Fast MM (Attorney Kim F&C et al., Counsel for the defendant-appellant)

Head of the District Tax Office

March 3, 2015

Seoul Administrative Court Decision 2012Guhap28711 decided April 25, 2014

1.The judgment of the first instance shall be modified as follows:

A. The Defendant limited to the Plaintiff on November 15, 2010:

1) Of the collection disposition of the corporate tax of KRW 9,857,100,00 (including the additional tax) for the fiscal year 2005, the penalty tax of KRW 896,100,000 for the fiscal year;

2) Of the disposition imposing penalty tax of KRW 741,800,280 (including penalty tax) on November 2005, the part of KRW 289,40,280 of the disposition imposing penalty tax of KRW 741,80,280;

Each cancellation shall be revoked.

B. The plaintiff's remaining claims are dismissed.

2. The total cost of a lawsuit shall be ten minutes and nine of them shall be borne by the plaintiff, and the remainder by the defendant.

The judgment of the first instance is revoked, and each disposition of collection of corporate tax of KRW 9,857,100,000 (including additional tax) for the business year 2005 that the Defendant rendered to the Plaintiff on November 15, 2010 and the securities transaction tax of KRW 741,80,280 (including additional tax) for the portion reverted to November 2005 shall be revoked.

1. Details of the disposition;

A. The Plaintiff is a foreign corporation established in accordance with German law, and was holding 100% equity interest in the Aventis Pharma Holdings (hereinafter “Merger Corporation”).

B. On November 7, 2005, the Plaintiff entered into a merger contract as follows, and merged the merged corporation on November 22, 2005 (hereinafter “instant merger”). Accordingly, the 5,800,000 listed shares of the Korean Pharmaceutical Drugs (hereinafter “instant shares”) owned by the extinguished corporation were transferred to the Plaintiff. In relation to this, the Plaintiff did not pay a realistic price, such as issuing new shares or paying cash, to the shareholders of the extinguished corporation or the extinguished corporation.

The parties concerned in this section: The plaintiff of the absorption company, the absorption company, and the merged corporation: Article 1 of the merged corporation: the merged corporation shall transfer to the plaintiff all the essential rights and obligations of the whole assets and all the essential rights and obligations of the merged corporation in the manner of dissolution that is not liquidated in accordance with the German Company Restructuring Act. Article 2 of the 00: Since all the shares of the merged corporation are owned by the merged corporation, there is no consideration for the merger in the form of stock grant. The plaintiff's capital increase is not increased due to this reason, and there is no demand for payment

C. (1) On November 15, 2010, the Defendant: (a) applied Article 92(2)3 of the Corporate Tax Act (amended by Act No. 7838, Dec. 31, 2005; hereinafter the same shall apply); (b) Article 131 of the Enforcement Decree of the Corporate Tax Act (amended by Presidential Decree No. 19328, Feb. 9, 2006; hereinafter the same shall apply); (c) Article 5(1)4 of the Adjustment of International Taxes Act (amended by Act No. 9914, Jan. 1, 2010; hereinafter referred to as “International Tax Act”); and (d) Article 92(2)3 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 19650, Aug. 24, 2006; hereinafter the same shall apply); (d) Article 90(5) of the Corporate Tax Act (amended by Presidential Decree No. 19050, Jan. 15, 20050; hereinafter the Stock Exchange).

(2) In accordance with Article 7(1)2(b) of the Securities Transaction Tax Act (amended by Act No. 8838, Jan. 9, 2008; hereinafter the same) and Article 4(2)1 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 20629, Feb. 22, 2008; hereinafter the same shall apply), the Defendant calculated the transfer price of KRW 90,480,000 (5,80,000 x 15,600) by applying the final transaction price of the stock exchange immediately before the date of the merger (15,60 won per share) to the Plaintiff on the same day, and calculated the transfer price of KRW 741,80,280 (including the faithful payment of penalty tax, additional tax, 400,280, 280) (hereinafter the “instant imposition disposition”). The instant securities transaction tax and the instant securities transaction tax were imposed upon the Defendant.

D. The Plaintiff appealed and filed an appeal on February 11, 201, but was dismissed by the Tax Tribunal on May 31, 2012.

[Reasons for Recognition] Facts without dispute, Gap's 1 to 5, 9 (including virtual numbers), Eul's 1 and 2, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiff's assertion

1) Transferability of shares

Since the transfer of shares by merger does not constitute the transfer of shares for the following reasons, the instant disposition is unlawful.

(A) Prior to the enforcement of Article 44 of the Corporate Tax Act (amended by Act No. 9898, Dec. 31, 2009) prior to the enforcement of Article 44 of the Corporate Tax Act, deeming the transfer of assets due to the merger as “transfer of assets,” and deeming the transfer of assets and liabilities as the comprehensive succession of assets and liabilities was a tax practice. Furthermore, the concept of transfer under the Corporate Tax Act shall be construed by Article 93 Subparag. 7 of the Corporate Tax Act and Article 94 of the Income Tax Act (amended by Act No. 8144, Dec. 306; hereinafter the same). However, the acquisition of stocks in this case is based on the comprehensive succession effect (free transfer) of the merger, which is the transfer of ownership due to sale, exchange, etc., and thus, it does not constitute a separate subject of taxation, and the extinguished corporation cannot be deemed as the recipient of the cost of the merger. The merger cannot be deemed as the consideration for the transfer of stocks by the merged corporation’s stockholders due to the merger.

(B) Since the Plaintiff, a merged corporation, owned 100% of the equity shares of an extinguished corporation and did not pay for any form of merger, such as issuance of new stocks for merger to the merged corporation’s shareholders, the transfer margin (domestic source income of the merged corporation) cannot be calculated. In addition, in the case of withholding income, the corporate tax liability of the person who pays the income amount is established “when the payment is made” and thus, the corporate tax, etc. cannot be imposed on the premise of the transfer income unless

(C) A foreign corporation is imposed only on the domestic source income listed in Article 93 of the Corporate Tax Act, and there is no express provision that the income from a merger between foreign corporations may be imposed on the transfer of securities. According to the Corporate Tax Act at the time of this case, a domestic corporation is taxed as liquidation income not on capital gains but on the basis of realizing profit held by a merged corporation. In addition, where income from a merger is imposed on the transfer of stocks, liquidation income and business income are compatible. In addition, in the case of a merger between domestic corporations, there is no separate taxation on the stock owned by a merged corporation. In particular, in the case of a merger between a merged corporation and a subsidiary holding the total number of stocks issued by a merged corporation, there is no taxation on liquidation income. Nevertheless, a foreign corporation’s stock owned by a merged corporation without asking whether the merged corporation owns the total number of stocks issued and outstanding. Thus, it violates the “non-discrimination principle” under Article 24 of the

2) Calculation of the value of the instant shares

For the following reasons, there is an error in calculating the tax base of corporate tax and securities transaction tax.

(A) calculation of corporate tax base;

In determining the tax base and the tax amount based on the arm's length price under international tax law, it should be proved that the tax authority has reasonably assessed the data secured by the best efforts, and that the difference between the key transaction and the comparable transaction's price has been reasonably adjusted.

In addition, since the transfer of shares in this case was comprehensively taken over without consideration by merger, the cause of transaction and legal character differ from that of the Stock Exchange. As such, the final market price of the Stock Exchange cannot be deemed to be based on the “incompetiable third party price method” under Article 5(1)1 of the International Tax Act or “reasonable method” under Article 5(1)4 of the same Act and Article 4 subparag. 3 of the Enforcement Decree of the same Act, and thus, it cannot be deemed to be the normal price.

Therefore, since the “cases where the arm’s length price cannot be calculated” under the International Tax Act, it should be assessed as KRW 14,990 per share, which is the average price for the month prior to the transfer date, by applying Article 131(3) of the Enforcement Decree of the Corporate Tax Act, Article 99(1)3 of the Income Tax Act, and Article 165(3)1 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 19327, Feb. 9, 2006; hereinafter the same).

B) Calculation of tax base of securities transaction tax

Article 4(2)1 of the Enforcement Decree of the Securities Transaction Tax Act refers to the transfer of stock certificates, etc. of a listed corporation outside the securities market by means of sale and purchase transaction between the parties concerned. The instant stocks fall under comprehensive succession due to merger, and thus, it cannot be applied. Therefore, since the instant stocks fall under the case of transfer of stock certificates, etc. by means other than those under subparagraphs 1 through 3, Article 99(1)3 of the Income Tax Act and Article 165(3) of the Enforcement Decree of the same Act, the transfer of the instant stocks shall be assessed as KRW 14,990 per share, the average value per month prior to the transfer date under Article 165(3) of the Enforcement Decree of the same Act

3) Grounds for illegality related to additional tax

Considering the following points, the imposition of additional tax on corporate tax and securities transaction tax at least should be revoked in violation of law.

A) As the Defendant did not at all specify the type of penalty tax or the basis for calculation in imposing penalty tax on corporate tax and securities transaction tax, there is a procedural defect in imposing penalty tax.

B) The previous established rules and lower court rulings did not regard the transfer of ownership of shares due to a merger as transfer of shares, and the merger company excluded the object of taxation in cases where the merger company did not deliver shares to the merged company in return for the merger while holding 100% of shares of the merged company. From October 2010, the tax authorities imposed corporate tax and securities transaction tax on the Plaintiff with different interpretations from the tax authorities. Since the Plaintiff believed the practice of non-taxation under the previous established rules and lower court rulings and did not perform tax liability, the Plaintiff cannot impose penalty tax on the Plaintiff on the ground that there exists a justifiable reason for failing to pay corporate tax and securities transaction tax on the Plaintiff.

(b) Related statutes;

It is as shown in the attached Table related statutes.

C. Determination

1) As to the issue of stock assignment

(A) In calculating the amount of domestic source income of a foreign corporation, unless otherwise provided for in a treaty or a domestic law, the domestic law and accounting standards shall be followed (see Supreme Court Decision 97Nu3903, Feb. 22, 200). Article 93 subparag. 10 (a) of the Corporate Tax Act provides that a foreign corporation shall have income derived from the transfer of stocks issued by a domestic corporation through a merger between foreign corporations as domestic source income. Thus, whether transferring the stocks issued by a domestic corporation, which is extinguished in the course of a merger, to a merged corporation, constitutes “transfer of stocks” as provided in subparagraph 10 (a) of Article 93 of the Corporate Tax Act shall be determined on the basis of the interpretation of domestic corporate tax law, by deeming that the increased value of stocks inherent in the merger was realized as gains from transfer, and Article 80(1) of the Corporate Tax Act provides that “If a domestic corporation dissolves due to a merger, the total price of the liquidation income at the time of the merger shall be determined by Article 14 subparag. 16 (1) of the Corporate Tax Act.

As can be seen, Article 80(1) and (4) of the Corporate Tax Act, Article 122(1) and Article 14(1)1(a) and (c) of the Enforcement Decree of the same Act, deeming that the transfer of assets following a merger constitutes the transfer of assets realizing gains on transfer, and thus, the method for calculating gains on transfer is prescribed, except in cases where a corporation satisfies the requirements under Article 44(1)1 and 2 of the Corporate Tax Act, where the value of stocks received in return for a merger is deemed as the price for the transfer of assets so that the merged corporation is de facto unable to calculate gains on transfer, thereby providing special policy exceptions for taxation deferred to the time that the merged corporation disposes of the assets. On the contrary, a foreign corporation provides that income generated from the transfer of stocks issued by a domestic corporation under Article 93 subparag. 10(a) of the Corporate Tax Act is subject to taxation, and there is no policy special provisions for taxation deferred on the transfer of stocks, etc. between foreign corporations. Article 90(1)3 of the Corporate Tax Act does not include transfer of stocks between domestic corporations.

In addition, in light of the main text of Article 1 and Article 2(3) of the Securities Transaction Tax Act, the language and purport of Article 1 and Article 117(1)14 of the Restriction of Special Taxation Act (amended by Act No. 6538, Dec. 29, 2001) newly provides that “where stocks are transferred for the purpose of a merger satisfying the requirements under each subparagraph of Article 44(1) of the Corporate Tax Act” shall be subject to the exemption of securities transaction tax, there is no reason to deem that the transfer of stocks by a merger does not constitute “share transfer” under the said provision (see Supreme Court Decision 2010Du7208, Nov. 28, 2013).

(B) Examining the following circumstances in light of the foregoing legal doctrine, the transfer of shares issued by a domestic corporation, which was held by an extinguished corporation upon a merger between foreign corporations, to a merged corporation constitutes “transfer of shares” under Article 93 subparag. 10 (a) of the Corporate Tax Act and Article 2(3) of the Securities Transaction Tax Act.

① A merger refers to an organizational change in which two or more companies are combined without undergoing liquidation procedures under the Commercial Act, and the parties to a merger contract are not members of a “company”. In addition, Article 523 of the Commercial Act (amended by Act No. 10600, Apr. 14, 201) provides that “the contents and allocation ratio of stocks to be received by stockholders of a extinguished company” as the conditions of merger shall be included in a merger contract with the adoption of the principle of the merger contract, and Article 522(1) provides that “the contents and allocation ratio of stocks to be received by stockholders of a extinguished company” as the conditions of the merger shall be approved by a special resolution of the general meeting of stockholders after the merger contract. Therefore, it is reasonable to view that a merger takes two steps to transfer all assets and liabilities of a merged corporation to a merged corporation and to receive the stocks, etc. of a merged corporation as the price for the merger and grant the stocks, etc. of a merged corporation to stockholders of a merged corporation, without excluding the merged corporation.

② Article 24(1) of the Agreement between the Republic of Korea and the Federal Republic of Germany for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and on Capital provides that “any national of a Contracting State shall not bear any taxes borne or payable by, inter alia, a national of the other Contracting State in the same situation as his/her residence, or taxes or requirements related thereto, which are different from, or greater than, the said other Contracting State. This provision shall, notwithstanding the provisions of Article 1, apply to persons who are not residents of one or both Contracting States.” Such principle of non-discrimination provides that “When a national of one Contracting State is in the same situation as a national of the other Contracting State or performs the same activity as that of the other Contracting State, the principle of non-discrimination shall not be subject to discriminatory treatment in taxation solely on the ground of the difference of nationality (see, e.g., Supreme Court Decision

Therefore, in the event that a domestic corporation is dissolved due to a merger, the Corporate Tax Act imposes corporate tax on the merged corporation and imposes corporate tax on the merged corporation with respect to the unrealized profits accumulated in the merged corporation. This is also a taxation on the unrealized profits accumulated in the merged corporation. In addition, in case of profits accrued to the stockholders of the merged corporation, this is not deemed a realization of profits from the disposal of stocks, but it is similar to the stock dividends ordinarily transferring earned surplus of the merged company into capital, and thus, deemed a constructive dividend. Therefore, even if the transfer of stocks by the merger is deemed a transfer of stocks, there is no difference in that it is taxed on unrealized profits from the transfer of assets. Furthermore, as to the method of calculating the amount of income, the difference between the acquisition value and the liquidation income is calculated based on the difference between the transfer value of all assets owned by the corporation and the acquisition value after deducting the total amount of equity capital from the transfer value of all assets owned by the merged corporation. In addition, there is no fundamental difference between the German Corporate Conversion Act, which applied at the time of the merger, in view of the method of taxation on the transfer of assets transfer.

③ Article 44 of the Corporate Tax Act amended by Act No. 9898 on December 31, 2009 provides that “if the merged corporation is dissolved due to the merger, the merged corporation shall be deemed to have transferred its assets to the merged corporation” and the new structure is as follows:

(1) Where a surviving corporation succeeds to the evaluation of assets of a merged corporation (limited to assets prescribed by the Presidential Decree) with the requirements falling under the following subparagraphs after the amendment on December 31, 2009, which is included in the main sentence of this Table, on or before the amendment of December 31, 2009, an amount equivalent to the evaluation marginal profit from the merger may be included in deductible expenses in the calculation of the income amount for the business year which includes the date of the registration of the merger as prescribed by the Presidential Decree. (1) Where an extinguished corporation is dissolved through a merger, the amount equivalent to the evaluation marginal profit from the merger of the concerned assets shall be included in deductible expenses. In this case, where the surviving corporation receives the total amount of gains or losses accruing from such transfer (referring to the amount subtracting the value of subparagraph 2 from the value of subparagraph 1; hereafter the same shall apply in this Article and Article 44-3) from the total amount of net assets of the merged corporation as of the date of the registration of the merger from the date of the merger to the date of merger to the merger:

Article 80(1) of the Corporate Tax Act prior to the amendment provides that "the merged corporation shall be imposed as "settlement income" the total amount of the cost of the merger received from the merged corporation minus the total amount of equity capital of the merged corporation, and where the merger corporation satisfies the requirements under Article 4(1)1 through 3, it shall be included in deductible expenses in the calculation of the income amount for the business year which includes the date of the merger. On the other hand, the amended Corporate Tax Act deleted the provision on liquidation income (Article 80) and provides that "if the merged corporation is dissolved, the corporation's assets shall be deemed to be transferred to the merged corporation. In this case, such transfer income or loss shall be included in the gross income or deductible expenses when calculating the income amount for the business year which includes the date of the merger registration." Even if the former Corporate Tax Act, separate from the nature of the merger under the Commercial Act, allows the merged corporation to receive liquidation income and the merger evaluation income from the merger corporation, and it shall not be deemed that the newly amended net asset value of the merged corporation is evaluated as the transfer of the corporation's assets subject to taxation.

④ Meanwhile, the main text of Article 88(1) of the Income Tax Act stipulates the concept of “transfer” in capital gains as “the actual transfer of an asset is made at a price due to sale, exchange, investment in kind in a corporation, etc. regardless of the registration or enrollment of the asset.” The same does not apply to cases where the asset is transferred due to sale, exchange, or investment in kind in a corporation, but it does not constitute “transfer” in capital gains. Even if the asset is actually transferred for any other reason, it shall be deemed that the transfer, which is the cause of taxation of capital gains tax, was made when the asset is actually transferred for a price (see Supreme Court Decision 2010Du15452, Dec. 9, 2010). Ultimately, even if the concept of transfer under the Corporate Tax Act is deemed as the same as that of the Income Tax Act, the transfer of the asset can be deemed as long as the instant

2) As to the merger with no cost of merger

The plaintiff holding 100% of the shares of a merged corporation did not pay the merged price to the merged corporation at the time of the merger.

① As such, deeming the transfer of assets by merger as transfer is for the purpose of taxation on unrealized profits, it cannot be deemed that the actual cost of merger is premised. ② If holding 100% of the stocks of an extinguished corporation is excluded from taxation, a de facto method such as merger after acquisition of stocks of an extinguished corporation occurs, and is contrary to the equity of taxation. ③ In order to prevent such evasion and to ensure the propriety of taxation, Article 80(2) of the Corporate Tax Act does not constitute a qualified merger of domestic corporations, and the merged corporation should add the acquisition value of combined stocks to the cost of merger (hereinafter “combined stocks”) in light of the purport of the Corporate Tax Act’s provision on such a domestic corporation, it cannot be deemed that the corporate tax was denied even if there was no actual cost of merger at the time of acquisition of combined stocks, and it cannot be deemed that the corporate tax was actually paid at the time of merger or at the time of acquisition of stocks of an extinguished corporation, rather than at the time of acquisition of stocks at the time of acquisition of the merged corporation.

3) As to the assessment of the value of the instant shares

The court's explanation on this part is the same as the corresponding part of the reasoning of the judgment of the court of first instance, and thus, this part is cited by Article 8 (2) of the Administrative Litigation Act and the main text of Article 420 of the Civil Procedure Act.

4) As to the illegality of imposing additional tax

A) Whether procedural defects are procedural defects

(1) Relevant legal principles

When both a principal tax and a penalty tax are to be imposed by a single tax payment notice, the individual tax amount and the basis for calculation of the principal tax shall be stated in the tax payment notice separately. In addition, where multiple types of penalty tax are to be imposed, it is a clear principle that the taxpayer can per se know the details of each tax assessment by classifying the amount and the basis for calculation of the penalty tax by type. As such, where only the total amount of penalty tax is stated without disclosing the type and the basis for calculation of the penalty tax (see, e.g., Supreme Court en banc Decision 2010Du12347, Oct. 18, 2012).

(2) Whether there was an error of omission in disclosing the type of additional tax and the basis for calculation of tax amount

In light of the above legal principles, the notice of tax payment of the corporate tax of this case stated that the principal tax is 8,961,00,000,000 won, and the additional tax is 896,100,000 won, and the principal tax is 896,10,000,000 won, and the type of additional tax and its calculation basis is not entirely stated. The notice of tax payment of the securities transaction tax of this case also states that the principal tax is 452,40,000,000 won, and the additional tax is 289,40,280,000 won, and the principal tax is 5,80,000,000 won, and the basis for calculation is not stated. Thus, the corporate tax and the securities transaction tax payment notice of this case is not stated in the law, and there is no defect or defect in the calculation basis.

Therefore, since the imposition of corporate tax and securities transaction tax is illegal due to procedural defects, the plaintiff's assertion on this part is with merit.

B) Whether there is a justifiable reason for a taxpayer to have failed to perform his/her duty

Meanwhile, even if a taxpayer neglected his/her duty to pay tax base and securities transaction tax, if there exist “justifiable cause” for non-performance of such duty, no additional tax may be imposed (see Supreme Court Decision 2002Du66, Aug. 23, 2002; Article 48(1) of the Framework Act on National Taxes amended on Dec. 30, 2006). Furthermore, in light of the fact that the tax office imposed corporate tax and securities transaction tax on the Plaintiff’s non-declaration of corporate tax and securities transaction tax for 20 years, it can be seen that the tax office imposed corporate tax and securities transaction tax for 20 years on the Plaintiff on the non-payment of stocks (see, e.g., Supreme Court Decision 200Du1667, Aug. 26, 200). It appears that the first instance court rendered a favorable judgment on the Plaintiff’s non-payment of corporate tax and securities transaction tax for 20 years prior to the merger of 20 years old stocks (see, e.g., Supreme Court Decision 20006Du1668.

5) Sub-committee

Therefore, among the disposition of collecting corporate tax in this case, the portion of additional tax of KRW 896,100,000 among the disposition of collecting corporate tax in this case, and the part of additional tax of KRW 289,40,280 among the disposition of imposing the securities transaction tax in this case, is unlawful

3. Conclusion

Therefore, among the disposition of collecting corporate tax of KRW 9,857,100,00 (including additional tax) that the Defendant rendered to the Plaintiff on November 15, 2010, the part of additional tax of KRW 896,100,000 among the disposition of collecting corporate tax of KRW 741,80,280 (including additional tax), and the part of additional tax of KRW 289,40,280 among the disposition of imposing the securities transaction tax of this case (including additional tax) shall be revoked, respectively. Since the judgment of the court of first instance is inappropriate with a different conclusion, the part of the above additional tax among the disposition of this case shall be revoked, and the remaining claims of the Plaintiff shall be dismissed, and the remaining appeal of the Defendant shall be dismissed. It is so decided as per Disposition.

[Attachment]

Judges Jan Jin-hun (Presiding Judge)

1) Where Article 99(1)3 of the Income Tax Act applies, Article 63(1)(a) of the Inheritance Tax and Gift Tax Act (amended by Act No. 8139 of Dec. 30, 2006) is only applicable and Article 165(3) of the Enforcement Decree of the Income Tax Act is not applicable. However, the Plaintiff appears to have claimed that Article 165(3) of the Enforcement Decree of the Income Tax Act is applied by mistake. However, there is no difference in the result of calculation.

2) There is the same problem as the note 1 above.

3) On May 2007, prior to the instant disposition, the tax authority rendered a judgment that the transfer of stocks by a merger of foreign corporations is subject to securities transaction tax (the National Tax Service’s laws and regulations and -2479 on May 16, 2007) and held that the transfer of stocks by a merger of foreign corporations is subject to securities transaction tax (the merger of the parent company holding 10% shares) on several occasions since the tax authority rendered a judgment that the transfer of stocks by a merger of foreign corporations was subject to securities transaction tax (the National Tax Service’s regulations and regulations on January 30, 2013 (this refers to the merger of the parent company holding 10% shares). However, the Tax Tribunal’s taxation cases on September 4, 2013, 2010-Gu0576 of the Tax Tribunal, and the Tax Tribunal’s judicial and established rules on December 16, 2013) were difficult for taxpayers to be disclosed to the General Advisory Committee on Taxation Standards.