The burden of proof that there was no purpose of tax avoidance for the purpose of title trust lies in the title claimant.

The burden of proving that there was no purpose of tax avoidance can not avoid the application of the provision on deemed donation solely on the ground that the actual owner is a nominal owner who asserts it, and that there was no purpose of tax avoidance.

Legal fiction of donation of title trust property under Article 45-2 of the Inheritance Tax and Gift Tax Act

2014Guhap1620 Revocation of Disposition of Imposing gift tax

AAA and 2

BB Head of tax office et al.

February 26, 2015

April 2, 2015

1. The plaintiffs' claims against the defendants are all dismissed.

2. The costs of lawsuit are assessed against the plaintiffs.

Cheong-gu Office

Defendant BB’s imposition of KRW 2,536,893,600 of the gift tax on October 31, 2013 against Plaintiff AB on October 14, 2013, and imposition of KRW 2,536,893,600 of the gift tax on December 31, 2008 by Defendant DD head of the tax office against Plaintiff AA on October 17, 2013, and imposition of KRW 98,301,200 of the gift tax on December 31, 2004 and the gift tax on KRW 951,429,90 of the gift tax on December 31, 2010, respectively, against Plaintiff CCC on October 16, 2013.

1. Details of the disposition;

A. The director of the Busan Regional Tax Office, from May 8, 2013 to September 3, 2013, inquired Plaintiff AA about the financial transaction information (including real estate, etc.) for the purpose of confirming the increase in funds for KRW 13.3 billion (hereinafter “the investigation of this case”) and confirmed that Plaintiff AA acquired and traded shares after opening an account under the name of Plaintiff B, CCC, etc., and confirmed that Plaintiff AA had the intention of tax avoidance, such as omitting the transfer income tax and the comprehensive income tax and underreporting, through stock transaction using the borrowed account.

B. According to the findings of the instant case, the Defendants determined and notified gift tax on Plaintiff BB and CCC as follows, and the title truster designated Plaintiff AA as a joint and several taxpayer and notified the title truster of the payment.

(Omission of List)

C. The title trust shares (hereinafter “instant shares”) that serve as the basis for calculating the amount of gift tax

The details are as follows:

(Omission of List)

D. The Plaintiffs were dissatisfied with the request for a trial to the Tax Tribunal. However, the Plaintiffs were dismissed on June 26, 2014.

[Ground of recognition] Facts without dispute, Gap evidence 1 to 6, Eul evidence 1, Eul evidence 2-1 to 3, the purport of the whole pleadings

2. Whether the instant disposition is lawful

A. The plaintiffs' assertion

The existence of the purpose of tax avoidance should be determined on the basis of the trustee. The Plaintiff BB and CCC did not have any objective or awareness of the tax avoidance. In addition, Plaintiff AA only avoided reporting obligation under the former Securities and Exchange Act and traded shares in the name of Plaintiff BB, CCC for the sake of protecting management rights and stabilizing stock prices. Furthermore, in the case of ① issuing shares of FFF (hereinafter “FF”), GGG Co., Ltd. (hereinafter “GGGGG”), HH HH Co., Ltd. (hereinafter “HHHHH”), Plaintiff BB and CCC did not fall under a major shareholder, and thus, Plaintiff B and CCC did not fall under the scope of capital gains tax avoidance even if the title trust was held in the name of Plaintiff CI Co., Ltd. (hereinafter “IIII”), and even in the case of shares issued in the name of 207 and 2010, the issue of title trust with Plaintiff CCC was not subject to the Plaintiff’s global income tax avoidance rate of KRW 80,000.

B. Relevant statutes

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

(c) Fact of recognition;

1) Plaintiff AA and its specially related persons have been holding not less than 5/100 of the total amount of shares issued by EE, a KOSDAQ-listed corporation, during the period from 2002 to 2010.

2) The aggregate market value of the shares issued by Plaintiff AA and its specially related persons as of December 31, 2007 is as follows:

(Omission of List)

[Ground of recognition] Unsatisfy, Gap evidence 5, Eul evidence 1, the purport of the whole pleadings

D. Determination

1) Relevant legal principles

In light of the legislative purport of Article 45-2(1) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 11130, Dec. 31, 2011); in light of the purport that the legislative purpose of Article 45-2(1) is to effectively prevent tax avoidance by using the title trust system, thereby realizing the tax justice, if the title trust was recognized to have been conducted for any reason other than the tax avoidance purpose, and only a minor tax reduction incidental to the title trust takes place, it cannot be readily concluded that there was a "tax avoidance purpose" in such title trust. However, it cannot be said that there was no other purpose as deemed donation by applying the proviso of the above provision only if the purpose of the title trust is not included in the purpose of the tax avoidance, so it cannot be said that there was no purpose of tax avoidance. In addition, the burden of proving that there was no purpose of tax avoidance exists no purpose of tax avoidance (see, e.g., Supreme Court Decision 2007Du17175, Sept. 8, 2011).

2) In the instant case:

In light of the following circumstances, which are acknowledged by comprehensively considering the above facts of recognition, the evidence as mentioned above, Eul evidence Nos. 3-1 through 7, Eul evidence Nos. 4-1 through 4-3, and Eul evidence No. 6's overall purport of pleading, it is insufficient to recognize that the entries of evidence Nos. 2-1, 2, 3, and 4 are insufficient to recognize that there was no purpose of tax avoidance in the title trust of the shares of this case, and there is no other evidence to support it. Accordingly, the plaintiffs' assertion is without merit.

(1) Where Plaintiff AA, a major shareholder of the EE, trades stocks under the name of Plaintiff BB and CCC, the transfer income tax under Article 94(1)3 of the former Income Tax Act (amended by Act No. 9270, Dec. 26, 2008; hereinafter the same shall apply) and Article 157(4)1 of the Enforcement Decree of the same Act (amended by Presidential Decree No. 21301, Feb. 4, 2009; hereinafter the same shall apply) may be avoided.

② From 2003 to 2009, Plaintiff AA traded in the name of Plaintiff BB and CCC with respect to gains on transfer of EE issued stocks amounting to approximately KRW 2.9 billion.

③ Plaintiff AA, in the year 2006, 2007, held title trust with Plaintiff B and CCC on a total of 32,500 shares issued IIII, could avoid the major shareholder requirement under Article 94(1)3 of the former Income Tax Act and Article 157(4)2 of the Enforcement Decree of the same Act at the time of the business year 2008.

④ However, if the market price of the above title trust shares is combined, Plaintiff AA may avoid capital gains tax if it becomes a major shareholder under the above provision and it traded Plaintiff BB and CCC shares issued IIII in the name of Plaintiff B and CCC.

⑤ In 2008, Plaintiff AA traded shares issued IIII in the name of Plaintiff BB and CCC in the year of 2008, capital gains amounting to approximately KRW 900 million.

④ Plaintiff AA’s global income tax base for the business year from 2008 to 2010 is both a section subject to the highest tax rate (88 million won). As such, if the trustee’s global income tax base is in a section subject to the lower tax rate, the trustee may obtain the effect of partially reducing the global income tax (i.e., avoidance) if the trustee’s global income tax base is in a section subject to the lower tax rate (see, e.g., Supreme Court Decision 2008Du824,309, 2009; 24,398,952, and 9,706,713 won in the business year of 2010.

7) As to the shares issued by FF, GGG, and HH H H, the Plaintiffs have failed to clearly state the reason for title trust.

3. Conclusion

Therefore, the plaintiffs' claims against the defendants are dismissed as it is without merit. It is so decided as per Disposition.