[1] The meaning of "establishment of a corporation" under Article 138 (1) 1 and 3 of the former Local Tax Act

[2] Where a third party purchases all the shares of a corporation with no business performance by closing its business after the completion of its establishment registration and then changes its executive officer, capital, trade name, purpose of business, etc., whether the registration tax may be imposed on the corporation by deeming it as "establishment of a corporation" (negative)

[1] According to the provisions of the Civil Act and the Commercial Act as to the incorporation of a corporation, the establishment of a corporation is basically required, and the establishment of a corporation is completed by acquiring the legal personality at the same time as it is established by registration of incorporation through the act of establishment. Thus, the establishment of a corporation without registration of incorporation cannot be established. On the other hand, the establishment of a corporation cannot be established unless it is extinguished after registration of incorporation. The above legal principle is the basic principle for the establishment of a corporation as prescribed by the Civil Act and the Commercial Act, which are the basic law governing the procedure for establishment. The registration of incorporation of a corporation has the effect of creation different from the registration or commercial registration of another corporation, which is a mandatory provision. When considering the form and content of other relevant provisions, the registration of incorporation of a corporation is a mandatory provision. Thus, unless the above general legal principle does not provide for the "establishment" in the former Local Tax Act (amended by Act No. 6549 of Dec. 29, 2001), it shall also be interpreted as "establishment of a corporation" under Article 138 (1) 38 (1) 3.

[2] It cannot be deemed that a third party’s entire shares of a corporation with no business performance by closing its business after the completion of the registration of its establishment changed its officers, capital, trade name, purpose business, etc., and thus, it does not constitute “establishment of a corporation” as provided in the above provision. Even if such an act is necessary to avoid heavy registration tax and it does not have individual and specific legal provisions that deny the validity of such act, the imposition of registration tax on the grounds that such act constitutes “establishment of a corporation” as provided in the above provision shall not be permitted as it extends or analogically without reasonable grounds.

[1] Article 138(1)1 and 3 of the former Local Tax Act (amended by Act No. 6549 of Dec. 29, 2001); Article 102(2) of the former Enforcement Decree of the Local Tax Act (amended by Presidential Decree No. 20708 of Feb. 29, 2008); Article 33 of the Civil Act; Articles 171(1) and 172 of the Commercial Act / [2] Article 138(1)1 and 3 of the former Local Tax Act (amended by Act No. 6549 of Dec. 29, 2001)

[2] Supreme Court Decision 98Du14082 delivered on Nov. 9, 199 (Gong1999Ha, 2531) Supreme Court en banc Decision 98Du11731 delivered on Mar. 16, 200 (Gong2000Sang, 989) Supreme Court Decision 200Du963 delivered on Aug. 21, 2001

Plaintiff (Attorney Han-soo et al., Counsel for the plaintiff-appellant)

Defendant 1 and one other (Law Firm Han-ro, Attorneys Ha-ju et al., Counsel for the defendant-appellant)

Intervenor (Law Firm continental Asia et al., Counsel for the intervenor-appellant)

Seoul High Court Decision 2007Nu12691 Decided December 4, 2007

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 138(1)1 of the former Local Tax Act (amended by Act No. 6549 of Dec. 29, 2001; hereinafter “the Act”) provides that “registration following the increase of capital within five years after the establishment of a corporation in a large city” is subject to subparagraph 3 of the same Article, “real estate registration following the establishment of a corporation and the establishment, establishment, and transfer of a corporation’s head office, main office, or branch office in a large city and the relocation of a corporation into a main office, main office, or branch office in a large city and another real estate registration after the establishment, establishment, and transfer are subject to registration tax.” Article 102(2) of the former Enforcement Decree of the Local Tax Act (amended by Presidential Decree No. 20708 of Feb. 29, 2008) provides that “The establishment, establishment, and transfer of real estate in a corporation or a branch office after its establishment, transfer, etc. means all non-business real estate for business use or within five years after its establishment, transfer.”

2. According to the reasoning of the judgment below, the court below acknowledged the facts as stated in its holding, and based on the legislative purport of Article 138 of the Act, it is reasonable to interpret that the establishment of a corporation provided for in Article 138 (1) 1 and 3 of the Act does not mean establishment by registration of incorporation, but also includes cases where the establishment of a corporation can be evaluated as substantial establishment without registration of incorporation, although it does not mean establishment by registration of incorporation. On the premise that in this case, the plaintiff did not have any business performance for about five years after closure of business on June 4, 2001 after its establishment as of January 9, 1996 and added real estate development business to purpose of business, and the increase in the capital as of June 15, 201 after the increase in the number of existing shareholders' stocks were transferred to the non-party company, and the establishment of the corporation was newly prepared, and immediately after the increase in the capital, the court below determined that there was no substantial difference between the establishment of the corporation and the acquisition of the real estate in this case.

3. However, it is difficult to accept the judgment of the court below for the following reasons.

A. The Constitution adopts the principle of no taxation without law and provides that all citizens are obliged to pay taxes under the conditions as prescribed by Act (Article 38 of the Constitution of the Republic of Korea), and that “types and rates of taxes shall be determined by Act” (Article 59 of the Constitution of the Republic of Korea). Such principle of no taxation without law means that taxation requirements, etc. shall be prescribed by Acts enacted by the National Assembly, which is a representative body of the people, and strict interpretation and application in the enforcement of such Acts. Although there is a need for taxation, it is not allowed to resolve it by expanded interpretation or analogical application of administrative convenience (see Supreme Court en banc Decision 98Du11731, Mar. 16, 200).

In addition, in order for taxpayers to achieve the same economic purpose while engaging in economic activities, one of the several legal relations chosen by the parties should be respected (see Supreme Court Decision 2000Du963, Aug. 21, 2001). However, in order to deny the validity of a party’s transaction in accordance with the substance over form principle, if a party’s transaction can be denied under the substance over form principle, it is necessary to establish individual and specific rules of denial under the principle of no taxation without law (see Supreme Court Decision 98Du14082, Nov. 9, 199).

According to the provisions of the Civil Act and the Commercial Act on the incorporation of a juristic person, the establishment of a juristic person is basically required, and the juristic person is formed by registration of incorporation through the act of establishment and at the same time it is acquired at the same time (see, e.g., Article 33 of the Civil Act and Articles 171(1) and 172 of the Commercial Act). Thus, the establishment of a juristic person is completed. Thus, there is no establishment of a juristic person without registration of incorporation. Once a juristic person is established through registration of incorporation, it is impossible to establish a new juristic

The above legal principle is the basic law that regulates the incorporation procedure and the Commercial Act. The registration of incorporation of a juristic person has a productive effect different from the registration of another juristic person or commercial registration, which is a mandatory provision, and considering the form and content of other related regulations, the "establishment of a juristic person" provided for in Article 138(1)1 and 3 of the Act shall be interpreted as "establishment by registration of incorporation" unless there is a separate definition provision different from the above general legal principle as to "establishment of a juristic person" in the Local Tax Act. Therefore, it shall not be deemed as "establishment of a juristic person" provided for in the above provision because a third party purchases all stocks of a juristic person in a state of business performance after its establishment is closed, and changes its officers, capital, trade names, or business purposes, etc., and it shall not be deemed as "establishment of a juristic person" provided for in the above provision. Even if it is necessary to regulate such acts to avoid heavy taxation of registration tax, etc., it shall not be deemed as "establishment of a juristic person" under the tax law or interpretation without any reasonable ground.

B. Nevertheless, on a different premise, the judgment of the court below which judged that the registration of capital increase and the registration of real estate of this case, which was made within five years thereafter, were subject to heavy taxation such as registration tax, by deeming that the substance of the Plaintiff corporation was changed entirely on June 15, 2001, and that there was a new establishment, and thus, it erred in the misapprehension of legal principles as to the interpretation and application of the establishment of a corporation under Article 138 (1) 1 and 3 of the Act, thereby adversely affecting the conclusion of the judgment.

4. Therefore, without examining the remaining grounds of appeal, the judgment of the court below is reversed, and the case is remanded to the court below for a new trial and determination. It is so decided as per Disposition by the assent of all participating Justices on the bench.

Justices Jeon Soo-ahn (Presiding Justice)