[1] Criteria for determining whether a shareholder of a company becoming a complete subsidiary has gained profits through an all-inclusive share swap under Article 360-2 of the Commercial Act

[2] Whether gift tax should be levied on profits earned by the shareholders of the company becoming a complete subsidiary through an all-inclusive share swap by applying Article 42(1)3 of the former Inheritance Tax and Gift Tax Act (affirmative)

[1] Whether a shareholder of a company becoming a complete subsidiary has obtained a profit through an all-inclusive share swap is determined based on whether the assessed value per share of the company becoming a complete subsidiary was higher than the assessed value under the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”) or whether the assessed value of new shares allocated by the company becoming a complete parent company was lower than the assessed value under the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”), rather than on whether there was a difference between the assessed value under the former Inheritance Tax and Gift Tax Act on the shares of the company becoming a complete parent company and the assessed value under the former Inheritance Tax and Gift Tax Act on the new shares allocated by the company becoming a complete parent company.

[2] In full view of the structure and characteristics of the comprehensive exchange transaction of stocks under the Commercial Act, the structure and nature of the comprehensive exchange transaction of stocks, and Articles 35(1)2 and (2), 39(1)1, and 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828, Dec. 31, 2007; hereinafter “former Inheritance Tax Act”), and the text, legislative purport, and system of the relevant provisions under the former Inheritance Tax and Gift Tax Act, including Article 360-2(1) and (2) of the Commercial Act, with regard to profits acquired by the shareholders of a company becoming a wholly owned subsidiary through an all-inclusive exchange of stocks, gift tax cannot be imposed by applying Article 35(1)2 and (2) of the former Inheritance Tax and Gift Tax Act or Article 39(1)3 of the former Inheritance Tax and Gift Tax Act concerning donation of profits from the issuance of new stocks at low prices under Article 39(1)4(c) of the former Inheritance Tax Act.

[1] Articles 35(1)2 and (2), 39(1)1, and 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Article 360-2(1) and (2) of the Commercial Act / [2] Articles 35(1)2 and (2), 39(1)1 (c), and 42(1)3 and (3) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007); Article 360-2(1) and (2) of the Commercial Act

Plaintiff 1 and 10 others (Law Firm Shin, Attorneys Lee Jong-soo et al., Counsel for the plaintiff-appellant)

Jungyang Tax Office et al.

Seoul High Court Decision 2010Nu31340 decided August 24, 2011

The judgment below is reversed and the case is remanded to Seoul High Court.

The grounds of appeal are examined (to the extent of supplement in case of supplemental appellate briefs not timely filed).

1. Article 35(1)2 and (2) of the former Inheritance Tax and Gift Tax Act (amended by Act No. 8828 of Dec. 31, 2007; hereinafter “Capital Increase Tax Act”) provides for “the donation of profits from the transfer of property at a high price” concerning “the donation of profits from the transfer of property at a lower price,” and Article 39(1)1 provides for “the donation of profits from the issuance of new stocks from among donations of profits from capital increase,” and Article 42(1) provides for “the donation of other profits” as “the donation of profits from the issuance of new stocks at a lower price,” and Articles 33 through 41, 41-3 through 41-5, 44 and 45 provide for “the value of the relevant profits from the conversion of stocks at a price higher than or higher than that determined by Presidential Decree, such profits shall not apply to the conversion of stocks at the time of the conversion or exchange of stocks from the price of stocks to the said person:

Meanwhile, according to Article 360-2 of the Commercial Act, a company may hold the total number of outstanding shares of another company (hereinafter “wholly owning parent company”) by an all-inclusive share swap. If an all-inclusive share swap is made, shares of the company becoming a wholly owned subsidiary shall be transferred to the company becoming a wholly owning parent company on the date of share swap. The shareholders of the company becoming the said wholly owned subsidiary shall be entitled to the allocation of new shares issued by the company becoming the said wholly owning parent company for share swap (Paragraph 2). As can be seen, an all-inclusive share swap under the Commercial Act is combined between the shares of the company becoming a wholly owned subsidiary and the shares of the company becoming a wholly owned subsidiary are transferred from the company becoming a wholly owning parent company for which the shares of the company becoming a wholly owned subsidiary are transferred, and transactions which become shareholders of the company becoming a wholly owned subsidiary after obtaining a share allocation from the company becoming a wholly owned parent company for consideration for shares of the company becoming a wholly owned subsidiary and transactions which become shareholders of the company becoming a wholly owned subsidiary under the tax law on the increase or decrease of new shares under tax law.

In full view of the structure and characteristics of the comprehensive exchange transaction of stocks, and the language, legislative purport, and system of the relevant provisions under the Inheritance and Gift Tax Act including the aforementioned provisions, gift tax may not be imposed on profits acquired by the shareholders of a company becoming a wholly owned subsidiary through an all-inclusive share swap under the Commercial Act by applying Article 35(1)2 and (2) of the Inheritance and Gift Tax Act or Article 39(1)1(c) of the Inheritance and Gift Tax Act concerning donation of profits arising from the issuance of new stocks at a low price, and the gift tax shall not be imposed by applying Article 42(1)3 of the Inheritance and Gift Tax Act concerning donation of profits arising from the transaction to increase corporate capital.

2. Nevertheless, the lower court deemed that gift tax may be imposed on profits acquired by the shareholders of a company becoming a wholly owned subsidiary through an all-inclusive share swap under the Commercial Act by applying Article 39(1)1(c) of the Inheritance Tax and Gift Tax Act to the profits earned by the shareholders of the company becoming a wholly owned subsidiary. In so determining, the lower court determined that the imposition of gift tax of this case was lawful on the premise that the Plaintiffs, who were the shareholders of the non-listed corporation, received profits by acquiring new shares issued by the company becoming a wholly owning parent company at a low price in the process of the all-inclusive share swap of the shares held in accordance with Article 360-2, etc. of the Commercial Act, based on the premise that they received profits by taking over the new shares issued by the company becoming a wholly owned subsidiary at low price, by applying Article 39(1)1(c) of the Inheritance Tax and Gift Tax and Gift Tax Act to which the difference between the appraised value of new shares acquired by the Plaintiffs and the acceptance value

3. Therefore, without further proceeding to decide on the remaining grounds of appeal, the lower judgment is reversed, and the case is remanded to the lower court for further proceedings consistent with this Opinion. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Min Il-young (Presiding Justice)