Hyundai Heavy Industries Co., Ltd. (Law Firm Rate, Attorneys So-young et al., Counsel for the plaintiff-appellant)

U.S. Head of Dongsan District Tax Office (Attorney Cho Young-gu, Counsel for the defendant-appellant)

October 6, 2010

Ulsan District Court Decision 2009Guhap892 Decided November 18, 2009

1. Revocation of a judgment of the first instance;

2. The defendant's rejection disposition against the plaintiff on October 1, 2007 regarding corporate tax and special rural development tax for the business year 2004 to 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 the disposition;

(a) Merger proceedings;

(i) Three parties to a merger agreement;

On December 17, 1998, when the foreign exchange crisis occurred, Hyundai Integrated Finance Corporation (hereinafter “Modern”) (hereinafter “Geowon Bank”), Gangwon Bank (hereinafter “Geowon Bank”), and Cho Jaeung Bank (hereinafter “Sungung Bank”) merged three financial institutions, and the merger method involves the merger of Hanwon Bank and the merger between the Hanwon Bank and the Hanwon Bank and the Hanwon Bank become the surviving corporation. The share swap ratio was to be calculated by appropriately considering the net asset value as of December 31, 1998 by each financial institution as of December 31, 198 and the standard share value.

(ii) the first merger;

In accordance with the above agreement, on December 31, 1998, the Gangwon Bank merged with Hyundai Sejong Bank, issued the registered ordinary shares (e.g., 5,000 won in face value) of the Gangwon Bank per registered common shares (e., 5,000 won in face value) of Hyundai Sejong Bank to its shareholders, and issued new shares (e.g., 5,000 won in face value) to its shareholders, and delivered them for the price of the merger. The merger agreement was entered into on February 9, 199 with the contents of the merger as of February 11, 199 after the resolution of each general meeting of shareholders, and completed the merger procedure on February 26, 199 (hereinafter “the first merger”).

(iii) the second merger;

Around May 10, 1999, the Chowon Bank merged the Gangwon Bank with the Gangwon Bank, and registered on September 15, 1999, the merger process was completed on September 14, 1999 with a resolution of the respective general meeting of shareholders on September 14, 199, with the acquisition of registered common shares (e.g., par value 5,000 won) of the Gangwon Bank to the shareholders of the Gangwon Bank, and issued the registered common shares (e.g., face value 5,000 won) of the Gangwon Bank to the shareholders of the Gangwon Bank, and issued the registered common shares (e.g., face value 5,00 won) of the Gangwon Bank to the proceeds of the merger.

B. Acquisition of merged shares by the plaintiff

The Plaintiff was a shareholder holding 21,446,770 shares of Hyundai Sejong Bank (the book value of KRW 112,211,334,080). According to the first merger, the Plaintiff received KRW 115,563,560 shares of Gangwon Bank (the face value of KRW 577,817,80,000) and KRW 2,220 of the merger subsidy. In other words, according to the second merger, the Plaintiff received KRW 12,089,238 shares of Sejong Bank (the face value of KRW 60,46,190,00,000) and KRW 10,622 of the merger subsidy.

(c) At issue of agricultural special tax and payment of the plaintiff's agricultural special tax contribution in the second merger process;

(1) Succession to the obligation to pay agricultural special tax by the Gangwon Bank

Modern Sejong was merged into Gangwon Bank due to the first merger, and the liquidation income was generated to Hyundai Sejong. The corporate tax was non-taxable under the revised Restriction of Special Taxation Act, but the special rural development tax imposed on the corporate tax base (hereinafter referred to as "agricultural special tax") was extinguished in the state where the obligation to pay agricultural special tax was borne, and the obligation to pay modern species special tax was succeeded to the Gangwon Bank that merged Hyundai Sejong special tax.

(ii) the process of processing agricultural special taxation issues of the Gangwon Bank;

A) However, in the second merger, the above ratio of merger did not take into account the obligation to pay the special agricultural tax of the Gangwon Bank. On June 9, 1999, the Choung Bank, which became aware of such fact, demanded Hyundai Group to preserve the special agricultural tax instead of readjusting the merger ratio. As a policy for the integration of financial institutions, government officials in charge of the government who induced and urged the integration between Hyundai Sejong Bank, Gangwon Bank, and Cho Ho Bank, are also exempted from the obligation to pay the special agricultural tax. In fact, at the time of the second merger, the member of the National Assembly, who was a member of the National Assembly at the time, made a petition for the reduction or exemption of the above special agricultural tax, and the National Economic Committee accepted the petition of the non-party member of the National Assembly on August 9, 199, and prepared the above special agricultural tax reduction or exemption plan in order to assist Hyundai Group in restructuring, and prepared the above special agricultural tax reduction or exemption plan and its affiliates, including the plaintiff 199.

(2) If the parties to the merger agreement were to have agreed to pay the amount equivalent to the interest of the 3rd shareholders of the 199 government bank, the 3rd government bank will be merged with the 3rd government bank for the purpose of the 19-570 government shares of the 3rd government bank. The 3rd government bank will be obligated to pay the 3rd government bank for the purpose of the 19-57 government shares of the 3rd government bank. The 3rd government bank will be obligated to pay the 1-th government treasury shares of the 3rd government bank for the purpose of the 1-th government treasury merger. The 3rd government bank will be obligated to pay the 1-th government treasury shares of the 1-th government treasury bank for the purpose of the 1-th government treasury merger agreement. The 1-th government treasury will also be obligated to pay the 3th government treasury shares of the 1-th government treasury bank for the purpose of the 3-th government treasury merger agreement. The 1-th government treasury will be obligated to pay the 1-th government treasury merger agreement.

B) On August 16, 1999, Hyundai Construction Co., Ltd, Hyundai Capital Co., Ltd., Hyundai Automobile Co., Ltd, Hyundai Industrial Development Co., Ltd., which was an affiliate of the Gangwon Bank, including the Plaintiff, agreed to share the amount equivalent to the agricultural special tax of this case that should be compensated for to the Cho Ho Bank, and the amount equivalent to the agricultural special tax of this case out of the total number of shares issued by the Gangwon Bank, among the total number of shares issued by the Gangwon Bank, in proportion to the following ratio (which is the share possession ratio between the members of the Seowon Group Co., Ltd.) out of the total number of shares issued by the Gangwon Bank.

213,146,580% 115,89,542 54.4% Hyundai Capital 35,892,892,129,226,545 11.8% Hyundai Construction 24,890,281.7% Modern Industrial Development 11,238,083% 11.3% Modern Industrial Development 11,238,083

(iii) the imposition and payment of agricultural special taxes by the director of the South Seodaemun Tax Office;

In accordance with Article 49 of the Restriction of Special Taxation Act, the director of the tax office of Seodaemun imposed 86,746,63,960 won on the total of the agricultural special tax amount corresponding to 199, which was determined to be the tax base of the corporate tax amount reduced or exempted on October 2, 199 with respect to the liquidation income acquired by absorbing Hyundai Geum-gu into the Gangwon Bank. On October 2, 1999, the director of the tax office of Seodaemun-gu imposed 86,746,63,960 won for the agricultural special tax corresponding to 199, which was determined to be the tax base of the corporate tax amount reduced or exempted. The research bank paid it on November 1, 199 as a corporation continuing to exist in the second merger.

4) Payment of the Plaintiff’s special agricultural tax contribution

The amendment of the Agricultural Special Taxation Reduction and Exemption Act, supra, was repealed on the ground that it was retroactive legislation at the plenary session of the National Assembly, and the Plaintiff paid KRW 54,276,470,263 in total twice on December 29, 200 and December 29, 2001 pursuant to the Agricultural Special Taxation Allocation Agreement.

(d) Progress of a lawsuit seeking revocation of imposition of the special agricultural income tax by the Cho Heung Bank;

The Seocho Bank was sentenced to partial winning judgment that "the Seoul High Court (No. 2001Nu13920) against the director of the Seoul Administrative Court against the director of the Seoul High Court for revocation of the imposition of the agricultural special tax on May 9, 2002," and on July 13, 2001, "the defendant (the director of the Seoul High Court) against the Gangwon Bank on October 2, 1999, issued a final appellate judgment that "the amount exceeding 54,87,982,805 won out of the imposition of the agricultural special tax on the Gangwon Bank for the year 1999 against the Gangwon Bank" was revoked. The Seoul High Court (No. 2001Nu13920) (No. 205573) which was the appellate court dismissed the plaintiff's claim on July 28, 200 and remanded to the Seoul High Court (No. 201.205.205.25.204.204.).

E. Plaintiff’s request for correction, such as sale of the Plaintiff’s shares and corporate tax of this case

1) After that, on May 21, 2004 and June 18, 2004, the Plaintiff sold all of the shares of Choung Bank in total to KRW 38,449,692,416, and reported the corporate tax for 2004 business year by reflecting this in the settlement of accounts.

2) On June 29, 2007, the Plaintiff included KRW 465,606,468,140, and KRW 30,780,719,720, out of the agricultural special tax charges paid by the Plaintiff to the Choungung Bank upon the first merger, the Plaintiff’s acquisition value of the stocks of Choungung Bank was included in the calculation of losses. However, even though the amount was included in KRW 30,780,019,720, among the agricultural special tax charges paid by the Plaintiff to Cho Jongung Bank upon the first merger, the amount corresponding to the above amount was not included in the calculation of losses as disposal losses. Accordingly, the Plaintiff’s inclusion in the calculation of losses was claimed to rectify the tax base and tax amount of the corporate tax and the agricultural special tax for the business year of 2004 through 206.

3) Accordingly, the Defendant: (a) accepted the Plaintiff’s claim on July 23, 2007 with respect to the deemed dividend amount of KRW 465,606,468,140, and recognized the Plaintiff’s claim as deductible expenses attributed to the business year of 2004 and corrected the tax base and tax amount for the pertinent business year; (b) on October 1, 2007, on the part of the instant agricultural special tax contribution, the Defendant rendered the instant disposition rejecting the Plaintiff’s claim for correction on the ground that “the agricultural special tax contribution that the Plaintiff shall pay is not included in the acquisition value of stocks

(f) Procedures of the previous trial;

The plaintiff appealed and filed a request for a trial with the Tax Tribunal, but was dismissed on December 31, 2008.

[Reasons for Recognition] 1, 3, and 14 Evidence A

2. Whether the disposition is lawful;

A. The plaintiff's assertion

1) Calculation of acquisition value

The Plaintiff’s shares of the Giwon Bank may be deemed to have been acquired in the form of the merger. However, considering the obligation to bear the agricultural special tax of the Kiwon Bank, which was not originally considered, the value of the assets of the Kiwon Bank may decline, and accordingly, the merger ratio with the Kiwon Bank should have been adjusted accordingly. In this case, several problems may arise, such as the postponement of the merger date, etc., and prevent this from adjusting the merger ratio, and promote the merger by the Hyundai Group companies, including the Plaintiff, who held the shares of the Kiwon Bank, instead of adjusting the merger ratio as originally determined. Accordingly, the Plaintiff acquired the shares of the Kiwon Bank and paid the agricultural special tax contribution in return for the acquisition of the shares of the Kiwon Bank in accordance with the merger ratio originally determined by the Plaintiff.

Therefore, the agricultural special tax contribution paid by the Plaintiff to the Choung Bank is paid as the price for the acquisition of the stocks of the instant Choung Bank, and the portion exceeding the new stocks acquired by merger according to the legitimate merger ratio falls under the assets purchased by the Plaintiff from the Choungung Bank. The agricultural special tax contribution paid by the Plaintiff to acquire the stocks of the instant Choung Bank should be included in the acquisition price of the stocks of the instant Choung Bank.

2) The time when the loss and the loss accrue

On June 29, 199, when the second merger took place, it discovered that the obligation to pay a large amount of agriculture special tax was succeeded to the Gangwon Bank in accordance with the above sharing agreement, and then demanded the old Hyundai Group affiliate companies, including the Plaintiff, to preserve the above agricultural special tax instead of adjusting the merger ratio. Furthermore, the government that strongly promoted the above third party merger for the purpose of prompt restructuring of financial institutions, as well as Hyundai Group affiliate companies, concluded an agreement on the agricultural special tax share around August 199, and made the payment of the instant payment to the Chowon Bank in accordance with the above sharing agreement on December 29, 200 and December 29, 2001. In light of such circumstances, the payment of the instant payment was required to hold the shares of the Plaintiff bank calculated according to the initial merger ratio and to create a stable business environment for the Plaintiff’s business operation as an expense for early cooperation and loss.

However, it shall be deemed that the plaintiff could not receive a refund of the agricultural special tax contribution if he/she filed a lawsuit seeking the revocation of the disposition of imposition of the agricultural special tax, and if he/she won the lawsuit, he/she could receive a refund of the agricultural special tax contribution. However, it shall be deemed that the judgment of the Supreme Court on April 8, 2004 that dismissed the plaintiff's claim in the lawsuit (2002du5573) or the judgment of the Supreme Court on April 8, 2004 that dismissed the plaintiff's claim in whole (205Du1220) and the judgment of the Supreme Court on the rejection of the plaintiff's appeal (205Du1220) was affirmed until April 15, 2005.

Therefore, the agricultural special tax contribution paid by the plaintiff should be included in the loss belonging to the business year from 2004 to 2005 according to the principle of confirmation of rights and obligations.

B. Relevant statutes

It is as shown in the attached Form.

C. Determination

1) Calculation of acquisition value

A) According to Article 41(1) and (2) of the Corporate Tax Act (wholly amended by Act No. 6558, Dec. 31, 2001; hereinafter the same), and Article 72(1)4 of the Enforcement Decree of the Corporate Tax Act (wholly amended by Presidential Decree No. 17033, Dec. 29, 2000; hereinafter the same), in the case of stocks acquired through a merger, the amount calculated by adding the amount of deemed dividends to the previous book value shall be the acquisition value of the merged stocks. Furthermore, according to Article 16(1)5 of the Corporate Tax Act, Article 14(1)1(a) of the Enforcement Decree of the Corporate Tax Act, the amount of deemed dividends, including the face value and money acquired through a merger, exceeds the amount required for acquiring the stocks, etc. of the merged corporation.

According to this, the plaintiff received 115,563,560 shares of the Gangwon Bank (the face value of 57,817,800,000 won) in return for the first merger of the modern class shares (the book value of 112,211,334,080 won) and 2,220 won in the merger subsidy. The constructive dividend amount is 465,606,468,140 won after deducting 112,211,34,080 won in the face value of the shares of the Gangwon Bank and 2,220 won in the total of 57,817,80,800 won in the face value of the shares of the Gangwon Bank and 2,220 won in the merger subsidy.

The Plaintiff held shares of the Gangwon Bank, which are KRW 577,817,802,220, the acquisition value of which was KRW 12,089,238 (the face value is KRW 60,446,190,00; hereinafter “the shares of the Seocho Bank”) and KRW 10,62 of the merger subsidy, as the price for shares of the Gangwon Bank was formally following the second merger, and the Plaintiff received KRW 12,089,238 (the face value is KRW 60,446,190,00; hereinafter “share Bank shares of this case”). Since the total face value of the shares and the merger subsidy of the Seocho Bank acquired through the merger do not exceed KRW 577,817,802,220 of the above acquisition value, which can be deemed the previous book value of the shares of the Gangwon Bank, the acquisition value of shares of the Gangwon Bank would be KRW 577,817,802,220.

B) However, as seen earlier in the process of the second merger, the issue was the obligation to bear the agricultural special tax of the Gangwon Bank, which was not originally considered during the second merger, and considering this, the value of the assets of the Gangwon Bank, which should have fallen, and accordingly, the merger ratio with the Cho Jong Bank should have been adjusted. However, if so, the amount of the agricultural special tax of the Gangwon Bank, instead of adjusting the merger ratio, would be prevented from causing various problems due to the delayed merger date, etc., and to promote the merger as originally determined, instead of adjusting the merger ratio, the amount of the agricultural special tax of the Gangwon Bank, which was the major shareholders of the Gangwon Bank, including the Plaintiff, would be shared by the Plaintiff, and accordingly, the amount of the agricultural special tax of the Gangwon Bank would be promoted as scheduled merger. Accordingly, the Plaintiff paid the agricultural special tax contribution paid to Cho Jong Bank in return for the acquisition of the stocks of the Seocho Bank, constitutes the assets actually purchased by the Plaintiff.

In other words, the Plaintiff provided the stocks of the Gangwon Bank (the book value of KRW 577,817,802,220), which is an extinguished corporation, in order to acquire the stocks of the Seocho Bank, and paid the special agricultural income tax contribution of this case.

Therefore, it shall be reasonable to view that the agricultural special tax contribution paid by the Plaintiff constitutes the acquisition value of the shares of the payment bank as the amount actually paid to acquire the shares of the payment bank in this case.

2) The time when the loss and the loss accrue

A) Article 19 of the Corporate Tax Act provides for deductible expenses as “the amount of losses incurred by transactions that reduce the net assets of the corporation in question” and, in principle, the amount of losses or expenses generated or spent in connection with the business is generally accepted as ordinary or directly related to profit.”

In addition, Article 40 of the Corporate Tax Act provides, “The fiscal year of accrual of gross income and deductible expenses shall be the fiscal year which includes the date on which the relevant gross income and deductible expenses are determined,” and declares the principle of confirmation of rights and duties, which is the principle of determining the time of accrual of gross income and deductible expenses. The principle of confirmation of rights and duties refers to the method of calculating the gross income and deductible expenses when the rights and duties, which are the cause of gross income and deductible expenses, are generated if there is time gap between the timing of confirmation of the rights and duties and the realization of the real estate and deductible expenses, not the time when the gross income and deductible expenses are realized, and the same refers to the method of calculating the gross income and deductible expenses in the relevant fiscal year. However, the principle of allowing the inclusion of gross income and deductible expenses in advance on the premise that the actual uncertainty is realized in the future. However, the concept of “determined principle of confirmation of rights and duties” as the legal basis declared under the Act should not be determined as an exception to the time of accrual of gross income and deductible expenses. In addition, considering the degree of control and deductible expenses in a concrete issue, it should be reasonably determined as of maturity (see.).

B) As to the instant case, even if the entire shares of the Choung Bank held by the Plaintiff were acquired according to the merger procedure, and thus, it cannot be included in the acquisition value of the Plaintiff’s agricultural special tax contribution paid by the Plaintiff, considering the following circumstances acknowledged by adding the facts as seen earlier and the entire purport of the pleadings to the entries in the evidence Nos. 2 and 15, it is reasonable to deem the instant agricultural special tax contribution as deductible expenses for the year 2004, and otherwise, the Defendant’s disposition on the premise that the instant agricultural special tax contribution was not included in the deductible expenses for the business year 2004.

① As seen earlier, the Plaintiff, as a major shareholder of the Gangwon-gu Bank, failed to take any particular measure due to the discovery of the problem of the obligation to bear the agricultural special tax of the Gangwon-gu Bank, was unable to maintain the merger ratio as originally determined between the Gangwon-gu Bank and the Seocho Bank, and, if the merger ratio is adjusted, the Plaintiff would incur the agricultural special tax to be paid by the Cho Jae-gu Bank in compliance with the request and the government policies of the Cho Jong-won Bank. Accordingly, the second merger was completed in accordance with the initial merger ratio. In light of such circumstances, the farming special tax contribution in this case was held as is by holding the stocks of the Hongwon Bank in this case computed according to the initial merger ratio, and was incurred in creating a stable business environment by cooperating with the government policy of the early termination of the merger procedure, and is deemed as deductible expenses.

② At the time when the Plaintiff agreed on the preservation of agricultural special taxes with another modern group affiliated companies, there was a significant possibility that the said agricultural special taxes liability will be extinguished due to the resolution by the Financial and Economic Committee of the National Assembly on the said reduction or exemption of agricultural special taxes.

③ After that, although the above special tax reduction and exemption bill was rejected at the plenary session of the National Assembly, Choung Bank filed a lawsuit seeking the revocation of the imposition of agricultural special tax with the Seoul Administrative Court No. 2000Gu10822, Jul. 13, 2001, it was sentenced by the above court to partly winning the above judgment that "the part exceeding 54,887,982,805 won in the imposition of agricultural special tax is revoked," and the Seoul High Court (No. 2001Nu13920) which was the appellate court (No. 200) declared the dismissal of appeal on May 9, 202. However, the Supreme Court (No. 202du55733) which was the appellate court, reversed the plaintiff's claim against the Seoul High Court on July 8, 200, which was declared against the plaintiff on July 205 (No. 201.25.25.204).

④ The Plaintiff did not dispose of the instant special tax contribution as deductible expenses belonging to the business year 200, 2001, and entered the accounts into accounts as outstanding bonds, because it is possible to receive a return of the contribution, while paying the instant special tax contribution to the Cho Ho Bank.

⑤ Meanwhile, the Plaintiff’s declaration amount of corporate tax in 2000 and 2001 was about KRW 43 billion, KRW 31.6 billion respectively, and the tax base was not the amount. Therefore, it was not a situation that could manipulate the timing of attribution of losses.

(6) As such, the Plaintiff held the shares of the instant Seocho Bank in accordance with the initial merger ratio as it is, and paid the instant agricultural special tax contribution as expenses for creating a stable business environment by cooperating with the government policy called early termination of the above merger procedure. Thus, this constitutes “ordinary and unnecessary expenses disbursed for the business,” and thus, it may have been refunded the agricultural special tax contribution that the Plaintiff paid to the Seocho Bank through the amendment of the legislative bill or litigation procedure of the Government, as there is possibility of extinction of the obligation to pay the agricultural special tax burden borne by the Gangwon Bank. Accordingly, the farming special tax exemption and cancellation lawsuit by the Cho Jaeung Bank cannot be deemed to be clearly unfair in light of its circumstances and contents. The Plaintiff’s accounting accounts also were entered as the outstanding amount claim, and the tax base paid by the Plaintiff as the outstanding amount claim on the premise that the Plaintiff paid the agricultural special tax contribution was not a situation of manipulating the period of attribution of the deductible expenses as the marina. The Plaintiff’s judgment dismissing the Plaintiff’s claim from the Supreme Court, and the judgment that lost the Plaintiff’s loss for the business year of 2004.

3) Sub-determination

Therefore, the defendant's disposition of this case based on the premise that the amount equivalent to the agricultural special tax of this case cannot be deemed as losses for the business year belonging to the plaintiff 2004 is illegal.

3. Conclusion

Therefore, the plaintiff's claim is justified, and the judgment of the court of first instance is unfair with different conclusions, so the plaintiff's appeal is accepted and the decision of the court of first instance is revoked and the defendant's disposition of this case is revoked, and it is so decided as per Disposition.

[Attachment Form 5]

Judges Han-soo (Presiding Judge)

1) 115,89,542 note 115,89,542 note ±375,85,640 note (total number of outstanding shares of an Gangwon Bank) ¡¿ 54,276,470,263 ¡¿ 54.38% (the ratio of the number of number of shares of the Gangwon Bank owned by the Plaintiff out of the number of the number of shares of the Gangwon Bank owned by the affiliates of the Hyundai Group that concluded the instant sharing agreement)