Cho High Court Decision 2009Da4253 (20 May 20, 2010)

In case of capitalizing the amount in excess of issuance of stocks within two years, it shall correspond to the fictitious dividend.

Where capital has been reduced at a cost within two years after the issuance of stocks in excess of the capital, the acquisition value of capital reduction as '0' and the total amount of the price for capital reduction as the amount of deemed dividend, the disposition imposing corporate tax does not violate the substance over form principle or violate the principle of equality.

1. The plaintiff's claim is dismissed.

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

The Defendant’s disposition of imposing corporate tax of KRW 176,702,540 for the business year 2005 against the Plaintiff on November 2, 2009, in excess of KRW 16,579,110, is revoked.

1. Details of the disposition;

A. On December 26, 198, the Plaintiff, a corporation established for the purpose of the mixed feed manufacture and sales business, etc. on January 9, 2002, invested KRW 40,000,000 in order to establish AAcom (hereinafter referred to as “Acom”), and acquired 80,000 shares (amount of face value 50,000 shares). On February 4, 2002, the Plaintiff participated in the capital increase of 50,00 won per share (an amount of face value 500,000 shares issued at KRW 5,00 per share) and paid KRW 760,00,000 for shares.

B. AAcom’s KRW 190,000 (i.e., KRW 380,000) equivalent to KRW 500 per share (i.e., KRW 1,710,000) out of the above capital increase (i.e., KRW 380,000, KRW 5000) shall be treated as capital and the remaining KRW 1,710,000 shall be treated as the amount of outstanding shares; and (ii) on August 10, 2004, according to a resolution of the board of directors to capitalizing the total amount of the above issued shares, the Plaintiff issued 3,420,00 shares (the face value shall be KRW 500) and was given free of charge to each shareholder in proportion to the ratio of the shares owned. At that time, the Plaintiff was also given 1,368,00 shares (no. 40% of the shares owned).

C. Since February 17, 2005, AAcom shall hold a regular general meeting of shareholders to reduce the amount of KRW 1,400,000,000 out of the total number of shares owned by each shareholder to KRW 70%. However, the method of reduction is to purchase shares equivalent to the total number of shares owned by each shareholder to the face value of KRW 1,200,000,000, and to make a decision to retire at 1,200,000 of the total number of shares issued. On March 22, 2005, the Plaintiff acquired shares of KRW 2,80,000 including the total number of shares owned by the Plaintiff to the total number of shares of KRW 1,60,000 (hereinafter “the income of this case”). Accordingly, the Plaintiff acquired shares of KRW 560,000,000 from AAcom.

D. On November 2, 2009, the Defendant deemed that the instant income constituted the fictitious dividend income under Article 16 subparag. 1 of the former Corporate Tax Act (amended by Act No. 7838 of Dec. 31, 2005), and on November 2, 2009, where the Plaintiff acquired shares by capital transfer of the amount in excess of issued stocks within two years prior to the retirement of the shares, the shares shall be deemed to have been retired first, and the initial acquisition price of the shares shall be zero, by applying Article 14(3) of the Enforcement Decree of the same Act (amended by Presidential Decree No. 18706 of Feb. 19, 2005), the Defendant issued a revised and notified 176,702,540 won of corporate tax for the business year 2005 (hereinafter “instant disposition”).

E. On December 2, 2009, the Plaintiff filed an appeal with the Tax Tribunal on December 2, 2009, but the Tax Tribunal dismissed the appeal on May 20, 2010.

[Ground of Recognition] Facts without dispute, Gap evidence Nos. 1, 2-1 through 4, Gap evidence Nos. 3 and 4-1 through 3, Gap evidence Nos. 5-1 through 4, Gap evidence Nos. 6, 7, Eul evidence Nos. 1 through 8, and the purport of the whole pleadings

2. The legality of the instant disposition

A. The plaintiff's assertion

Article 14(3) of the former Enforcement Decree of the Corporate Tax Act (hereinafter “instant provision”) is null and void in violation of the principle of substantial taxation, the principle of tax equality, or in excess of the purpose and scope of delegation under Article 16 of the former Corporate Tax Act, which is a parent corporation, and thus, the instant disposition based thereon is unlawful. Even if it is not a domestic business, the instant disposition is unlawful in violation of the principle of substantial taxation, and thus, it is unlawful. Therefore, the part of the instant disposition regarding the instant income as deemed the income of constructive dividend

(b) Related statutes;

It is as shown in the attached Form.

C. Determination

1) Whether the pertinent provision is unlawful

A) Whether the substance over form principle violates the principle of substantial taxation

The plaintiff asserts that when calculating the amount of constructive dividend, it violates the principle of substantial taxation by confirming and reflecting the "amount required by the shareholder, etc. to acquire the relevant stocks, etc." as a matter of course, the issue clause argues that the acquisition value of the stock without compensation should be considered as "0" in the case of gratuitous acquisition by capital transfer of excess stocks within two years prior to the retirement of stocks.

On the other hand, Article 16(1)1 of the former Corporate Tax Act provides that the amount of deemed dividend shall be calculated by subtracting the amount actually paid by the stockholders in order to acquire the relevant stocks from the amount of money or other property value acquired by the stockholders through the retirement of stocks. "The amount required" under the above provision shall be deemed to be the amount actually paid in order to acquire the stocks of the relevant corporation. The acquisition value is actually included in the acquisition value of the stocks previously held (see Supreme Court Decision 90Nu2154, Feb. 28, 1992) since the provision on the issue of this case provides that the acquisition value of the paid retirement, which was made within two years from the acquisition of capital stock by the transfer of stocks, shall be deemed to be zero won, even if it is stipulated that the acquisition value of the paid retirement, which was made within two years from the acquisition by the transfer of stocks, shall not be deemed to violate the principle of substantial taxation.

Therefore, the plaintiff's above assertion is without merit.

B) Whether the principle of tax equality is violated

Unlike the issues of this case, the Plaintiff asserts that Article 27(3) of the Enforcement Decree of the Income Tax Act provides that there is no acquisition value of the so-called so-called single-term retirement stocks, and that the above provision does not apply to the stocks issued following the capital transfer of the amount in excess of the issuance of stocks. Thus, the Plaintiff asserts that even though the shareholder status of a specific company does not exist either a corporation or an individual, the status of a specific company is against the principle of tax equality by discriminating between corporate shareholders and individual shareholders without

In light of the legislative purpose, it is difficult to readily conclude that the above provision is contrary to the principle of equality solely on the basis that the legislators prescribed that the acquisition value only to corporate shareholders shall be zero won in accordance with the provisions of the Enforcement Decree of the Income Tax Act, on the basis of the accurate data on the actual state of national finance, social economy, national income, life, etc.

Therefore, the plaintiff's above assertion is without merit.

C) Whether the delegation purpose and scope of the parent law were exceeded

The plaintiff asserts that Article 16 (1) 1 of the former Corporate Tax Act provides that the amount of deemed dividend shall be calculated by subtracting the amount required for acquiring the relevant stocks from the value of money acquired through stock retirement and other property values. Article 16 (2) of the former Corporate Tax Act delegates only the matters necessary for the assessment of the value of stocks, etc., but the key issue clause is that the former provisions stipulate the initial acquisition value of stocks as zero won by

One of the important criteria for determining which provision goes beyond the scope of delegation by the mother law is predictability. This means that the content of the enforcement decree in question is already specifically delegated by the mother law itself, and it is within the scope which can be predicted by the mother law itself. The existence of such predictability is not determined by only one of the pertinent specific provisions, but should be determined by systematically and systematically considering the legislative intent of the law (see, e.g., Supreme Court Decision 2006Du19570, Nov. 27, 2008). In full view of the following circumstances, the key provision is merely a concrete substance based on the purport of the mother law and can be predicted from the mother law itself. Thus, the Plaintiff’s aforementioned assertion is without merit.

① The purpose of imposing deemed dividend under Article 16 of the former Corporate Tax Act is to impose tax on the deemed dividend in light of the principle of equity in taxation, in cases where the profit reserved in the company is returned to stockholders or investors due to the reasons prescribed in each subparagraph of the above Article of the Act in the form of legal reserve, earned surplus reserve, other voluntary reserve, etc. instead of being leaked out of the surplus which is the performance of corporate management, and such profit is an economic profit similar to the actual cash dividend.

(2) The purport of Article 16 (1) 2 of the former Corporate Tax Act (amended by Act No. 1635, Feb. 28, 1992; Act No. 1335, Feb. 28, 1992; Act No. 1354, Feb. 28, 1992; Act No. 1337, Feb. 28, 1992; Act No. 3354, Feb. 28, 1992; Act No. 3555, Feb. 28, 1992).

③ “The amount required” as stipulated in Article 16(1)1 of the former Corporate Tax Act refers to the amount actually paid for the acquisition of the stocks of the pertinent corporation as seen earlier. However, the acquisition value should be deemed as KRW 0 in principle, as it is merely a receipt of free share capital, which is allocated in accordance with the capital transfer of stocks issued by the relevant corporation.

④ The key point is that, if a share retirement is made within two years after the acquisition of gratuitous shares, a gratuitous share shall be deemed to be retired first and its acquisition value shall be deemed to be zero won. This is sufficiently acceptable as it is based on the legislator’s judgment on tax policy.

2) Whether the instant disposition is lawful

According to Article 16 (1) 1 of the former Corporate Tax Act and Article 14 (3) of the Enforcement Decree of the same Act, where stocks are acquired without compensation by capital transfer of excess stocks within two years prior to the retirement of stocks, the amount of constructive dividend resulting from the retirement of stocks shall be deemed to be retired first, but it shall be calculated by deducting the initial acquisition value of the stocks from the economic profits acquired by the stockholders, and there is no exception to the provisions under related Acts and subordinate statutes.

The Plaintiff returned to the instant case and paid KRW 1,368,00,00 as the price for retirement of 1,120,000 shares owned by the Plaintiff on March 22, 2005 according to the resolution of capital reduction at a general meeting of shareholders on August 10, 2004, the Plaintiff allocated 1,368,00 shares for free capital due to the capital transfer of excess shares issued by AAcom. The Plaintiff’s assertion that the instant disposition was unlawful since it violated the principle of substantial taxation is without merit, in light of the content of the above relevant laws and regulations.

3. Conclusion

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