Cho High Court Decision 2008 Deputy0938 ( December 30, 2008)

whether the capital stock is refunded shall be determined in accordance with the substance transaction.

Whether a sale of shares constitutes a transfer of shares or a refund of shares or capital as a capital transaction is a matter of interpretation of a legal act, it shall be determined by grasping the whole process of the transaction such as the parties' intent and the process of conclusion of the contract, the method of determining the price, and the progress of the transaction.

The contents of the decision shall be the same as attached.

1. The plaintiff's claim is dismissed.

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

The Defendant’s imposition of global income tax of KRW 64,113,540 as of February 5, 2008 and global income tax of KRW 364,064,690 as of May 20, 2005 and global income tax of KRW 258,852,70 as of May 20, 2008 shall be revoked.

1. Circumstances of the disposition;

A. On February 18, 2003, the Plaintiff (SS) transferred 35,887 shares of SS to 60 million won on February 18, 2003 (hereinafter “the first stock transfer”). On April 30 of the same year, the Plaintiff made a preliminary return and payment of KRW 21,476,70 of the capital gains tax on April 30 of the same year, and ② on August 12, 2005, the Plaintiff’s 47,849 shares of SS including 18,642 shares of SS that were trusted in trust to Kim-ri and Do, transferred 2,952,187,602 shares of SS to 2,952,602 shares (hereinafter “the second stock transfer”) and paid KRW 210,505,980 of the capital gains tax on October 31 of the same year (hereinafter “the second stock transfer”).

B. On the other hand, SS implemented the reduction procedure of capital equivalent to each acquisition amount by acquiring its own shares from the Plaintiff and then retiring its shares in full.

C. On February 5, 2008, the Defendant: (a) on the ground that the transfer of each of the instant shares to the Plaintiff was part of the procedure for reducing the capital of the SS capital; (b) on the ground that the transfer margin constitutes the constructive dividend income as prescribed by Article 17(2) of the Income Tax Act, the Defendant determined and notified the Plaintiff of KRW 64,113,540 of global income tax for the year 2003; (c) global income tax for the year 2005; and (d) global income tax for the 364,064,69,480 of global income tax for the year 2005; and (e) on the ground that the shares of the Kim-won Special Self-Governing City were held in title by the Plaintiff; and (e) on May 20, 2008, notified the Plaintiff of the disposition imposing transfer income tax for the remaining amount after deducting it from the Plaintiff’s global income tax for the global income tax for the year 2005.

[Based on Recognition] In the absence of dispute, Gap evidence 1-1-4, Gap evidence 11-6, Gap evidence 13-1-3, Gap evidence 17-1-2, Gap evidence 18-1 through 3, Eul evidence 1-1-3, Eul evidence 1-2, Eul evidence 2-2, and the purport of the whole pleadings

2. Whether each of the dispositions of this case is legitimate

A. The plaintiff's principal

The transfer of shares No. 1 was made pursuant to the agreement between the plaintiff and Park Jong-K on December 11, 2001. The transfer of shares No. 2 of this case was made according to the follow-up agreement that changed only the transfer value based on the agreement, and the transfer value was made according to the agreement, and only the transferee was made at the request of Park K-K as SS, and the plaintiff was never aware that SS was carrying out the capital reduction procedure. The transfer of shares of this case is an individual transaction between the plaintiff and Park K-K, which was made regardless of the reduction procedure of capital due to the retirement of shares of SS, and the transfer gains are regarded as a dividend income, and each disposition of this case was unlawful.

(b) Related statutes;

It is as shown in the attached Form.

(c) Fact of recognition;

1) On May 12, 198, the Plaintiff and ParkK established SS with three other investors, and the remaining investors except the Plaintiff and Park KK have recovered the investment money in 1995 through 1996 and left SS. They were working as the representative director of SS, and the Plaintiff was working as the managing director and the head of Busan. The Plaintiff was dismissed from office on October 16, 2001, from office as director on November 9, 2001, and was dismissed from office as director on November 25, 2002.

2) On November 2000, the Plaintiff came to know of the fact that Park K in the course of the prosecutor’s investigation by the prosecutor’s office with respect to other companies raised funds, and requested Park K in the process of management rationalization of SS and reorganization of shares, and on October 13, 2001, Park K in the process of embezzlement and breach of trust filed a complaint against Park K in the manner of embezzlement and breach of trust.

3) Accordingly, on December 11, 2001, ParkK requested the Plaintiff to reach an agreement with the investigative agency, and on December 11, 2001, the Plaintiff and ParkK agreed to withdraw the said complaint and pay the Plaintiff the amount of KRW 2 billion in agreement. The main contents of the agreement are as follows (hereinafter referred to as “instant agreement”).

4) In accordance with the instant agreement, the Plaintiff received total of KRW 600 million 1,200,000,000,000,000 for 17,944 shares, and transferred to Y on two occasions, respectively. However, on January 15, 2003, YK did not intend to sell the total of KRW 600,000,000,000,000,000,000,000,000,000,000,000,0000,000,0000,000,0000,000,000,000,000,0000,000,000,000,000,000,000,000,000,000,000,000,00,000,00.

5) However, around the end of December 2003, the Plaintiff became aware of the fact that the amount of the non-funds created by Park K to the Plaintiff was up to the million won, and submitted a written accusation of tax evasion, etc. following the creation of the SS funds to the Seoul Regional Tax Office, and filed a complaint with Park K to the Seoul District Public Prosecutor's Office on December 17, 2003.

6) On April 29, 2004, Park K-K, who was subject to an investigation by an investigative agency, actively requested the Plaintiff to reach an agreement, and on April 29, 2004, Park K-K paid 12 billion won to the Plaintiff for the agreement to withdraw the Plaintiff’s criminal complaint, consolation money, and the transfer price of the remaining SS shares of the Plaintiff, and the Plaintiff written an agreement with the National Tax Service to revoke both criminal complaints and criminal complaints.

7) However, upon completion of the case of criminal complaint against oneself and the case of accusation by the National Tax Service, ParkK filed a complaint against the Plaintiff on July 28, 2004 with the Seoul Central District Public Prosecutor's Office, and on accordance with the agreement under the above paragraph 6, Park K and SS filed a complaint against the claim for objection (Seoul Central District Court 2004Gahap6204) against the promissory note notarial deed jointly issued and delivered to the Plaintiff by ParkK and SS.

8) Thereafter, on April 11, 2005 in the proceedings of the above claimant's case, 1.3 billion won in installments to the plaintiff on April 30, 2005 (1.6 billion won until June 30, 2005, 350 million won until December 31, 2005, 350 million won until June 30, 2006, and 80 billion won until December 31, 2006). ② At the same time, the plaintiff received 1.6 billion won from Park K and SS from the plaintiff to June 30, 2005, the plaintiff was fully aware of the plaintiff's shares (including the shares held in title trust to the other party to Gak), and at the same time, K or S did not complete the dispute between the plaintiff and the designated party to the dispute and the third party to the dispute.

9) According to the instant conciliation, on August 12, 2005, the Plaintiff, Kim Dong-won, and SSS established a contract with SSS in the name of the Plaintiff 29,207 shares of SS 29,642 shares and 47,849 shares of SS 18,642 shares in the name of Kim Young-ri, Kim Young-ri. The Plaintiff received KRW 1.6 billion, the first payment following the instant conciliation, and at the same time transferred all share certificates to SS (the second transfer of shares of this case). SS paid KRW 1.6 billion to the Plaintiff on the day of the instant sales contract, and paid the remainder in full according to the schedule set forth in the first sale of this case.

10) (A) On the other hand, SS held a temporary general meeting on January 27, 2003, the day immediately before the transfer of stocks of this case, on which it held a temporary general meeting of shareholders on the agenda of acquiring its own stocks and reducing its capital. Here, the Plaintiff’s S shares 35,887 won per share was purchased at 16,719 won per share, and there was a resolution to reduce the SS’s capital by retiring its purchased treasury shares. On February 12, 2003, SS publicly announced that creditors who have an objection to the reduction of capital would raise an objection.

① On March 13, 2003, SS changed the total number of outstanding shares from 362,50 to 326,613 shares, the total amount of capital from 3,625,00,000 to 3,266,130,000 won (the reduced amount of KRW 358,870,000 purchased from the Plaintiff and retired from the Plaintiff shall be the total amount of face value of 35,887 shares), and on March 22, 2003, S changed these contents.

② After the transfer of the first stock, as of December 31, 2003, SS capital in the balance sheet was reduced to KRW 3,266,130,000 from December 31, 2002, and KRW 241,130,00 (the amount calculated by subtracting the reduced amount from KRW 358,870,000) was found to have occurred.

(b)S also held a temporary shareholders meeting on August 9, 2005, immediately before the transfer of the 2nd shares, on the agenda of acquiring its own shares and reducing its capital. According to the instant conciliation, the resolution was made to purchase 47,849 shares of the Plaintiff at KRW 61,69 per share, to reduce the SS capital by retiring its purchased own shares, and the SS publicly announced that creditors who have an objection to the reduction of capital will raise an objection to the reduction of capital on November 29, 2005, by disclosing the above resolution on November 29, 2005.

③ On December 30, 2005, SS changed the total number of outstanding shares from 280,087 to 232,238 shares, the total amount of capital from 2,80,870,000 to 2,322,380,000 won (the reduced amount of KRW 478,490,000 purchased from the Plaintiff and retired from the Plaintiff shall be the total amount of face value of 47,849 shares) and changed on the same day.

④ As of December 31, 2005 after the transfer of 2nd shares, the SS’s capital in the balance sheet was reduced from 2,322,380,00 won on December 31, 2004 to 2,322,380,000 won, and the 2,473,706,700 won (the amount calculated by subtracting the reduced amount from 2,952,196,700 won) was found to have occurred.

[Ground for recognition] In without dispute, Gap evidence 3, Gap evidence 8, 9, Gap evidence 14, 15, Gap evidence 16-1, 2, Gap evidence 27 through 29, Gap evidence 33, 34, Gap evidence 38, 39, Gap evidence 43, 44, Eul evidence 2 through 18 (including each number), the purport of the whole pleadings, and the purport of the whole pleadings

D. Determination

Whether a sale of shares constitutes a transfer of shares as an asset transaction, or a capital transaction, or a refund of shares or capital is subject to a legal act’s interpretation, and should be determined based on the contents and intent of the parties. However, under the substance over form principle, not simply depends on the contents or form of the relevant contract, but rather on the party’s intent and the entire process of the transaction, such as the process of concluding the contract, the method of determining the price, and the progress of the transaction (see, e.g., Supreme Court Decision 2001Du6227, Dec. 26, 2002).

However, the following circumstances revealed in the above facts, i.e., the agreement of this case and the mediation of this case aim to resolve the dispute between the plaintiff and Park K, and adjust the plaintiff's shares in SS. From this point of view, the plaintiff's transfer price of shares seems to have been determined. ② The plaintiff's shares held by SS can be paid to KS and the amount determined by the agreement between KS and the plaintiff (the 1st share transfer) or Park K, SSS and the plaintiff (the 2nd share transfer) to reduce their capital by acquiring shares with compensation and then reducing their total amount of shares. It is difficult to view that the plaintiff's shares were transferred to SS 2 as part of the capital reduction of SS 2's own shares to be disposed of with SS 3's capital reduction, and it is difficult to view that the plaintiff's shares were transferred to KS 2's own shares as part of the 2nd issue of SS 3's own shares to be acquired with KS 2's own shares.

Therefore, the difference between the purchase price of each of the instant shares and the amount needed by the Plaintiff to acquire each of the instant shares shall be deemed as income constructive dividend under Article 17 (1) 3 of the Income Tax Act. Therefore, the Plaintiff’s assertion is without merit.

3. Conclusion

Therefore, the plaintiff's claim is dismissed as it is without merit, and it is so decided as per Disposition.