined by the supplementary assessment methods stipulated under Article 63 of the former Inheritance Tax and Gift Tax Act, and Article 54 of the Enforcement Decree of the same Act, since their market value is unclear, it is examined specifically as to the assessment methods of the instant golf course related to the application of the said supplementary assessment methods.

B) According to Article 63(1)1(c) of the former Inheritance Tax and Gift Tax Act, the unlisted stocks shall be assessed according to the method prescribed by the Presidential Decree, considering the assets, profits, etc. of the pertinent corporation. Article 54(2) and (4) of the Enforcement Decree of the same Act, which is prescribed by delegation, provides that the net asset value of the pertinent corporation shall be calculated by dividing the net asset value by the total number of issued and outstanding stocks for less than three years after the commencement of the business. Article 55 of the same Decree provides that the net asset value of the relevant corporation as of the base date of appraisal shall be the value calculated by deducting liabilities from the value assessed under Articles 60 through 66 of the Act as of the base date of appraisal. Article 60 of the former Inheritance Tax and Gift Tax Act provides that, in principle, the value of the relevant corporation’s assets shall be the value generally recognized as being traded where a free transaction is made between many and unspecified persons. In cases where it is difficult to calculate the market value, the value assessed by the method under Articles 61 through 65 shall be the publicly assessed individual land price.

C) On April 7, 201, 201, ○○○ Group purchased the instant golf course from the △△△△△ Province. Although ○○ Group and △△△△△ is not in a position as a specially related party, it cannot be deemed that the acquisition value of real estate formed in the instant golf course is ordinarily established when it is freely traded among many and unspecified persons. (In accordance with the Plaintiff’s assertion, △△△△ was difficult to operate the instant golf course and the individual land price to be raised for the bankruptcy crisis was not confirmed, and the instant golf course was sold rapidly without confirming the individual land price to be raised. Accordingly, the price formed in the circumstance cannot be viewed as the market price reflecting the objective exchange value formed by the general and normal transaction. Thus, it is reasonable to assess the market price of the instant golf course according to the individual land price as stipulated in Article 61(1)1 of the former Inheritance Tax and Gift Tax Act.

D) The fact that the Defendant assessed the instant golf course according to the officially assessed individual land price, which is a supplementary assessment method under the former Inheritance Tax and Gift Tax Act, and assessed the instant shares as KRW 9,712 per share after calculating the net asset value of the ○○○ Group’s instant shares, is apparent in the calculation that the market price of KRW 1,165,440,00 per share is KRW 1,165,40,000. Accordingly, it is lawful as it is in accordance with the provisions of the former Inheritance Tax and Gift Tax Act and the Enforcement Decree thereof. Accordingly, the Plaintiff’s assertion on a different premise is without merit.

3) Determination as to the assertion that economic rationality exists

A) The term “unfair calculation of unfair act” means a legal fiction that a person having the authority to impose taxes denies or reduces the tax burden by abusing the various forms of transactions listed in each subparagraph of Article 88(1) of the Enforcement Decree of the Corporate Tax Act, instead of using a reasonable method by a person having a special relationship with the person having a special relationship. From the perspective of the economic person, the same is applicable only to cases where it is deemed that the person disregards the economic rationality by calculating a natural and unreasonable act, and the determination of whether an economic rationality exists shall be based on whether the transaction is unfair in light of sound social norms or commercial practices, and shall also be based on whether the transaction was conducted in light of whether the transaction was conducted with a non-specially related person, and special circumstances at the time of the transaction, etc. (see, e.g., Supreme Court Decision 2018Da1554, Oct. 25, 2018).

2016Du39573, supra.

B) We examine the following circumstances: ① the Plaintiff acquired the instant shares at par value and transferred them at the same price; however, it is difficult to view that determining the transfer value of the instant shares at the same amount as the stock price paid at the time of establishment of ○○○ Group’s assets, profit and loss without considering any specific factors; ② The transfer value of the instant shares is merely 51% of the value of the instant shares calculated by the supplementary assessment method under the Inheritance Tax and Gift Tax Act; ③ the Plaintiff had no choice but to transfer the instant shares to ○○○○○ case on February 24, 2012 due to the need to secure funds, and there was no choice but to believe that the transfer value was a legitimate market value; ② the Plaintiff had no choice but to have attempted to sell the instant shares at the same price to ○○○○○○○○○○○○○○○○○○○○○○○○○’s assets, or there was no need to find out the Plaintiff’s lack of legal grounds for the Plaintiff’s participation in the instant shares in the sale of the instant shares.

3. Conclusion

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