early 2014west 2079

A director of a corporation, in whose case five years have not passed since the date on which the reduction of capital was decided, shall be deemed as a donation of profits arising from the reduction of capital and shall be subject to taxation.

A director of a corporation and for whom five years have not passed after his retirement at the time when the capital reduction was decided, the instant disposition that was imposed on a person who was a specially related person and was subject to taxation due to the donation of profits arising from capital reduction is justifiable.

Article 39-2 (Donation of Profits Accruing from Reduction of Capital)

Article 19 (Inheritance Deductions of Financial Property)

2015Guhap57512 Revocation of Disposition of Imposition of Gift Tax

SAA

Head of Yeongdeungpo Tax Office

October 29, 2015

December 10, 2015

1. The plaintiff's claim is dismissed.

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

Cheong-gu Office

The Defendant’s disposition of imposition of gift tax OO on January 16, 2014 against the Plaintiff is revoked.

1. Details of the disposition;

A. BB (hereinafter “instant company”) is a company established on August 12, 1998 for the purpose of O operation business, and the Plaintiff is a major shareholder of the said company and an in-house director.

B. On the other hand, on March 31, 2001, the CCC assumed office as a director of the instant company and resigned on December 31, 2007. On March 17, 2011, the CCC sold KK owner (hereinafter “instant shares”) owned by it among the OO of the said company’s shares at KRW 21,428 per share to the instant company as KRW 21,428 per share. The instant company held a temporary general shareholders’ meeting on November 24, 201, and retired the instant shares as OOO out of the profits accrued from the previous disposal of electricity (hereinafter “the instant capital reduction”).

C. The number of shares and the shares ratio of the company of this case before and after the capital reduction of this case are as follows.

D. On January 16, 2014, the Defendant: (a) deemed that CCC had a special relationship with the Plaintiff since five years have not elapsed since the Plaintiff retired from the instant company; and (b) the Plaintiff received “interest of donation due to the reduction of capital as stipulated in Article 39-2 of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 201; hereinafter “Inheritance Tax and Gift Tax Act”); and (c) deemed the difference between the appraised by the supplementary method of assessment (74,48 won per share) and the amount paid by the instant company (21,428 won per share) as the gift income, and notified the KRW OOO on November 24, 201 (hereinafter “instant disposition”).

E. On March 21, 2014, the Plaintiff, who was dissatisfied with the instant disposition, requested an inquiry to the Tax Tribunal on March 21, 2014, but was dismissed on December 18, 2014.

[Ground of recognition] Facts without dispute, Gap evidence Nos. 1, 5 through 7, 9, 10, Eul evidence Nos. 1, 5 through 8, and the purport of the whole pleadings

2. Whether the disposition is lawful;

A. The plaintiff's assertion

The plaintiff asserts that the disposition of this case is unlawful for the following reasons.

① Article 39-2 of the Inheritance Tax and Gift Tax Act provides for taxation in cases where the result of the transfer of economic benefits to a major shareholder who has a special relationship with the relevant major shareholder appears due to the reduction of capital by a corporation’s reduction of capital at an amount significantly below the market price. However, CCC’s tort is committed, and the instant company sells the instant shares as it did not have sufficient means to compensate for damages against the instant company. On November 24, 201, the instant company retired the instant shares, which are the treasury shares acquired pursuant to the Commercial Act through a special resolution of the general meeting of shareholders. As can be seen, there is no room for the application of Article 39-2 of the Inheritance Tax and Gift Tax Act in cases where a corporation retires

② Article 39-2 of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 23591, Feb. 2, 2012; hereinafter the same) Article 13(7)1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act (amended by Presidential Decree No. 23591, Feb. 2, 2012; hereinafter the same) provides for the scope of a domestic corporation not specially related to a contributor of a public-service corporation, etc., which does not correspond to Article 39-2(1) of the said Inheritance Tax and Gift Tax Act and the Enforcement Decree or Enforcement Rule thereunder. Therefore, Article 13(7)1 of the Enforcement Decree of the said Inheritance Tax and Gift Tax Act shall not apply to the disposition

③ Even if Article 13(7)1 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act applies, the CCC is merely an employee who is not an officer of the instant company (section 3).

④ Even if the Plaintiff and CCC constitute a specially related person, the Defendant’s assessment of the price per share of the instant shares of KRW 74,488 without any ground without considering the fact that CCC acquired the instant shares from RR on December 12, 2005, without considering the fact that it acquired them in KRW 30,000 per share (section 4).

B. Relevant statutes

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

(c) Fact of recognition;

1) Since December 2005, CCC was indicted for the crime of interference with business with respect to the leakage of HH test problems operated by the instant company, and was sentenced to one year and six months in the Seoul Central District Court 2000OOOO case on February 14, 2008. The above judgment became final and conclusive on April 25, 2008 (200OO). CCC was dismissed from its president position on December 31, 2007.

2) The instant company filed a lawsuit claiming damages against CCC with Seoul Southern District Court 200OOOO, and conciliation was concluded on April 6, 2010 with the content that CCC shall pay OOO personnel in two installments to the instant company by December 31, 2010.

3) Meanwhile, on the other hand, on December 12, 2005, the CCC purchased OCO shares of the instant case from RR in KRW 30,000 per share, and the RCC reported to the tax authorities that it transferred the instant shares in KRW 10,000 per share to KRW 10,000 per share. Accordingly, upon the request of the Board of Audit and Inspection, the tax authorities assessed the market price of the said shares as supplementary assessment methods under the Inheritance Tax and Gift Tax Act, and imposed gift tax on KRW 103,193 per share. The CCC filed an appeal with the Tax Tribunal on April 22, 2011. On October 11, 2011, the Director of the Tax Tribunal decided to rectify the tax base and tax amount on the grounds that it is reasonable to deem that CCC acquired the said shares in KRW 30,000 per share.

4) The amount assessed pursuant to the supplementary assessment method under Articles 60 and 63 of the Inheritance Tax and Gift Tax Act, and Article 54 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act is KRW 74,488 per share.

[Reasons for Recognition] The above evidence, evidence Nos. 2 and 3-1, evidence Nos. 4 and 11, evidence Nos. 4-1, 2, Eul's evidence Nos. 6 and 7-2, and the purport of the whole pleadings

D. Determination

1) Whether Article 39 subparagraph 2 of the Inheritance Tax and Gift Tax Act is applicable (the judgment on the first proposal)

A) Article 39-2(1) of the Inheritance Tax and Gift Tax Act provides that “in case where a corporation retires shares or equity shares for the purpose of reducing its capital and thereby a large shareholder who has a special relationship with the company obtains profits, the amount equivalent to such profits shall be deemed to be the value of property donated to the large shareholder.” Meanwhile, the former part of Article 343(1) of the Commercial Act provides that “stocks may be retired only in accordance with the provisions on reduction of capital” and Article 341 of the same Act provides that “the company shall not acquire its own shares on its own account except for the purpose of retiring shares (Article 1).”

B) As seen earlier, the instant company purchased the instant shares on March 17, 201 at a general meeting of shareholders on November 24, 201, and retired the instant shares voluntarily. According to the foregoing recognition, the instant capital reduction was made as part of the capital reduction procedure by means of stock retirement, and thus constitutes the subject of Article 39-2 of the Inheritance Tax and Gift Tax Act.

Therefore, this part of the plaintiff's assertion is without merit.

2) Whether the person is a specially related person (a determination as to Chapter 2 and Chapter 3)

A) Article 29-2(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act, which is established by delegation under Article 39-2(2) of the Inheritance Tax and Gift Tax Act, provides that “a major shareholder with a special relationship under Article 39-2(1)” means a shareholder, etc. and a person with a relationship under any of the subparagraphs of Article 19(2), who is stipulated in Article 28(2), and Article 19(2)2 of the Enforcement Decree of the same Act provides that “an employee and a person, other than an employee, who maintains their livelihood with the relevant shareholder, etc.”

On the other hand, Article 13 (7) 1 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act refers to an officer (a person who was an officer under Article 20 (1) 4 of the Enforcement Decree of the Corporate Tax Act and a person who was an officer for whom five years

Article 13(10)2 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 267 of Feb. 28, 2012) provides that "an employee prescribed by Ordinance of the Ministry of Strategy and Finance (including an employee of a corporation controlled by investment; hereinafter the same shall apply) or a person, other than an employee, who maintains the livelihood of an inheritor's property." Article 4 of the former Enforcement Rule of the Inheritance Tax and Gift Tax Act (amended by Ordinance of the Ministry of Strategy and Finance No. 267 of Feb. 28, 2012) provides that "an employee prescribed by Ordinance of the Ministry of Strategy and Finance" means an officer, a commercial employee, or any other person in an employment contract." In addition, Articles 13(12)3 and 19(2)6 of the Enforcement Decree of the Inheritance Tax and Gift Tax Act provide that one of the "corporation controlled by investment", the stockholder, his relative, etc.

As above, Articles 13(7)1 and 13(10)2 of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provide that "executive" and "employee" shall be defined as "employee", and Articles 19(2)2 and 19(2) of the Enforcement Decree of the same Act do not provide for the meaning or scope of "employee", and Articles 13-2 and 19(2) of the same Decree concerning "special relationship" shall be defined as "the above Article 13", and they shall be interpreted as "employee" under Article 19(2)2 of the Enforcement Decree of the same Act as "employee" under Article 13(10)2 of the same Enforcement Decree of the same Act and shall be interpreted as the same concept as "employee" under Article 13(10)2 of the same Decree (see Supreme Court Decision 2011Du6899, Oct. 11, 2012; 2000Du30589, May 30, 2012.

B) As to the instant case, it is difficult to recognize that CCC provided labor in a subordinate relationship with the instant company for the purpose of wages or that the status of CCC’s registered director is merely a formal and explicit purpose. Rather, according to the facts acknowledged earlier, CCC is reasonable to deem that CCC fell under an officer of the instant company.

Ultimately, since CCC as its officers had not passed five years since it retired from the instant company at the time of the reduction of capital, it would be deemed that the special relationship between the Plaintiff and the Plaintiff is recognized.

3) Whether the appraisal of the instant shares is legitimate (see, e.g., Supreme Court Decision 4

A) Article 39-2(2) of the Inheritance Tax and Gift Tax Act and Article 29-2(2) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act stipulate profits from capital reduction, such as where the value calculated by subtracting an amount per share paid when stocks are retired from the appraised value per share of stocks reduced, is at least 30/100 of the appraised value per share of stocks reduced. Meanwhile, Article 60 of the Inheritance Tax and Gift Tax Act provides that the value of an asset subject to gift tax shall be based on the market value as of the base date of the donation as of the base date of appraisal (Article 1). Such a market value includes the value generally recognized as the market value if a transaction is made freely between many and unspecified persons as prescribed by Presidential Decree (Article 49(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act). In addition, Article 69(1) of the former Enforcement Decree of the Inheritance Tax and Gift Tax Act provides that the market value of the asset is recognized as the market value as prescribed by Presidential Decree, in consideration of the market value before or after the appraisal date.

B) The following circumstances revealed through the evidence revealed earlier, namely, ① the instant shares are unlisted stocks, and even based on the Plaintiff’s assertion, the Plaintiff was bound to retire treasury shares because it is difficult to sell a third party of the instant shares. Unlike the Plaintiff’s assertion, no other evidence exists to deem that the instant shares are freely traded among many and unspecified persons as of the base date of appraisal. ② The market price of the Inheritance Tax and Gift Tax Act refers to the objective exchange price formed through a general and normal transaction. Thus, in order to recognize the transaction example as the market price, the relevant transaction should reflect the objective exchange value at the time of donation (see, e.g., Supreme Court Decision 2010Du26988, Apr. 26, 2012).

In light of the developments leading up to the purchase, the status of the CCC, and the special relationship with the Plaintiff, etc., it is difficult to view that the objective exchange value formed by normal transaction is adequately reflected in the purchase price of the instant shares. ③ Meanwhile, the CCC transferred 30,000 won per share of the instant shares from RR on December 22, 2005, but RR reported that it transferred 10,000 won per share when it reported transfer income tax. The gift tax was imposed on the basis of 30,000 won per share, the actual acquisition price after the audit and tax judgment. ④ The transaction between the CCC and RR was conducted on December 22, 2005, based on the gift price of the instant shares, which is the date of the appraisal as of December 24, 2005, which is the date of the appraisal of the instant shares, and the transaction between the CCC and the Plaintiff cannot be deemed appropriate as the comparison price under Article 16(1) of the Enforcement Decree of the Inheritance Tax and Gift Tax Act.

Therefore, the plaintiff's above assertion is without merit.

3. Conclusion

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